Perelman on qualitiative versus quantitative value theory narratives

["Mark Jones" <jones118@xxxxxxxxxxx>]

[Michael's message may be subliminal but it is important. Mark]

Marx, Devalorization, and the Theory of Value

Michael Perelman

Marx, Devalorization, and the Theory of Value
Introduction
I am offering yet another reinterpretation of Marx's value theory. Although
this value theory does not easily lend itself to algebraic or statistical
modeling, the approach that I propose has the advantage of providing a
closer link between Marx's crises theory and his theory of value.
The core of this article concerns the treatment of constant capital in
Marx's value theory. All quantitative treatments of Marxian value theory
must find a way to measure the transfer of value from constant capital to
the final products. Although the expanding literature on the solutions to
Marx's so-called transformation problem has worked on this problem, none to
my knowledge has satisfactorily come to grips with the impossibility of
correctly measuring this transfer of value.

An Alternative Approach

Let us begin at the beginning. In the first volume of Capital, Marx analyzed
commodities at their most abstract level. We might refer to the quantitative
value theory that Marx presented there as a presentation of "simple value,"
to indicate an affinity with simple reproduction or the most simplistic
version of Marx's model of expanded reproduction.
Keep in mind that both simple reproduction and expanded reproduction were
merely analytical devices, neither a full description of reality nor a
formal model. Nonetheless, neither simple nor expanded reproduction is
entirely without interest.

Both simple reproduction and simple value theory represented a significant
theoretical advance over classical economics. For example, Marx's
reproduction schemes laid the foundation for a more concrete investigation
of a dynamic economy in the sense that they illustrate the difficulty of
establishing the right proportions among sectors of the economy. In effect,
Marx proposed an anti-equilibrium theory, which demonstrates that, unless
certain unlikely conditions are met, the economy can experience a
disproportionality crisis, similar, in some respects to the Harrod-Domar
model. Had he gone no further, Marx might be remembered today as an
interesting economist, but perhaps not much more.

Both simple value theory and simple reproduction presume either a static or
at least, a proportionately expanding economy, implying that all
relationships retain all aspects of their initial structure, including
relative prices. Nobody would argue that Marx's schemes of simple
reproduction were a realistic model of the economy, but only a conceptual
device that demonstrated the weak foundations of the sort theory that Say's
Law represented.

Neither simple value theory nor simple reproduction was a mere mental
exercise. Marx used both to analyze the contradictory nature of capitalism.
Despite their indisputable importance in this regard, both simple
reproduction and simple value theory are inadequate for a more concrete
level of analysis.

The limits of simple reproduction theory are easier to recognize than those
of simple value theory. To acknowledge the limits of simple value theory
does not minimize the analytical importance of this concept, any more than
the unrealistic assumptions underlying simple reproduction theory invalidate
the insights that the reproduction schemes provided.

Although Marx developed enormous insights from simple value theory in the
first volume of Capital, simple values are inadequate for analyzing the
dynamic economy that Marx analyzed in the later volumes. Certainly, Marx was
interested in the dynamic nature of the economy. He saw himself as breaking
new ground by realizing, "Capital ... can be understood only as a motion,
not as a thing at rest" (Marx 1967; 2, p. 105). Before he could begin his
dynamical analysis, Marx had to move beyond simple value analysis.
Of course, Marx had already moved away from simple value theory, even before
he began his dynamic analysis. For example, he allowed for deviations due to
different organic compositions of capital, although he considered that
modification to be minor.
To sum up the argument to this point, most of the literature on Marx accepts
the assertion that Marx's general method was to begin with a very abstract
analytical approach, which he would progressively modify as he applied his
theory to more concrete levels of analysis. Value theory is a case in point.
Marx continually developed his value theory as he moved to more concrete
levels of analysis. This value theory was not a formal model to be used to
derive a mathematical rule for establishing prices, but rather a way of
understanding the laws of motion of capital.

