[Sivad]

Power theory of value

Nitzan and Bichler argue that it was never possible to separate economics from politics. This separation is required to allow for neoclassical economics to base their theory on utility value and for Marxists to base the labour theory of value on quantified abstract labour. Instead of a utility theory of value (like neoclassical economics) or a labour theory of value (as found in Marxist economics), Nitzan and Bichler propose a "power theory of value". The structure of prices has little to do with the so-called "material" sphere of production and consumption. The quantification of power in prices is not the consequence of external laws—whether natural or historical—but entirely internal to society.

In capitalism, power is the governing principle as rooted in the centrality of private ownership. Private ownership is wholly and only an act of institutionalized exclusion, and institutionalized exclusion is a matter of organized power.[1] And since the power behind private ownership is denominated in prices, Nitzan and Bichler argue, there is a need for a power theory of value. There is, however, a causality dilemma to their argument that has drawn criticism: power is based on the ability of firms to set monopoly prices yet the ability to set prices is based on firms possessing a degree of power in the market.

Capitalization, in their theory, is a measure of power, as illuminated through the present discounted value of future earnings (while also taking into account hype and risk). This formula is basic to finance which is the overarching logic of capitalism. The logic is also inherently differential as every capitalist strives to accumulate greater earnings than their competitors (but not profit maximization). Nitzan and Bichler label this process differential accumulation. In order to have a power theory of value there needs to be differential accumulation where some owners' rate of growth of capitalization is faster than the average pace of capitalization.

Capital as Power: A study of order and creorder
Conventional theories of capitalism are mired in a deep crisis: after centuries of debate, they are still unable to tell us what capital is. Liberals and Marxists both think of capital as an 'economic' entity that they count in universal units of ‘utils’ or 'abstract labour', respectively. But these units are totally fictitious. Nobody has ever been able to observe or measure them, and for a good reason: they don’t exist. Since liberalism and Marxism depend on these non-existing units, their theories hang in suspension. They cannot explain the process that matters most – the accumulation of capital.

This book offers a radical alternative. According to the authors, capital is not a narrow economic entity, but a symbolic quantification of power. It has little to do with utility or abstract labour, and it extends far beyond machines and production lines. Capital, the authors claim, represents the organized power of dominant capital groups to reshape – or creorder – their society.

Written in simple language, accessible to lay readers and experts alike, the book develops a novel political economy. It takes the reader through the history, assumptions and limitations of mainstream economics and its associated theories of politics. It examines the evolution of Marxist thinking on accumulation and the state. And it articulates an innovative theory of 'capital as power' and a new history of the 'capitalist mode of power'.

[Steve_American]

I can't buy books, so I can't be persuaded by their arguments.
However, as an MMTer I would have liked if they had argued against MMT's assumptions also.
It sounds like they ignored MMT. [=Modern Monetary Theory]

[Sivad]

However, as an MMTer I would have liked if they had argued against MMT's assumptions also.
It sounds like they ignored MMT. [=Modern Monetary Theory]

I'm not sure that MMT has a specific theory of value? I thought it was just a fiscal theory?

[Steve_American]

I'm not sure that MMT has a specific theory of value? I thought it was just a fiscal theory?

Well, all economic theories need to have a definition of value and of capital.
Is capital the factories or is capital the money you need to build new factories? Or both?
I'm just a layman MMTer, so I don't know.

[Rugoz]

Conventional theories of capitalism are mired in a deep crisis: after centuries of debate, they are still unable to tell us what capital is.

What?

Liberals and Marxists both think of capital as an 'economic' entity that they count in universal units of ‘utils’ or 'abstract labour', respectively.

Capital isn't measured in 'utils'.

But these units are totally fictitious. Nobody has ever been able to observe or measure them, and for a good reason: they don’t exist.

'Utils' don't have to be measured. Utility as a function of consumption, leisure etc. is assumed have a certain (intuitive) properties, like decreasing returns. As for 'abstract labor', I cannot be bothered with Marxist terminology right now, I leave it to Marxists to come up with a defense.

