Tuesday, May 3, 2016

2305. Book Review: Money and Totality

By Michael Roberts, Michael Roberts' Blog, April 29, 2016

In a previous post I reckoned that Anwar Shaikh’s magnum opus was probably the best book on capitalism this year.  Well, Fred Moseley’s 20-year work on his new book, Money and Totality, is probably the best on Marxist economic theory this year and for this century so far.

Fred Moseley is Professor of Economics at Mount Holyoake women’s college in Massachusetts and has been for decades. He is one of the foremost scholars in the world today on Marxian economic theory (as a theory of capitalism). He has written or edited seven books, including The Falling Rate of Profit in the Post-war United States Economy (1991), Marx’s Logical Method: A Re-examination (1993), Heterodox Economic Theories: True or False?(1995), New Investigations of Marx’s Method (1997), and Marx’s Theory of Money: Modern Appraisals (2004).

In Money and Totality, Moseley has made a major contribution to a clearer understanding of Marx’s method of analysis.  He shows that a Marxist analysis delivers money, prices and values integrated into a single realistic system of capitalism. Moseley shows that Marx had two main stages of analysis or theoretical abstraction. First, he analyses the production of surplus value in capital as a whole (Volumes 1 and 2 in Capital) and then he analyses its distribution through the competing sectors of many capitals (Volume 3). Marx starts with money so there is no need to ‘transform’ an underlying system based on value into a system based on prices.

At the beginning of the circuit of capital, money capital is taken as given or ‘presupposed’. So total value equals total prices in the ‘totality’ (this is what the title of the book alludes to – the subtitle for Moseley’s book is “A macro-monetary interpretation of Marx’s logic in Capital and the end of the transformation problem” a mouthful for most.  And all that happens with ‘many capitals’ is that the extra value (surplus value) created in each sector will be equalized by the market so that the rate of profit is equalized (or tends to equalize) across all sectors.  Total surplus value equals total profit but the prices of production vary in each sector to equalize profitability across all sectors.  And the whole circuit of capital is one that takes place over real time and is not completed hypothetically and simultaneously, as critics argue.

So there is one real capitalist system, advancing money in order to make more money, namely a profit (a surplus of value) over the money (or value in labour time) paid to the workforce and for the means of production (value contained in constant capital).  We do not start with a certain value of labour time or a certain amount of physical units of workers and technology and finish with that.  We start with money and we finish with money.

Yes, beneath the process of money making money, we can show that this happens through the exploitation of labour and the amount of exploitation or extra money made can be explained by the appropriation of surplus labour time (beyond that needed to keep workers alive and in production).  Thus money is value, or the form of value that we see.  Value explains money; surplus value explains profit.

When we go below the macro aggregates and consider individual prices of production for different products and individual profit rates for each capitalist, then values in labour time do not match prices.  This is the so-called “transformation problem”.  If labour is the source of all value and surplus-value, then one would expect industries with a higher proportion of labour to have higher rates of profit; but this is not the case in reality.

The critics argue that Marx attempted to resolve this contradiction with his theory of prices of production in Part 2 of Volume 3 of Capital, but he failed to solve the problem, because he ‘failed to transform the inputs’ of constant capital and variable capital from values to prices of production.  He left the inputs of constant capital and variable capital in value terms, and this is logically contradictory, because inputs in some industries are also outputs of other industries, and inputs cannot be purchased at values and sold at prices of production in the same transaction.  This was Marx’s crucial mistake, according to the critics.

Moseley argues that, contrary to the critics, that Marx did not ‘fail to transform the inputs from values to prices of production’ because the inputs of constant capital and variable capital are not supposed to be transformed.  Instead, constant capital and variable capital are supposed to be the same in the determination of both values and prices of production; C and V are taken as given as the actual quantities of money capital advanced to purchase means of pf productions and labour-power at the beginning of the circuit of money capital.

Marx solved this issue of the macro to the micro by showing that because individual capitals compete among each other, as a result, sectors with higher profitability get ‘invaded’ by other capitalists seeking to increase their profitability.  In so doing, profit rates tend to be equalised between sectors.  As Marx showed, this did not change the overall value created in an economy, but merely redistributed the surplus value over and above the cost of capital advanced from less efficient capitals to more efficient ones through the equalisation of profit rates across sectors.  This transformation solution was a brilliant one that Marx was very proud of.