Capital Valuation and Technical Change

Depreciation Rules and Simple Value Theory
Let us look at how Marx developed his more concrete concept of value. We all
know that unsophisticated critics have charged that Marx suddenly discarded
value theory in mid-course once he realized that he left something out of
his original analysis of value theory.
Nothing of the sort ever happened. Disregarding the debates over whether
value should be interpreted as a monetary expression of value or not, value
theory and price theory operate on different levels of abstraction. From my
perspective, each serves a different purpose. The more abstract theory can
reveal aspects of the economy that more concrete levels of analysis would
obscure. Marx's application of value theory analysis to the wage form stands
as the classic case. Price theory hides the nature of exploitation. Simple
value theory makes it transparent.
Remember that in simple value theory, value depends on the direct and
indirect labor embodied in the commodity. This indirect labor represents
labor, which was previously deposited in capital goods and which gradually
becomes re-embodied in the finished commodities.
This transfer of value from capital goods to finished commodities is as
unobservable as the process whereby labor values are abstracted. The
question of abstract labor is instructive in pointing out some of the
difficulties of quantitative marxian theory.
How can labor values be measured in terms of abstract labor? Many readers of
Marx have long understood that the process of abstraction of labor defies
quantification. Faced with the challenge of quantifying the abstract labor
process, we are left with two choices. Either we can measure the total
amount of labor hours (presuming that each hour contains the same quantity
of abstract labor) or we can weight each hour by the appropriate wage rate.
The first choice is obviously wrong, since it rules out the process of
abstraction altogether. The second choice involves circular reasoning. It
suggests that we have to use the price system to get a handle on the value
system, which was supposed to allow us to go beyond the price system in the
first place.
Either approach makes quantification questionable, if not impossible. We
will soon see that even more difficult hurdles stand in the way of
quantification when we address the movement from simple value theory toward
a more concrete form of value theory.
This analysis will be worth the effort since it throws light on some
qualitative aspects of Marx's value theory that have not been properly
appreciated. It also provides some guidance to those who want to pursue
quantitative Marxian analysis.
At this point, we can extend Marx's famous hint, that there is nothing
simple about a commodity, to the value of a commodity (see Schwartz 1977).
In the same vein, value theory is not as simple as it seems.
According to simple value theory, capital goods unrealistically depreciate
according to predetermined patterns, just as they do in neo-classical
production theory. If a tool is to be used over a fixed period of time with
a known pattern of intensity, we can develop a rule to measure the rate at
which the labor embodied in the tool is deposited in the flow of
commodities. To argue for the realism of such conditions is tantamount to
proposing some sort of "rational marxian expectations."
Once we go beyond the analysis of semi-static, expanded reproduction, how
could we make the theory operational? We would require knowledge about
future economic conditions before we can calculate the amount of abstract
labor transferred from constant capital to the final commodity. For example,
if unpredictable technical change can make a tool obsolete in the near
future, how do we develop an appropriate rule to allocate the transfer of
value from the tool to the final product? In short, without a proper rule
for determining the rate at which abstract labor is deposited in
commodities, precise measurement and quantification of value is impossible.
The absence of such a rule does not present a problem if the primary
objective of simple value theory is the qualitative information that it
provides, as in the case of Marx's analysis of the wage form. Unfortunately,
most of the literature on value theory treats values as if they are simple
quantitative values, assuming that they do not stand in need of any
modification to take account of more concrete analysis. I will attempt to
show why that interpretation prevents us from taking advantage of the full
power of Marx's analysis.
Toward a More Concrete Theory of Value: Reproduction Values
Marx did not always take pains to give us much guidance in following his
methodology. He placed many of his valuable analytical signposts in prefaces
and postfaces of his work or even letters or notebooks rather than in the
actual body of Capital. In the case of process of continual modification of
his value theory, Marx left little doubt about the importance that he placed
on the subject, although he never established its methodological importance.
The most crucial step in his elaboration of the value theory is the shift
from value as a measure of the sum of the actual labor values used to
produce a commodity in the past to a new definition of value as the amount
of labor that would be required to reproduce the commodity today. In his
words:
