While I have been MIA over the last four years a lot has changed on the internet and in terms of economic and social discourse. The weird infatuation of the alt-right with “globalists” and nonsensical economic arguments is particularly upsetting – and I’ll be discussing how the decline in persuasiveness of economists has helped these types of people fill the void in the future.
My concern four years ago was that the non-rationalist identity politics of the left would open this type of negative nationalistic politics on the right – or would at least be used as a foil for it. The refusal to actually state our assumptions and values is a failure irrespective of the intentions we hold. In that way, when exploring Youtube I’ve been pleasantly surprised by the leftist video blogs – and their willingness to fully articulate their views. Key examples of this are Shaun, Contrapoints, and Philosophy Tube.
However, these channels are distinctly “anti-capitalist” in terms of wanting sizable change in the status quo. I am a mainstream economist that believes in incremental change. A full discussion of this would be interesting – but give me time. But to do so we need to get something clear about the labour theory of value that I am hearing them describe – it doesn’t make sense as a justification for anything let alone as a “theory of value”.
Note: The actual labour theory of value has been defined many ways – and the most profitable Marxian interpretation I’ve seen is trying to understand LTV as part of a subsistance wage argument on factor income shares. That isn’t the focus here.
Here is the theory being used recently on Philosophy Tube [Note: In his Marx video he says there is debate about it … but I was of the impression that Marxists didn’t rely on the specific assumption articulated here, and economists have would not find this particularly useful for description or as having normative significance – after all Joan Robinson did call the whole LTV tautological and a silly verbal game, and she is one of the most historically left leaning people in the economics discipline].
So without labour it does not matter how much capital we have nothing is produced. Therefore all “profit” is generated by labour and is labour value that is extracted by capitalists.
Now that first premise is true isn’t it? Without labour, capital produces nothing! This is indeed an assumption I teach early in stage 1 economics, and the production process in most firms shows this to be very true. Take the example of a lawnmowing business – if we have a lawnmower but no-one to operate it we can’t mow lawns. Furthermore, buying another lawnmower won’t “increase” output, as we still have no-one to actually do it! This is textbook true.
But lets flip the script. Suppose you have hired a bunch of people to work for several hours for your lawnmower business, but:
- You provide them no lawnmower [physical capital – or the tools used by labour which increase their output]
- You provide no fuel for a potential lawnmower [other inputs]
- You provide no information about where lawns need to be mowed [coordination services]
- You have no connection to the demand for lawnmowing services [entreprenuership]
- The labourers have no knowledge or skills that make them able to mow a lawn [human capital]
Well in that case no matter how many people you hire you get no output! Wait a second … does this mean that all the value of production is embedded in one of these other inputs!!! No, no, no.
Could it instead be that all factors of production codetermine output. Furthermore, these factors require a minimum return in order to be supplied, where these rates of return/ prices are termed “profit” and “wages”? Doesn’t this make it a collaborative process rather than extractive? [Protip: It can be both collaborative and extractive – but we need to model why rather than just positing it is 😉 ]
The production process
Production is a process of coordination between factors of production – that is why in macroeconomics we have a firm (the thing that combines factors of production to create output) and households (the group that buys output, but also supplies all the different factors of production to the firm – yes including capital, capital owners are “households”). In macro we refer to these varying incentives (the incentive to supply factors of production to purchase consumption over time, and the incentive to supply output in order to “get profit”).
Yes it is true, labour does not receive the entire surplus from production. But they don’t supply the only factor of production either – so I am uncertain why they should. Production is a joint process which creates surplus value – and this surplus value is then shared according to the bargaining power of participants. Inequity is then a process of insufficient bargaining power – not a natural consequence of private capital.
Much economics treats other factors as fixed and labour as variable. Typical descriptions of the labour theory of value also look at a “fixed production process” such that additions to labour explain the entire addition to output. Furthermore, there is an opportunity cost associated with every single input – labour is sacrificing alternative uses of their time, capital owners could liquidate assets to fund consumption or alternative investments. Each has an opportunity cost, and is undertaking a process that creates surplus value – we need to ask about the relative bargaining power (which then determines the price here, the real wage) in order to ask how this is split.