“In Marx’s theory, total price = total value but individual prices = prices of production.  There is no contradiction with Marx’s logical structure of the two levels of abstraction” (Moseley, p39 note 13).   The logical approach of Marx is to look at the macro first to show how money makes more money and then look at the micro second to see how that extra money is distributed among many industries and capitals through competition and the equalisation of profitability.  The more efficient get a transfer of value from the less efficient through capitalist competition.  But profits come from the surplus value generated by the labour force employed in the whole economy and appropriated by capital as a whole.

This macro-monetary approach is a realistic view of capitalism.  The circuit and motion of capital starts with money and finishes with money.  It does not start with value (labour time) or with physical things (labour and means of production) and end with value or things.  So it does not need value or things to be converted or transformed into money.  There are not two ‘states of capitalism’ (one with values and one with money or prices).  Marx’s view is a single state system.  So there is no ‘mistake’ or logical contradiction in Marx’s explanation of the transformation of values into prices.  The so-called transformation problem of values into prices and money does not exist.

The mainstream critiques of Marx’s analysis make the mistake (deliberate or not) to argue that Marx had two logical analyses, first based on values which had to be transformed into prices.  They say, if you start with ‘inputs’ of labour and means of production measured in values (as they claim Marx does), surely you must convert these values into money prices?  And if you do so, then using simultaneous equations, you find that total values no longer equal total prices and/or total surplus value no longer equals total profit.  That’s because your original inputs in value will also be converted into prices.  Marx’s analysis is thus indeterminate or logically inconsistent.

This is the kernel of the critique first pronounced by Ladislaus von Bortkiewicz in the early 20th century, “the most frequently cited justification for rejecting Marx’s theory over the last century” (Moseley, XII).  This critique was enthusiastically adopted by mainstream economics as finally crushing Marx’s value theory of capitalism.  It was accepted by hosts of Marxist economists like Paul Sweezy and others, many of whom spent many years trying to reconcile Marx’s ‘mistake’ with a theory of capitalism or looking for an alternative interpretations of value theory – a “long 100-year detour”, as Moseley describes it.

The Bortkiewicz-Sweezy ‘standard interpretation’ of Marx’s value theory, as Moseley calls it, was destroyed with a seminal paper by the leading mainstream economist of the post-war period,  Paul Samuelson, the author of the major academic textbook on economics in my days at college.  Samuelson showed that if you started with two systems, one in values in labour time and one in prices, the labour values can be cancelled out and play no determination in the real world of prices.  Prices are then determined by the quantities of things produced and the demand for them (supply and demand).  “In summary, transforming from values to prices can be described as the following procedure, 1) write down the value relations; 2) take an eraser and rub them out; 3) finally write down the price relations – thus completing the transformation process”! (Moseley p 229.)  Samuelson’s sarcastic joke may have buried the ‘standard interpretation,’ but his own mainstream theory of prices was equally irrelevant. What determines whether the price of a car is $20,000 or $2,000? – it’s supply and demand.  But why $20,000 and not $2,000? – well, because the market says it is so (revealed preference of individual consumers).  Brilliant!

But as Moseley says, Samuelson was right about the standard interpretation.  If you interpret Marx to have two systems of capitalism, one based on values (in labour time or physical units) and another on prices, then you have to transform values into prices.  But why bother: values can be cancelled out.  Marx’s value theory then becomes a metaphysical unnecessary like the concept of God.  We can explain all in the universe without God and God explains nothing.

But Moseley takes the reader carefully and thoroughly through all the competing interpretations of Marx’s value and price theory, starting with the standard interpretation as expressed by the theory of Piero Sraffa, an epigone of Ricardo.  He shows not only that Sraffa’s approach of looking at capitalism as the production of commodities by means of commodities’ is being unrealistic to the extreme[4]; it is also nothing to do with Marx’s analysis of capitalism as the process of money capital trying to make more money capital (pp. 230-243).

Sraffa ends up with a theory that implies capitalism can go on producing more things from things without any contradiction or limit – the example of automation (p233) shows that.  Marx’s own theory shows that there is an essential contradiction in capitalism between the production of things and services and the profitability of doing it for private capital.  That contradiction is real, explaining cycles of boom and slump, crises and the eventual demise of capitalism as a system.  Sraffa’s theory implies the universality of capitalism, Marx argues for its specificity.

Moseley then shows that other interpretations (Anwar Shaikh’s iterative way; the ‘New interpretation’; Rethinking Marxism etc.); all fail really to break with the standard interpretation and thus cannot resolve the apparent logical inconsistency (Bortkiewicz) or irrelevance (Samuelson) of Marx’s analysis.