They cannot explain the process that matters most – the accumulation of capital.

Sure they can. Maybe he's referring to the aggregation problem, but that has per se nothing to do with the process of accumulation.

[Truth To Power]

Well, all economic theories need to have a definition of value and of capital.

And economics will remain theory until there is one definition per term.

Is capital the factories or is capital the money you need to build new factories? Or both?

The classicals said factories and other products of labor devoted to production. Accounting says assets devoted to obtaining income. Neoclassicals say anything that can be appropriated. Piketty went to the extreme, and said all assets.

I'm just a layman MMTer, so I don't know.

Nobody does.

[Rugoz]

And economics will remain theory until there is one definition per term.

The classicals said factories and other products of labor devoted to production. Accounting says assets devoted to obtaining income. Neoclassicals say anything that can be appropriated. Piketty went to the extreme, and said all assets.

Nobody does.

Why should there be "one defintion" just because people are too lazy to put a qualifier in front of the word? If you mean the value of capital, call it financial capital or wealth, or whatever stand for capital measured in prices. Otherwise, call it productive capital or technical capital, or whatever stands for capital measured in quantities.

[Truth To Power]

Why should there be "one defintion" just because people are too lazy to put a qualifier in front of the word?

Because science cannot progress unless people can communicate, replicate and confirm each other's observations. That is not possible if they use different defintions to describe the phenomena they observe.

If you mean the value of capital, call it financial capital or wealth, or whatever stand for capital measured in prices.

Value is measured in money, but that is not the issue. The issue is as identified above: what COUNTS as capital?

Otherwise, call it productive capital or technical capital, or whatever stands for capital measured in quantities.

We can only measure it by value in money; the problem is aggregation.

[Sivad]

Dean Baker gives me the courage, in his recent post on Pikkety, to reiterate a statement I’ve made some few times in the past:

Economists have no coherent or consistent idea of what they’re talking about when they use the word “capital.”

They lump together real capital — fixed, human, organizational, whatever — with “financial capital,” an oxymoron that confutes actual productive stuff with financial claims on that stuff.

Dean (emphasis mine):

This relates to the Cambridge controversies since the Cambridge U.K. people argued that the idea of an aggregate production function did not make sense. They pointed out that there was no way to aggregate different types of capital independent of the rate of return. The equilibirum price of any capital good depended on the rate of return. Therefore we can’t tell a simple story about how the rate of return will change as we get more capital, since we can’t even say what is more capital independent of the rate of return.

The takeaway from this, or at least my takeaway, is that we don’t have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn’t make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit.

So it’s not just Steve Roth, internet econocrank, making this wild-eyed claim. You’ll find similar in Jamie Galbraith’s review of Pikkety. (His opening line? “What is capital?”), and I would suggest that every other review you’ve read wallows in the same quagmire of non- or multiple-definition.

As does Pikkety, unfortunately. He explicitly defines capital as being synonymous with wealth, which is a very tricky and messy conceptual proposition indeed. That does not obviate his work’s incredible value, but he should have called his book Wealth in the 21st Century.

“Capital” means, should mean, real, productive assets: real inputs to production that require real resources to produce, and that are consumed over time (through use, decay, obsolescence, and death). There’s the obvious “fixed capital” as tallied in the national accounts (broken out as structures, equipment (hardware), and software) and there’s all that other real capital that arguably constitute the great bulk of real capital, but that is so deucedly hard to measure — skills, knowledge, ideas, organizational structures and processes, human ability, etc. Then there’s all the tricky stuff that sits on the borderline between real assets and financial assets (thing which have exchange value but cannot be, are not, consumed): land, art and collectibles, etc.

“Financial capital” — all the financial assets out there, embodying all the “money” out there — is, roughly, all the outstanding claims on that real capital, or on the future production from that capital. Financial assets are not inputs to production (though they can be exchanged for such inputs), and they cannot be, are not, consumed.

The stock of financial assets can increase in several ways. 1. A sovereign currency issuer can deficit-spend. 2. A bank can print new money for lending ex nihilo (with the help of borrowers who want to monetize their real assets; think: student loans). 3. The market can decide that the real assets out there are worth more than the outstanding claims against them, and bid up financial-asset prices. Voila, more money, more financial assets, more so-called “financial capital.”