Or to put it another way, there is a stock of labour and a flow of labour provision (hours of work) which is remunerated with wages, there is a stock of physical and coordination capital and a flow of related business services (the use of capital hours, “effective” entrepreneurial labour by capital owners) which is remunerated through profits. Those utilising capital may need to borrow in some way (selling shares, borrowing from a bank) to put this in place which then changes the allocation of these profits sure – but is still predicated on the provision of this flow of services.
So given that economists often treat the level of capital as if it is fixed and provided in the moment (a similar assumption to the one we make for land – and one that is not necessarily appropriate in many instances), if we want a theory of price determination looking at the “labour embodied in a production process” appeared to be a way to get there. This Ricardian view wasn’t saying that labour was solely responsible for production – this is a semantic point that gets lost!
In the end this left some problems though – why is a painting that ages with no additional labour input more expensive than when it was initially painted? The solution to this appeared to be adding “use value” which in turn begs the question why is water free while diamonds are so expensive? In the end marginalism, with price set in relation to the marginal cost of production and the marginal use value/utility of consumption solved both of these! With labour is often treated as the variable factor, the marginal cost is often stated as the marginal cost of labour – and thereby wages being set relative to the marginal product of labour became a description for labour markets as well.
We can go too far with this as well. We may say that any urge to change this “natural” wage by increasing labour’s bargaining power will reduce employment and output/surplus value in the industry. Of course this ignores two things (assuming it is descriptively accurate of firm-employee behaviour in the long-run):
- There can be bargaining power the other way – monopsony matters.
- Just because this describes prices doesn’t tell us that labour is receiving their contribution to the process [we might think of this in terms of the average product of labour IF we could define a portion of production that is attributable to labour]
That last bit makes the issue of distribution bloody difficult – and the idea that we can rely on marginal products for considering a fair income distribution is NOT mainstream economics.
At this point the relation between this and income shares must become sort of clear – so let me just point out the posts we’ve done on classical, Marxian, Neo-classical, Marshallian, Post-Keynesian, Neo-Ricardian, and General Equilibrium factor shares here. Given the complication of discussing such shares I note:
It is for this reason I strictly favour analysis of household level data for discussing points on distribution, rather than analysis of factor shares. If I was to build up larger “groups” than households to discuss, I can tie them together on shared characteristics in this framework – compared to the arbitrary and loaded combinations of “parts of individuals” that occur with factor work.
A big point here is also prices in goods markets. If returns to labour AND capital are equal to their opportunity cost then we know that prices will be set in a way that “maximises surplus” from the production process. This is nice. Now if that process leads to very low labour income WHEN those things are occurring, the implied labour value must be low in that process – that is fine. This doesn’t need to imply that incomes must be low – instead it describes a specific income generating process, and would suggest to many people that we should find a way of supporting individuals with a low opportunity to earn income.
Now, if we were in a situation where labour and capital were only earning their opportunity cost I doubt the return to most labour would be that low – but there would be industries, and individuals with issues that limit their income earning capabilities, where that may be the case. I think, perhaps, the focus can then be on:
- Competition in goods markets
- Competition in factor markets (specifically labour markets)
- The opportunities and income adequacy of the worst off.
There are a lot of clear functional injustices in these places – why do we need to use a nonsensical “theory of value” to complain about the return to labour?
Left Youtube seems to view the idea that “all surplus is generated by labour” as true – and by association “all surplus should go to labour”. They term this the “labour theory of value” and use it in a normative sense. However, it makes no sense to use the labour theory this way, especially once we start thinking about other factors of production and how they are chosen.
The reason this narrative is used is because they seem to disagree with the idea of private capital, and they want to see fundamental injustices as due to the private nature of capital. However, applying a standard supply-demand framework allows us to see that there is potential for piles of injustices out there that have nothing to do with the ownership structure of capital – instead there are clear power imbalances, power imbalances that can be identified and “solved” if they exist.
There is no need to dismantle current ownership and governmental structures – but there is need to think about fairness and distribution more clearly using the economics tools we already have 😉