[The] value [of a unit of capital] is no longer determined by the necessary
labour-time actually objectified in it, but by the labour-time necessary
either to reproduce it or the better machine .... When the machinery is
first introduced into a particular branch of production, new methods of
reproducing it more cheaply follow blow upon blow. [Marx 1977, p. 528]
Reproduction value differs from simple value in one important respect:
simple values are objective values (presuming that we can measure the
previous inputs of abstract labor). In the case of simple values, we treat
the lifetime of the capital goods as given in advance. If a machine lasts
ten years, we can assume that 1/10 of its value is transferred to the
commodities produced in a given year. Each commodity that the machine
produces will account for a portion of that total value. Consequently, to
calculate the value of a commodity, we merely have to take the sum of the
direct labor input and the amount of value transferred to the commodity.
In the case of reproduction values, quantitative measurement of value is
more difficult. We could even say that it is subjective since capitalists
cannot know in advance what will happen to the cost of reproducing their
machines once they purchase them.
Marx understood that these considerations were important. He was certain
that, once produced, machines typically undergo dramatic revolutions in
reproduction values. He went so far as to insist that new technology
destroys capital values so rapidly that no factory ever covers its original
production costs (Perelman 1987, Ch. 4; see Marx to Engels on 14 August
1851, in Marx and Engels 1982, p. 424; Marx 1967, III, p. 114; and Marx
1963, p. 65; Marx to Engels, 19 November 1869; in Marx and Engels 1942, p.
270). Marx observed:
The value of machinery, etc., falls ... because it can be reproduced more
cheaply. This is one of the reasons why large enterprises frequently do not
flourish until they pass into other hands, i.e., after their first
proprietors have been bankrupted, and their successors, who buy them
cheaply, therefore begin from the outset with a smaller outlay of capital.
[Marx 1967; 3, p. 114]
Marx cited Babbage's example of frames for making patent net that initially
sold for twelve hundred pounds. They cost only sixty pounds a few years
later (Marx 1977, p. 528; Babbage 1835, p. 286 and 214; see also Baumol and
Willig 1981; and Gaskell 1833, p. 43; cited in Alberro and Persky 1981).
Babbage claimed, "the improvements succeeded each other so rapidly that
machines which had never been finished were abandoned in the hands of their
makers, because new improvements had superseded their utility" (Babbage
1835, p. 286).
Babbage's rule of thumb was that the cost of an original machine was roughly
five times the cost of a duplicate (Babbage 1835, p. 266). According to
Babbage's estimates, one hour of labor embodied in patent nets that were
only a few years old would be equivalent to three minutes of direct labor
embodied in a new machine.
To the extent that Babbage's example was typical, quantitative measurement
of values would be difficult, if not impossible. Reproduction costs shift in
unpredictable patterns. Because we cannot predict what future technologies
will be available at any given time in the future, we have no way of knowing
in advance how long a particular capital good will be used before it will be
replaced. A machine that lasts 20 years would presumably transfer value to
the output at a different rate from a machine that would be expected to last
only a single year.
Because we cannot see into the future, we can only retrospectively calculate
the appropriate amount of value transferred from the constant capital. In
other words, some time in the future after the equipment used in the
production process had been used up we could calculate the values of goods
produced today. We cannot calculate the values of goods produced today,
because knowing the appropriate values of the constant capital being
transferred today is impossible without advanced knowledge of future
reproduction values.
Alternatively, we could calculate the value of goods based on capitalists'
estimates of future depreciation patterns. Once we embark on the path of
taking subject estimates of future depreciation into consideration, we open
a new can of worms.
To begin with, we have no way of knowing the capitalists' subjective
opinions. In addition, Marx's assertion about bankruptcies suggests that
these subjective opinions are grossly mistaken.
Although replacing simple values with reproduction values makes quantitative
analysis more difficult, I want to demonstrate that the qualitative insights
of reproduction value theory make Marx's analysis of business cycle theory
more powerful than any analysis based on simple value theory.
Parenthetically, let me mention here that reproduction values can also
increase, especially if capitalism creates environmental destruction, which
makes reproduction more difficult. Here again reproduction value theory
offers deeper insights into that relationship between the resource base and
economic conditions. I have treated this matter elsewhere (Perelman 1987,
Chapter 2). Now I want to concentrate on Marx's analysis of how reproduction
values change and how, in the short run, the market allows prices to deviate
from reproduction values.
A Qualitative Crisis Theory