However, it is somewhat different with the temporal single state interpretation (TSSI).  The essential points of the TSSI group of Marxist economists were summed up in another seminal work on Marx’s analysis from Andrew Kliman in 2007, with his book, Reclaiming Marx’s Capital.  Those points were that Marx’s theory is temporal.  Money advanced for means of production and the labour force are the initial capital, in time.  The production of commodities and their sale on the market come later.  So we cannot impute simultaneous equations in the conversion of value into prices, as the standard interpretation and others do.  Second, Marx’s theory is single state.  It is not a question of converting initial inputs (means of production and labour) as values into prices of production in the final commodity.  Capitalist start with money (prices of production) and end up with money (prices of production).  But they end up with a different value or price of production as explained by the exploitation of labour power, with its value ultimately measured in labour time in the whole economy.

The TSSI did provide the breakthrough in refuting the standard interpretation by returning Marx to the logic and reality of a money economy.  Moseley agrees.  However, he has two important disagreements with the TSSI.

First, Moseley reckons that TSSI makes prices of production as short-term movements that change with each production cycle to equalise profitability within sectors.  Moseley reckons that this cannot be right as prices of production are predetermined over the long term by the productivity of labour (new value) and the rate of surplus value in the class struggle (deciding the level of the real wage).  So prices of production only change if productivity and real wages alter.  Prices of individual commodities fluctuate around a ‘centre of gravity’ set by prices of production.  Indeed Moseley argues, that unless his interpretation of prices of production as long term centres of gravity for individual prices is accepted, then the two aggregate equalities (total price = total value and rate of profit = rate of surplus) would not hold over successive production periods, thus defeating the very objective of TSSI.

Second, Moseley disagrees that a temporal interpretation of Marx’s circuit of capital means that the cost price of the advanced money capital (for means of production and the employment of the labour force) is fixed and historic after production has commenced.  Moseley reckons that if the price of equipment and other means of production changes after production starts (as it does), it is still okay to revalue the value of the commodity produced to include the current cost of the means of production not the original cost.  So it is not necessary or correct to use historic cost in the measure of constant capital or in the profitability of capital.

This latter point is very important in any empirical analysis of profitability in modern capitalist economies.  Andrew Kliman’s view is that historic cost measures must be used and anything else is a distortion of Marx’s measure of profitability.  And this makes a difference when we try to measure to the movement in the rate of profit in a major capitalist economy like the US.  Kliman’s measure shows a ‘persistent fall’ in profitability of US capital since 1945 without any significant rise, even during the so-called neo-liberal period from the early 1980s to now.  The current cost measure, on the other hand, shows a trough in the early 1980s and then a significant rise through to the end of the 1990s at least.  Which is right has led to different views on the health of US capitalism, the role of the financial sector and what causes capital investment to change.  However, perhaps the differences between the two measures are overdone because, as Basu shows, over the long term, since 1945, the two measures have tended to converge.

One implication of Moseley’s interpretation of Marx’s analysis as a macro-monetary one that starts with money and finishes with money, is that it is perfectly open to empirical verification. There is a view among some Marxist economists as eminent as Paul Mattick Jr for one, that it is impossible to measure empirically a Marxian rate of profit on capital and use official price data to evaluate trends in modern capitalism.  That is because value cannot be calculated from money prices and Marx’s theory of capitalism is a value theory.  We are left with just recognising that Marx was right because of the very occurrence of exploitation and crises.  This is a bit like saying that we cannot determine the existence of black holes in the universe because their mass is so great and gravity so strong that nothing comes out of them.  So we can only tell they exist because of the wobbles they cause in other objects in space nearby.

But if we interpret Marx’s as a single system, an actual capitalist monetary macro-economy, then it is perfectly possible (with all the caveats of measurement problems and data) to carry out empirical analysis to verify or not Marx’s laws of motion of capitalism.  Indeed, Marx did just that.  In 1873, Marx wrote to Frederick Engels that he had been “racking his brains” for some time about analysing “those graphs in which the movements of prices, discount rates, etc., etc., over the year, etc., are shown in rising and falling zigzags.” Marx thought that by studying those curves he “might be able to determine mathematically the principal laws governing crises.” But he had talked about it with his mathematical consultant, Samuel Moore, who had the opinion that “it cannot be done at present.” Marx resolved “to give it up for the time being.”

Times have moved on and now we have lots more data and better methods of analysing it.  Testing theory and laws with evidence is now the name of the game.  Fred Moseley allows us to do that with confidence that we are testing a logical and consistent theory that is verifiable empirically.

A more substantial review by me of Fred Moseley’s book can be found in Weekly Worker here.

No comments: