# Keen/Ernst Discussion

John R. Ernst ernst at pipeline.com
Mon Oct 23 01:11:45 MDT 1995

```Steve,

All the material you sent me under separate cover
remains unread. Indeed, some of it needs some
cleaning as strange symbols appear hear and
there.  At any rate, here goes.

_____________

Without continuing to delve into the same example,
let me see if I can state the issue by using some
simpler numbers. Should I depart from the
assumptions of the original example in a significant
way, I will, hopefully, not only see it
but also acknowledge it.

At first a change in technique, requires greater
investment in constant capital on the part of
the innovating capitalist. This greater investment
results in greater output.

Let's start with a capital of \$150, with \$100 in
constant capital, and \$50 in variable capital.
This capital produces 10 cartons of cigarettes that
sell for \$20 each or \$200.

Initial State  (Period I)
c   +   v   +  s    =     w
\$100  +  \$50  + \$50   =  \$200

Now let's assume that by doubling the investment in
constant capital, out cigarette producer is able to
triple his output. (Note the degree to which the
increase in investment  brings about an increase
in output is in keeping with the spirit
of this example; but it does differ from Marx's
example in Chapter 12 of the Book I of CAPITAL where
a doubling of constant capital invested brings about
a doubling of output.)

Period II
\$200  +  \$50  + \$150  =  \$400

Unlike Marx of CAPITAL, we assume no immediate price
decrease in the price of cigarettes.  How does Marx
explain the extra \$100 in profit or surplus value.  For
him, the social value created is greater than the
individual value.  The rate of surplus value(s/v)
increases from 100% to 300%. Unless we assume price
decreases, little more can be said.  Cigarettes are
selling at their social value and above their individual
value.   Now the question becomes what if the cigarettes
sold at their individual value, say in the next period.
If we assume, the nominal wage remains the same.

Period III
\$200 +   \$50 + \$50 =  \$300

Cigarettes now sell for \$15 a carton.  Note that with
this constant rate of surplus value the profit rate,
s/(c+v) falls from an initial 33.33% to 25%.  And there
you have it, the falling rate of profit proved at last.
(Smile)

Seriously, why is this questioned?  First, we've not said
how the prices of inputs (c and v) are affected by this
price decrease as well as by others taking place at the
same time.  Second, Marx himself assumed that this type of
innovation would bring about increases in the ratio of
s/v even in what we call period 3.  But what really
lacks is any kind of dynamic treatment of technical
change that shows how the value of the outputs of one
period are treated as the value of the inputs of the
next period.  Unless we presume that everyone lives on
cigarettes and uses them to produce more cigarettes
that cannot be done in this example.  It cannot be
done with the sheets in Marx's example from the
GRUNDRISSE either.   So what this example really show?
For Marx's treatment of technical change and
the falling rate of profit to be taken seriously, one
needs to develop such models.  Here I'll simply suggest
looking at the work of what someone has called the
New Orthodox Marxists (NOM) -- Kliman, Freeman, et al.

Yet there are still issues between Steve and me.

1.  What is the point, Steve, of assigning the
extra value produced when the social value
is above the individual value to the machine?
When the prices fall, does the machine cease
to produce value? Or, does the worker create
less value in a day then before so that the
machine can still be seen as a creator of
value?

2.  By giving the machines the power to create value
it would seem that you loose a rather powerful
analytical tool -- Marx's "dynamic" concept of
value.  That is, what Marx is able to do is
analyze an economy in time.  Each period is
connected to the next even if there is technical
change.  Periods can be compared and their origins
taken into account.  Unlike the neo-Ricardians,
Marx does not use an eraser as he moves from one
period of production to the next.  Here I am
suggesting that the NOM approach be taken seriously
lest in dealing with Marx we read him only through
the eyes of neo-Ricardians who have dominated the
field all too long.

____________________

Those seem to me to be the major issues.  Note well,
I am not saying Steve is a neo-Ricardians; rather I am
asking how his approach to value can capture a really
dynamic economy -- where technical change is more or
less continuous.  Indeed, Steve has oft remarked that
he, like other post-Keynesians, is not a neo-Ricardians;
thus, my question is serious.  On the other hand, I
think that many of his criticisms of Marx's FRP assume
that Marx is a neo-Ricardians (perhaps, even a minor
post-Ricardians(smile)).  What we really need to see
is how your way of defining value helps
the analysis of a dynamic economy.  Without that, our
differences appear scholastic.

Steve, the issues between us will not easily go
away; but we have only begun the process of convincing
you of the deviant way in which you have been
reading Marx.(another smile).

Cheers,

John

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