An Application of Qualitative Crisis Theory
The analysis of the depression of the late 19th century provides an
excellent application of the sort of qualitative value theory that I am
suggesting. For example, the 1880s were the most rapid decade of economic
growth in the post Civil War period, measured by per capital growth of
reproducible tangible wealth, amount of savings, investment funds and growth
of per capita income (Sklar 1988, p. 44; and Friedman and Schwartz 1963, pp.
92-3). At the time, industry in the United States was rapidly introducing
new technologies. Between 1869-89, the average factory doubled in size and
capital invested per manufacturing worker grew from $700 to $2000 (O'Brien
1988; and Jensen 1993, p. 834).
You might expect that capital profited from a general prosperity during this
period. In fact profits suffered.
This new technology forced owners of outdated plant and equipment to adopt
one of three options. First, they could withdraw from production. Second,
they could adopt improved technologies. Or third, they could attempt to meet
the competition by dropping their prices.
Apparently, relatively few took the first option, since prices plummeted. As
a result, installed capital generally depreciated before firms could
amortize their investments. Profits fell because firms had to abandon
equipment before it had paid for itself.
Consider the example of Andrew Carnegie, who was notorious for his
single-minded determination to lower production costs. Once when his young
assistant, Charles Schwab, reported a superior design for a rolling mill,
Carnegie ordered him to raze and reconstruct an existing three month old
mill (McCraw and Reinhardt 1989, p. 595).
As a result of this ruthless pursuit of the best available technologies, the
price of steel rails fell by 88% from the early 1870s to the late 1880s
(Jensen 1993, p. 835). Steel was not unique. Electrolytic refining reduced
aluminum prices by 96%; synthetic blue dye production costs fell by 95% from
the 1870s to 1886 (ibid.). Based on this experience, most major U.S.
economists abandoned their faith in the market and sought refuge in trusts,
cartels and monopolies as a means to stabilize capital values (Perelman
1994).
In one of the most dramatic mergers in history, J.P. Morgan bought out
Carnegie's organization and merged it with a number of lesser firms to form
United States Steel. Freed from competitive pressures, the company did
little to modernize its operations (ibid. pp. 607 and 595).
In this regard, the editors of Fortune magazine reported:
Now there are two possible ways to look at a steel plant or an ore mine. One
is as an investment that must be protected. The other is as an instrument of
production, to be cherished only so long as it cannot be replaced by a more
efficient instrument. The first may be called the banker's point of view;
the second, the industrialist's. [Anon. 1936, p. 170]
According to the investigators at Fortune, United States Steel "has always
been a management with a financial rather than an industrial turn of mind"
(ibid., p. 63). This perspective reflected the origins of the corporation.
"The Steel Corporation was founded by financiers, has been dominated ever
since by financially-minded men" (ibid., p. 170).
Under the leadership of United States Steel, the industry's management in
the United States was notorious for its unwillingness to invest in
modernization. Even though basic oxygen furnaces and continuous casting
offered substantial cost savings, the industry refused to invest in these
technologies long after they had become standard in steel plants throughout
the world (Adams and Dirlin 1964; and 1966; Oster 1982; and Barnett and
Schorsch 1983).
Because capitalists with substantial market power can avoid the necessity of
adjusting prices immediately when reproduction values fall below from simple
values, the price system will effectively attribute excessive values to
capital goods -- at least temporary. Marx called these claims to excess
values, "fictitious capitals."
The Benign Divergence of Values and Prices
In effect, firms in an industry with market power can act as if the values
of their capital goods were simple values rather than reproduction values.
The more this practice continues, the more their prices will diverge from
reproduction values.
When large divergences become typical throughout the economy, the price
system will become increasingly incapable of coordinating the economy.
Malinvestment will become common. This state of affairs cannot continue
forever. Eventually, forces of competition will compel prices to fall in
line with reproduction values (see Perelman 1987, Chapter 6).
Marx repeatedly explained how, over and above changes in reproduction
values, value can appear to take on a more or less independent existence
until a crisis brings values back in line with reproduction values. The
following citation is worth considering in detail:
Capital, as self-expanding value ... can be understood only as motion, not
as a thing at rest. Those who regard the gaining by value of independent
existence as a mere abstraction forget that the movement of industrial
capital is this abstraction in actu .... If social capital experiences a
revolution in value, it may happen that the capital of the individual
capitalist succumbs to it and fails, because it cannot adapt itself to the
