# Keen/Ernst Discussion

John R. Ernst ernst at pipeline.com
Thu Oct 26 01:30:06 MDT 1995

```Steve,

You're right old habits do indeed die hard.
Let's see if we can develop some new ones
"should have been" with some modifications.

Initial State  (Period I)
c   +   v   +  s    =     w
\$100  +  \$50  + \$150   =  \$300   (30 units
at \$10ea)
Period II (Case A)

\$200  +  \$50  + \$650  =  \$900     (90 units
at \$10)

To show why I have problems with all this,
let's assume that what we have in Period I
represents the entire economy as does what
we have in Period II. Let's say that in the
initial state the \$50 in wages purchase enough
labor power to add 10 hours of abstract labor
to the constant capital. One hour of abstract
labor thus is represented in \$20 of exchange
value.  Of the \$300 in the output of Period I,
\$200 is invested in constant capital in Period II.
How does Marx discuss the valuation in Period II.
For him, the social value created or added to
the constant capital is \$700.  The individual
value added is still \$100.   Thus, if prices
fell such that the individual value and social
value added were equal, with the given wage we
see that

Period II (Case B)
\$200  +  \$50  + \$150  =  \$300     (90 units
at \$3.33)

Thus, we see a fall in the rate of profit as we
move from Period I to II.  From 100% to 60% !
Can cutting the money wage so that the real wage
is constant save the capitalists from this
disaster?   In Period I, with the \$50 workers
were able to purchase 5 units of the commodity.
If

Period II (Case C)
\$200  +  \$16.65  + \$183.35  =  \$300     (90 units
at \$3.33)

The rate of profit still falls from 100% to about
83%, despite an increase in the rate of surplus
value!

>From here I hear you demanding that I have
forgotten something as I often do.
What?   Yes, indeed, I forgot to revalue the
constant capital inputs of Period II.(Now for the
life a me, I do not know why a post-Keynesian would
want to do such a thing. So maybe I am wrong in
imputing this requirement to your thinking.)

But, here, we are looking at an economy
not at an abstract system in equilibrium.
Nevertheless, let's try it and see what happens.
To assume equilibrium and calculate the
unit value of the commodity,

20 units + \$200 = 90 units
\$200 = 70 units
\$2.86/unit (rounding)

Period II (Case D)

\$57.2  +  \$14.30  + \$185.70  =  \$257.20  (90 units
at\$2.86)

At this point, neo-Ricardians assure us that all is
well since the rate of profit went from 100% in
Period I to almost 260% in Period II.

If \$200 is invested, there is no reason to tell
the poor souls that invested it that they
really did not.  For them the 10 units of the
commodity in Period I's constant capital
and the 20 units of the commodity in Period II's
constant capital are not units of commodities but
capital measured in terms of exchange value,
not things. It's one exercise thing to reduce
variable capital by cutting wages; it's quite
another to tell our capitalists that they  of the \$200
invested in Period II they lost \$200-\$57.2=\$142.8.
What do we make of this mess?

It seems to me that the task of LOV is to explain
the various possibilities or cases and, perhaps,
to develop others as well.  Traversing from Period I
to Period II is, in other words, no easy task.  But
it is precisely such movement that LOV or, any other
theory of economic growth, must seriously consider.
Why don't Marxists take up such topics?   One reason
solving the transformation problem.
Indeed, this issue remains hidden as all too
often Marxists get caught up in trying to prove the
LOV by showing some sort of derivation of a set
of equilibrium prices from equilibrium values.
This task is taken up even though all know
that the number of products in a capitalist
economy far exceeds the number of processes.
Equilibrium is assumed at what price?  The price, to
me, is the very heart of matter -- the motion of the
economy itself.  That is, to derive prices one must
assume the economy is -- at rest.  Thus, apples do not
fall from trees as economists have assumed away
time itself.

Hence my query to you about the significance of
attributing value creating powers to machines is
in good faith.  That is, for Marxists the notion that
labor is the sole value creator is both a starting
point as well as that which must be shown by a theory
of accumulation. We are forced to show the manner in
which the economy moves from Period I to Period I for
all of the above cases as well as those not listed.

Tentative Conclusion

I do not think that looking at the economy in motion,
as I do above, means giving up on the FRP. Indeed,
it's hard to see the relevance of the FRP without
looking at such dynamics.  I do not see the need to
maintain that the value added by a worker in one
period is the same as that in the next period, given
technical change.  Marx himself referred to the oft
neglected idea of social value differing from individual
value.  Thus, I would say that the LOV you want to
toss out should be tossed out, and replaced by one
more consistent with that found in Marx's work --
one that is dynamic, not static.

Mired in Marx (MIM),

John

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