All of this points to the fundamental problem in economic thinking that Dean states so clearly: you can’t lump together, or really even measure, real capital in dollar terms. You certainly can’t just add together the value of real capital and the value of financial capital, which constitutes claims on that real capital.

And: The outstanding value of financial assets/”capital” is not any kind of reliable representation of the value of outstanding real capital. It’s all over the map, depending on how much of that real capital has been monetized/indebted/financialized (via private and public debt and money issuances), and based on the current state of investors’ “animal spirits” — their beliefs about future returns to that financial capital.

A minor aside: The whole “reswitching” business in the Cambridge Capital Controversy is just a carefully explicated special case, or example, of the fundamental confusion that the U.K. gang pointed out (and that Samuelson admitted to): the value of capital is a function of its future returns, and future returns are a function of the value of capital. Economics is based on a circular definition.

Or in Dean’s words, “The theoretical concept doesn’t make sense.” (This is some significant relief to me, because after more a decade of really struggling to make it make sense to me, it still doesn’t make sense to me.)

Cambridge capital controversy

[Truth To Power]

https://www.youtube.com/watch?v=M6ouCSnUT8Q

Capital as Power: A study of order and creorder
Conventional theories of capitalism are mired in a deep crisis: after centuries of debate, they are still unable to tell us what capital is. Liberals and Marxists both think of capital as an 'economic' entity that they count in universal units of ‘utils’ or 'abstract labour', respectively. But these units are totally fictitious. Nobody has ever been able to observe or measure them, and for a good reason: they don’t exist. Since liberalism and Marxism depend on these non-existing units, their theories hang in suspension. They cannot explain the process that matters most – the accumulation of capital.

This book offers a radical alternative. According to the authors, capital is not a narrow economic entity, but a symbolic quantification of power. It has little to do with utility or abstract labour, and it extends far beyond machines and production lines. Capital, the authors claim, represents the organized power of dominant capital groups to reshape – or creorder – their society.

Written in simple language, accessible to lay readers and experts alike, the book develops a novel political economy. It takes the reader through the history, assumptions and limitations of mainstream economics and its associated theories of politics. It examines the evolution of Marxist thinking on accumulation and the state. And it articulates an innovative theory of 'capital as power' and a new history of the 'capitalist mode of power'.

This theory appears to be almost pure bull$#!+.

Economics is based on a circular definition.

More accurately, neoclassical (mainstream) economics is. But neoclassical economics is not an empirical science. It is an ideological rationalization of privilege.

[Sivad]

This theory appears to be almost pure bull$#!+.

Maybe, but only a dipshit would take your word for it.

[Rugoz]

Value is measured in money, but that is not the issue. The issue is as identified above: what COUNTS as capital?

We can only measure it by value in money; the problem is aggregation.

It's easy in a one-commodity world. For example shovels plus labor hours give holes in the ground. Capital here is simply the number of shovels. It's arguably still possible to create an aggregate if you have different vintages of shovels, some of better quality than others (shovels measured in efficiency units). It gets nasty once you have heterogenous capital goods. The conditions for creating a capital aggregate in that case are generally not given, so the question is whether it's possible to create an aggregate that is a good enough approximation.

It turns out that the value of capital might just be a good enough approximation to be used in production functions. Samuelson called it a surrogate production function. Basically in the absence of reswitching and reverse capital deepening it's possible to represent the factor price frontier with a neoclassical production function with the usual properties, with capital entering in value terms ("jelly capital"). All assuming competitive markets and constant returns of course.

There's still work done on this stuff. E.g. Schefold shows that wage curves of large random input-output matrices become quasi-linear (i.e. reswitching and reverse capital deepening become rare). If it helps, I'm somewhat lost in the paper too.

It's kind of annoying that this stuff isn't part of the standard curriculum at universities (at least not where I was). IMO it's one of the two major issues with mainstream macro theory, the other one being the question of the stability of the equilibrium (unrelated to capital theory), e.g. Saari showed that any price adjustment process that always converges to an equilibrium has essentially infinite information requirements.