conditions of this movement of values. The more acute and frequent such
revolutions in value become, the more does the automatic movement of the now
independent value operate with the elemental force of a natural process,
against the foresight and calculation of the individual capitalist, the more
does the course of normal production become subservient to abnormal
speculation, and the greater is the danger that threatens the existence of
the individual capitals. These periodic revolutions in value therefore
corroborate what they are supposed to refute, namely, that value as capital
acquires an independent existence. [Marx 1967; 2, pp. 105-6]
Of course, this 'independence' of values is only a partial independence. We
shall explore the nature of this independence in the next section.
The Labor Theory of Value as a Requirement of Capital
Under the ideal conditions that Marx used in presenting his simple value
theory, a capitalist economy would maintain its balance by exchanging
commodities at prices roughly equal to the underlying labor values. Again,
the treatment of simple values parallels the treatment of simple
reproduction. We know that Marx never claimed that the algebraic equations
of simple reproduction provided predictions of equilibrium. He was merely
showing that an economy that failed to satisfy the requirements of the model
could fall into a crisis. In this sense, the reproduction schemes are
consistent with a qualitative value theory.
Marx's simple labor theory of value worked in the same fashion. Like the
simple reproduction model, simple value theory showed the difficulties that
arose when economic conditions failed to meet certain relatively stringent
conditions. Simple values, like simple reproduction schemes, suggested a
requirement of capitalist stability. Marx demonstrated that prices had to
indicate underlying labor values in order to steer the economy away from
crises (see Perelman 1987, Ch. 6).
In the analysis that some call the transformation problem, Marx acknowledged
that prices would not exactly equal values, even in the context of a system
of simple values. Nonetheless, in writing about crises, Marx indicates that,
despite the deviations of prices and values, the structure of prices should
still roughly conform to the structure values. Otherwise, prices cannot give
a signal to capitalists that is adequate to maintain a coherent economic
organization (see Perelman 1987, Ch. 6).
Just as the mathematical relations of simple reproduction are unlikely to
hold in a real economy, actual prices tend to drift away from underlying
labor values. As the linkage between prices and values becomes looser, the
price system gives increasingly misleading signals, making speculation more
profitable than earning profits by producing goods and services for the
market.
The deviations of prices and values due to the failure to adjust prices in
light of the gaps between simple values and reproduction values can cause
far more substantial deviations of prices and values than the deviations
caused by the transformation problem. More important, unlike the deviations
associated with the transformation problem, these deviations are not
systematic and will accumulate over the business cycle.
As fictitious capital accumulates during an upswing, it drags down the rate
of profit. As we suggested before, when these fictitious capitals become too
extreme, they contaminate the price system, which can no longer give the
proper signals. The continued functioning of the system then requires a
crisis strong enough to wipe out fictitious capitals and bring prices back
in line with values (Perelman 1987, Chapter 6). If the system can withstand
the shock of the crisis, a new cycle will begin with a higher rate of profit
and a coherent system of prices and values.
Here we have a different crisis theory than a regular, decennial replacement
cycle. This one revolves around the irregular accumulation and destruction
of fictitious values. I believe that this non-periodic crisis theory will
prove to be a more fruitful line of investigation than the more algebraic
analysis commonly associated with marxian crisis theory (Perelman 1987).
This analysis also helps to clarify finance's role in crisis theory.
Reproduction Values and Business Cycle Theory
We have seen that, in an unpredictable, dynamic world current values depend
on the future reproduction values of constant capital. Revaluations of
reproduction values create a parallel, but delayed counterpart on the price
structure. In addition, these shifting prices of capital assets can be a
major influence on the rate of profit.
Let us look at this relationship between capital asset revaluations and
profits more closely. The profit resulting from a purchase of fixed capital
depends upon the sum of current profits from basic business activities plus
any appreciation or depreciation that occurs as a result of that investment.
Often, the introduction of a new capital investment entails the devaluation
of a capital good that the new investment replaces.
In an economy with high capital-output ratios (measured in value terms),
such fluctuations in asset prices can swamp current profits. Both Kliman and
Perelman have argued that the rate of profit has a tendency to fall when
sufficiently rapid technical change devalues existing assets before their
values can be realized in finished commodities (Perelman 1987; Kliman 1988;
