Our Fundamental Theory Of Value [Was: Re: US Trade Deficit As 'World Engine Of Growth'?

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

Paul:

Re. the following:

> >When in the reflective mood of Ch. 16, Keynes will have none of this -
for,
> >if "everything is produced by labour," then it follows necessarily that
the
> >"marginal efficiency of capital" of Ch. 11 is a measure, NOT of
> >non-productive capital's ZERO "marginal efficiency", but of the spillover
> >effects of Final Demand Inflation on the "yield [of capital] over the
course
> >of its life in excess of its original cost." (Ch. 16 language.)
>
> In my view, you are just condfused-- It has nothing to do with final
demand
> inflation -- only that the present value of a future stream of quasi-rents
> associagted with a new piece of real investment exceed the present cost of
> producing that piece of investment.

And, in my view, you are just confused.

> If only you would read my book perhaps you might understand.

Here are points which I circulated yesterday to Gang8 and PKT (it has yet to
be posted) on what Keynes termed "Our Fundamental Theory Of Value".

If you read it with attention, perhaps you might understand what Keynes was
all about

Gunnar

*****

Our Fundamental Theory Of Value

For the past two centuries, otherwise lucid and level-headed economists have
been deeply divided on the answer to a very simple question:  How does
Money - specifically, NEW Money as Jeremy Bentham put it - relate to
Investment in an Entrepreneurial Market Economy?



Bentham's answer - insofar as New Money is used to mobilize the services of
otherwise idle resources, it increases Investment - struck both James Mill
and David Ricardo as nonsense for, surely, New Money can ONLY serve to
inflate current prices of goods and services.



The fact that Bentham had embraced this outcome for New Money which, on its
FIRST use, raises aggregate demand for final output caused neither Mill nor
Ricardo to consider the alternative result - their minds were made up,
closed, and immune to reason.



In a recent posting to PKT, Paul Davidson took issue with the concept of
Final Demand Inflation - my short-hand expression for New Money in the
context of the Mill-Ricardo scenario wherein New Money inflates Aggregate
Demand and Final Output Prices.



In the context of contemporary economics, Davidson advised, Final Demand
Inflation is something which 'usually' occurs at Full Employment - a
proposition which mirrors the essence of the Mill-Ricardo viewpoint of two
centuries ago.



In the interim, Schumpeter and Keynes - in Theory of Economic Development
(1911) and Treatise on Money (1930), respectively - had presented near
analogous analytical frameworks for rigorous treatment of related key
aspects of Entrepreneurial Production.



While in Schumpeter's Circular-Flow view thereof, "the law of cost strictly
rules, in the sense of equality between value of products and value of means
of production," Keynes' Treatise represented Entrepreneurial Profit as
identically equal to NET investment.



In both cases, the authors became dissatisfied with their work - in
Schumpeter's view (1934), his  scheme had to be supplemented by "more
'realistic' studies in money and credit, interest, and cycles" while Keynes'
dissatisfaction set in before publication of the Treatise itself.



And for good reason too - for it is self-evident that "the law of cost"
whereby "value of products" is equal to "value of means of production" alias
Entrepreneurial Investment is in principle independent of both the level of,
and any rate of change in, such Investment.



In this respect, Schumpeter's concept of "creative destruction" was more
germane, for it accorded with the logical corollary of "the law of cost"
that, while Entrepreneurial Profit is identically Zero in the aggregate, the
Profits of some must equal the Losses of others.



In Preface to the General Theory, Keynes acknowledged that the scheme of the
Treatise on Money had been "incomplete and extremely confused" insofar as
its dynamic aspects were concerned, but did not spell out the root cause -
NET investment as source of Profit.



Keynes also emphasized that he viewed the alternative approach of the
General Theory, whose dynamic aspects were a function of "the interaction of
supply and demand", as fully consistent with "our fundamental theory of
value" - Schumpeter's "law of cost."



With that, "our fundamental theory of value" dropped out of sight, for, as
explained by Keynes in the Preface, "whilst it is found that money enters
into the economic scheme in an essential and peculiar manner, technical
monetary detail falls into the background."



However, in a letter to Hicks (September 8, 1936), Keynes summed up the
implications of "our fundamental theory of value" for the concept of Income:
"I commence with the conviction that one has in some way to identify income
with the value of output."



[In Ch. 21, Keynes did comment on "the Theory of Value" as synonym for
neoclassical Price Theory, noting that "One of the objects of the foregoing
chapters has been to . bring the theory of prices as a whole back to close
contact with the theory of value."]



Once out of sight, "our fundamental theory of value" - alias "technical
monetary detail" which requires identification of "income with the value of
output" - was soon forgotten by academics whose intellectual acuity did not
match that of Keynes and Schumpeter.



Thus, from Roy Harrod's The Life of John Maynard Keynes (1951) to Robert
Skidelsky's The Economist As Savior (1992), modern students of Keynes'
thought will search in vain for any mention of "our fundamental theory of
value" and associated "technical monetary detail".



