Shoot that Beaver Part 3: Clearing Up Confusion About the Labour Theory of Value
‘Im glad you talking about discounts’ It was Fisher.
‘You can calculate the economic depreciation using Sraffa’s formula if you have a rate of return on the machine, which you can do using Hotelling’s maximising method, that way you are calculating the ‘own rate of interest’ on the process to use Sraffa term. Once you know the ‘own rate’ you can then apply that in my Net Present Value formula to discount the value of the goods at the point of sale to the point of capital advanced’
‘Hmm’ Marx was thinking ‘This is a transformation – but a transformation in time – rather it’s a recalculation, of output prices to real input prices.
‘Indeed’ said Fisher ‘And you can also use another of my formulas to calculate the real cost of inflation, this way you have an approach which enables you to calculate viable investments’
‘Yes’ replied Marx ‘some of my followers have applied an approach which recalculate input prices at output price values, The TSS School. The problems is they simply calculate the difference and rub out one set of numbers and write the other in’
‘You’ve been reading Samuelson’ quipped Adam Smith
‘Quite there is no better device to use then you opponents, that’s dialectics for you’
‘What opponents of the recalculation approach say is that business don’t do that – but they do it every day, accountants do it recalculating input prices at anticipated output prices to see if investments are viable, and unlike the TSS school we have had no need of an eraser’
Torrens was intrigued, ‘Of course the big problem with the pure Ricardian approach was time, we had to make all kinds of exceptions for when different processes involved different lengths of time, different turnover, the lifetime of a capital good, because its turnover would be different from the good produced, and the proportion of variable capital and fixed capital because they would have different turnovers’.
‘Yes’ said Marx ‘ I sum these features up in my organic composition of capital’ idea, the ratio between fixed and variable capital in any process, it is the variation of this between processes which account for variance between cost of production and embodied labour values’
‘I can see the direction of your reasoning’ said Ricardo, ‘if we have a means of recalculating all prices so it was if they took place in the same time frame, an instant, as Fisher suggests then those valuation issues go away, we may have an approach which not only applies in a primitive profit free, fixed capital free economy but any economy’
Before we explore that ‘said James Mill ‘id like to explore exactly how you calculate the rate of surplus on a machine, based on the cost of the machine alone or the fixed and variable costs together?
‘Together’ said Sraffa
‘Then you also need to discount variable capital costs including labour inputs’ said James Mill ‘But in a different way, the turnover time is different, and if you don’t employ ‘just in time’ then you need to discount for the time inventory os kept in stock.
‘So’ said Adam Smith ‘ The approach suggested seems to imply a formula, he scratched in the sand
Labour Value=NPV variable capital labour +NPV fixed capital labour
‘Yes’ said Fisher
‘Lets add one small enhancement’ it was Jevons
‘Imagine we don’t have constant returns to scale – that rather we had Adam Smith’s increasing returns or even decreasing returns whatever’
‘Then if a capitalist is considering hiring or firing one units of labour he or she must then consider the marginal contribution of labour, so I would rewrite it.
Marginal Labour Value= NPV variable capital marginal labour +NPV fixed capital marginal labour
‘I shall leave aside marginal consumption issues for a moment as in this simple model we have no ability to gain a premium from scarcity’
‘I always argued that if one considered marginal labour then the marginal theory of value was the same as the labour theory, here we are approaching a proof’
‘Aha so if any marginalists challenge this theory that are also challenging their own theory’ Ricardo was unusually pleased.
‘So in the final analysis’ said James Mill, price is equal to
NPV variable capital marginal labour +NPV fixed capital marginal labour
‘And again’ said Hotelling, you can use my maximising method to determine the maximum rate of surplus
‘So in the final analysis’ asked Fisher, why use a labour theory
‘Because it connects you to objective reality’ replied Ricardo
‘A purely subjective economy does not exist, the economy is about connections between real things, some of which are more scarce than other and take longer to make than others, by using the LTV we can easily calculate labour and this as later economists have stressed enables you to calculate unemployment and effectual demand its joined up, the distinctions between ‘micro and macro’ are irrelevant as ‘political economy’ always claimed’
Babbage sighed he was going to have to do a lot or programming in Victorian Mathcad
‘Ok’ said Adam Smith ‘We have made good progress in our friction free, scarcity free, rent free, profit free world, lets mix things up and see if this approach applies to modern capitalism’
Continued in part 4