and 1996).
Although economists have generally overlooked this problem of capital
revaluation, business has not. Because of the resulting capital losses on
existing equipment, business resists replacing capital-intensive investments
unless the savings that result from the investment repay the cost of the
investment in a very short period of time; however, such a strategy is not
always feasible. As Marx observed:
On the one hand the mass of the fixed capital invested in a certain bodily
form and endowed in that form with a certain average life constitute one
reason for the only gradual pace of the introduction of new machinery, etc.,
and therefore an obstacle to the rapid general introduction of improved
instruments of labour. On the other hand competition compels the replacement
of old instruments of labour by new ones before the expiration of their
natural life, especially when decisive changes occur. Such premature
renewals of factory equipment on a rather large social scale are mainly
enforced by catastrophes or crises. [Marx 1967: 2, p. 170]
In short, Marx realized that, in an economy where large firms can blunt the
force of competition, some firms will be able to treat obsolete capital
values as if the forces of devalorization had never existed.
Toward a Rehabilitation of Qualitative Value Theory
My concern here is two-fold. I am warning against a one-sided application of
marxist theory in which we take simple value theory to be an objective
representation of reality. Second, we must guard against being lulled into a
false sense of scientificity in working with empirical measures.
I could have mentioned other difficulties with quantitative value theory.
For example, estimating a social rate of profit requires knowledge of total
constant capital. Unfortunately, measures of aggregate constant capital are
of questionable validity because of the complications created by changes in
the social division of labor (Perelman 1987, Chapter 5).
In addition, many of the quantitative measures used in making empirical
estimates are of dubious accuracy. For example, Engels observed, when
supplying Marx with estimates of surplus value in English spinning mills,
that such statistics are not readily available only because "few capitalists
ever think of making calculations of this sort with reference to their own
business" (Marx 1967; 3, p. 76; see also Perelman 1987, pp. 126-8; and Marx
1977, pp. 327-28).
My emphasis on qualitative value theory does not mean that we must throw
quantitative theory overboard. The sort of algebraic analysis associated
with the mathematics of reproduction schemes or a rising organic composition
of capital is be appropriate at some times and inappropriate at others. In
this sense, we might also interpret the respective analysis of reproduction
values and reproduction schemes as complementary. To begin with, we can look
at the reproduction schemes as a qualitative method for demonstrating the
difficulty of establishing a balance between sectors even when values are
fixed. Reproduction value theory reinforces that analysis, since with
reproduction values fluctuating and fictitious capitals accumulating and
then vanishing, economic stability is even more unlikely.
In addition, quantitative analysis, such as we find in the reproduction
schemes, might be more appropriate during specific periods. Babbage
witnessed what was apparently a process of rapid technological change, which
would make estimation of future capital depreciation all but impossible.
Under such conditions, quantitative value theory would become especially
problematical.
In contrast, according to Engels' account of the cotton industry, capital
goods were relatively long-lived. Quite possibly, values were relatively
stable in that industry at the time. Under these conditions, simple value
theory might offer a reasonable tool of quantitative analysis, since
capitalists might not go terribly wrong in their estimates.
I do not want to deny the importance of quantitative analysis. We still need
empirical analysis to get a rough handle on broad social issues such as the
rate of profit. Although such empirical work is undeniably important, we
should be modest in the way we regard it. We must also keep in mind that
quantitative analysis reflects capital's own tendency to reduce everything
down to quantitative measures.
In short, quantitative analysis can yield, at best, a crude approximation.
We should drop any pretense of exactitude. Marx's comparison of rates of
surplus value across widely different social formations, from Britain to
Danubian feudalism is an excellent example of modest empiricism. These
estimates are on a different level of abstraction than Marx's value theory,
which deals with unmeasurable units of analysis. Although they are not
precise, they illustrate an insight that some might find
counter-intuitive -- that capitalism is more exploitative than a vestigial
form of feudalism. In this sense, a closer reading of Marx's qualitative
value analysis will not supplant empirical research. Instead, it will
strengthen empirical research by making it more realistic.
Conclusion
We have seen that quantitative value theory faces a serious problem in
determining in advance how fast fixed capital goods will lose value. An
algebraic value theory must
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