Instead, students of contemporary economic "thought" are taught that, as
Samuelson put it, Entrepreneurial Profit is "due to SOMETHING, and it may be
labeled by any name we please" - a proposition which appears to sit well
with PKT economic scholars.



In turn, this would seem to square with Hayek's view that, "some of the most
orthodox disciples of Keynes . hav[ing] thrown over-board . all that used to
be the backbone of economic theory . in consequence . have ceased to
understand any economics."



I have long been persuaded that the like view inspired remarks which Keynes
addressed to fellow economists in his last paper, "The Balance of Payments
of the United States", published post-humously in the June 1946 issue of The
Economic Journal:



1.  "I find myself moved, not for the first time, to remind contemporary
economists that the classical teaching embodied some permanent truths of
great significance, which we are liable to-day to over-look because we
associate them with other doctrines which we cannot now accept without much
qualification."



2.  "[The profession's reaction to a certain US proposal on trade and
employment] shows how much modernist stuff, gone wrong and turned sour and
silly, is circulating in our system."



Then, in what may be construed as his last remarks on issues relating to
"our fundamental theory of value", Keynes pointedly recalled his recent
remarks to the House of Lords:



3.  "Here [the Bretton Woods System - insert] is an attempt to use what we
have learnt from modern experience and modern analysis, not to defeat, but
to implement the wisdom of Adam Smith."



These remarks shocked the editorial board of The Economic Journal, which
considered withholding the paper from publication lest they be construed as
evidence that Keynes had gone soft in the head on the eve of his death -
that Keynes was just confused.



Gunnar



----- Original Message -----
From: "pdavidso" <pdavidso@xxxxxxx>
To: "Gunnar Tómasson" <gunnar.tomasson@xxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Sunday, September 28, 2003 10:29 AM
Subject: RE: US Trade Deficit As 'World Engine Of Growth'?


> >===== Original Message From Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>
> =====
>
> >
> >In Ch. 16, Keynes steps back, as it were, from the conceptual scheme of
the
> >General Theory with which you are concerned, to reflect in more general
> >terms on the nature of "capital" - and, in so doing, effectively abandons
> >the "marginal efficiency of capital" concept of which he wrote in Ch. 11
as
> >follows:
> >
> >"I define the marginal efficiency of capital as being equal to that rate
of
> >discount which would make the present value of the series of annuities
given
> >by the returns expected from the capital-asset during its life just equal
to
> >its supply price.  This gives us the marginal efficiencies of particular
> >types of capital-assets.  The greatest of these marginal efficiencies can
> >then be regarded as the marginal efficiency of capital in general."
>
> This quote is the basis of my chapter on Investment in FINANCIAL MARKETS
MONEY
> AND THE REAL WORLD. --- namely that for profit maximizers, real investment
> decisions depends on the present value of expected future quasi-rents to
be
> earned by installing newly produced investment goods exceeds the present
cost
> of producing these investment goods.
>
> There is nothing inconsistent with this view of investgment and the
maginal
> efficiency of capital and the aggregate demand and supply analysis in my
book.
>
>
> >When in the reflective mood of Ch. 16, Keynes will have none of this -
for,
> >if "everything is produced by labour," then it follows necessarily that
the
> >"marginal efficiency of capital" of Ch. 11 is a measure, NOT of
> >non-productive capital's ZERO "marginal efficiency", but of the spillover
> >effects of Final Demand Inflation on the "yield [of capital] over the
course
> >of its life in excess of its original cost." (Ch. 16 language.)
>
> In my view, you are just condfused-- It hjas nothing to do with final
demand
> inflation -- only that the present value of a future stream of quasi-rents
> associagted with a new piece of real investment exceed the present cost of
> producing that piece of investment.
>
> If only you would read my book perhaps you might understand.
>
> >
> >Hence - after expressing his 'preference' for labor "as the sole factor
of
> >production operating in a given environment of technique, natural
resources,
> >capital equipment [I have reservations on this last point, but will let
it
> >pass for now - insert GT] and effective demand," Keynes continues
directly
> >as follows: "This PARTLY explains why we have been able to take the unit
of
> >labour as the sole physical unit which we require in our economic system,
> >apart from units of money and of time."
>
> This has to do with Keynes's worry about the homogenity of adding
micro-units
> to achieve a meanikngful aggregate value.  In essence Keynes argued you
could
> not aggregate capital that is hetergeneous such as  a shovel plus a com
> munications satellite -- except via either its monetary value  or units of
> imputed labor time (when labor units were made homogeneous by use of the
wage
> unit -- see Keynes chapter on units in the GT.
>
>
> >
> >My comments relate to ONE part - yours to ANOTHER part.
>
>
> No my com ments relate to all parts of Keynes's consistent vision
throughout
> the GT.  [See Keynes's biographer, Robert Skidelsky's comment on my book.]
> paul
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> University of Tennessee
> SMC 503
> Knoxville, Tennessee 37996-0550
> office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
> home phone and fax # (865)692-0802
> email pdavidson@xxxxxxx
> http://econ.bus.utk.edu/davidsonextra/Davidson.html
>
>