[Truth To Power]

It's easy in a one-commodity world.

Or numerous other neoclassical dream worlds that bear no discernible resemblance to reality.

It gets nasty once you have heterogenous capital goods. The conditions for creating a capital aggregate in that case are generally not given, so the question is whether it's possible to create an aggregate that is a good enough approximation.

More importantly, HOW it's possible.

It turns out that the value of capital might just be a good enough approximation to be used in production functions.

Capital defined how?

Samuelson called it a surrogate production function. Basically in the absence of reswitching and reverse capital deepening it's possible to represent the factor price frontier with a neoclassical production function with the usual properties, with capital entering in value terms ("jelly capital"). All assuming competitive markets and constant returns of course.

IOW, factors neoclassical economics calls capital can't be included as capital because they are circular: their measured value depends on their return, and their return depends on their value.

There's still work done on this stuff. E.g. Schefold shows that wage curves of large random input-output matrices become quasi-linear (i.e. reswitching and reverse capital deepening become rare). If it helps, I'm somewhat lost in the paper too.

You are lost because it is an artificial epistemological labyrinth, not empirical science.

It's kind of annoying that this stuff isn't part of the standard curriculum at universities (at least not where I was).

No, what's annoying is that it IS part of the standard economics curriculum, but is wildly wrong.

IMO it's one of the two major issues with mainstream macro theory, the other one being the question of the stability of the equilibrium (unrelated to capital theory), e.g. Saari showed that any price adjustment process that always converges to an equilibrium has essentially infinite information requirements.

Equilibrium has the same role in neoclassical economics that circular orbits had in pre-Keplerian planetary astronomy: a false and irrelevant idealized assumption of only theoretical interest, which when applied to actual empirical observations just leads farther and farther from the truth.

[Rugoz]

Capital defined how?

Capital goods weighted by their prices, which corresponds to the balance sheet value.

IOW, factors neoclassical economics calls capital can't be included as capital because they are circular: their measured value depends on their return, and their return depends on their value.

What matters is that the interest rate and the marginal product coincide, which they do on the factor price frontier (under the assumptions previously mentioned). If you want to endogenize the interest rate, you have to add a capital market anyway (or anything else).

You are lost because it is an artificial epistemological labyrinth, not empirical science.

It's a theoretical paper, though it mentions empirical results as well. I'm somewhat lost because I'm not familiar with this type of analysis. I have a basic understanding of input-output models and the factor price fontier though.

These two papers are a better start:
http://theme.univ-paris1.fr/M1/hpe/HPEM1-TD7.pdf
http://www.centrosraffa.org/public/6c38 ... 468eec.pdf

Equilibrium has the same role in neoclassical economics that circular orbits had in pre-Keplerian planetary astronomy: a false and irrelevant idealized assumption of only theoretical interest, which when applied to actual empirical observations just leads farther and farther from the truth.

The concept of equilibrum makes sense when thinking of an economic system, and obviously classical economists used it as well.

[Truth To Power]

Capital goods weighted by their prices, which corresponds to the balance sheet value.

So products devoted to production. That makes sense.

What matters is that the interest rate and the marginal product coincide, which they do on the factor price frontier (under the assumptions previously mentioned).

But the assumptions are false.

If you want to endogenize the interest rate, you have to add a capital market anyway (or anything else).

There is no reason to EXPECT interest rates to match marginal product, because interest rates are the fee for temporary use of another's purchasing power, not the contribution by capital goods.

The concept of equilibrum makes sense when thinking of an economic system, and obviously classical economists used it as well.

Circular orbits also make sense, and were used by classical astronomers. They just don't describe the actual movement of ANY astronomical bodies, and were a distraction that blocked understanding of the truth. Similarly, equilibrium does not describe the condition of ANY actual market, and is only a distraction that blocks understanding of the truth: the behavior of ACTUAL markets might be described by differential equations, but never by a solution of simultaneous equations.