Value, Price and Profit

The (so-called) transformation problem Marx the temporalist Marx the probabilist

Value, price and proﬁt The transformation problem and its afterlife

Julian Wells

An Introduction to Post Keynesian Economics and Political Economy Kingston University 11–13 July 2013 Value, price and proﬁt The transformation problem and its afterlife

Julian Wells

An Introduction to Post Keynesian Economics and Political Economy Kingston University 11–13 July 2013 2013-07-08

Reading 1. Preliminary: Brendan McCooney videos at http://www.youtube.com/user/brendanmcooney; Marx: Wage Labour and Capital, Value, Price and Proﬁt (also published under the title Wages, Price and Proﬁt); Freeman (1995); Wells (2013); Wright (2005) 2. Further: Kliman (2007) Reclaiming Marx’s “Capital“; Kliman (2012) The Failure of Capitalist Production; Farjoun and Machover (1983) Laws of Chaos; Allin Cottrell et al. (2009) Classical Econophysics. 3. Marx: Capital (but you knew that), and references given in notes and slides. 4. My web-site: http://fass.kingston.ac.uk/faculty/ staff/cv.php?staffnum=287 The (so-called) transformation problem Marx the temporalist Marx the probabilist How to use this document

If you are viewing this document on screen you should be using a file called VPPshow.pdf; if so, you do not want to try printing from it. Instead, look to see if you also have a file called VPPnotes.pdf. In this file each slide has an accompanying Notes page. You may want to print out this file so that the slides are laid out in n × 2 format, where n is the number of rows. If you want to add your own notes 2 × 2 is good in A4 landscape format; 4 × 2 in portrait format works if you don’t mind small type. How to use this document

If you are viewing this document on screen you should be using a file called VPPshow.pdf; if so, you do not want to try printing from it. How to use this document Instead, look to see if you also have a file called VPPnotes.pdf. In this file each slide has an accompanying Notes page. You may want to print out this file so that the slides are laid out in n × 2 format, where n is the number of rows. If you want to add your own notes 2 × 2 is good in A4 landscape format; 4 × 2 in portrait format works if you don’t mind small type. 2013-07-08

Notes The (so-called) transformation problem Marx the temporalist Marx the probabilist Outline

1 The (so-called) transformation problem Prologue Why it matters: the falling rate of proﬁt The problem posed and answered The problem problematised

2 Marx the temporalist The Temporal Single System Interpretation Is Marx a temporalist? 3 Marx the probabilist Dissolving the transformation problem Econophysics and complexity Is Marx a probabilist? Outline

1 The (so-called) transformation problem Prologue Why it matters: the falling rate of proﬁt The problem posed and answered Outline The problem problematised 2 Marx the temporalist The Temporal Single System Interpretation Is Marx a temporalist? 3 Marx the probabilist Dissolving the transformation problem

2013-07-08 Econophysics and complexity Is Marx a probabilist?

Notes 1. Prologue explains the alleged problem, and how it came to be re-problematised after Marx’s solution. 2. TSSI: ‘making sense of Marx’—although it is ‘20th century Marxism’ that made nonsense of Marx. Falling rate of profit (LTRPF): ‘in every respect the most important’ (Marx – source?). 3. T-problem is a logical problem relating to a special case—permanent actual equalisation not only of profits but of market prices; in other words, ‘perfect competition’. 4. The world Marx wanted to change was ‘actually-existing’ capitalism, so how should we interpret his theory? Prologue The (so-called) transformation problem Why it matters: the falling rate of profit Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised What this is about ...... and what it’s not

It’s about interpretation is Marx a theorist of equilibrium or disequilibrium? Compare Keynes . . . and disproving claim that Marx’s theory is logically incoherent hence allowing his other work to be considered seriously in particular, falling rate of proﬁt as basis of capitalist crisis

It’s not about ‘correcting’ or ‘completing’ Marx neither new methods nor new solutions not proving Marx’s value theory correct especially not proving that everything he wrote was true emphatically not about re-interpreting Marx What this is about . . . The (so-called) transformation problem . . . and what it’s not

It’s about interpretation is Marx a theorist of equilibrium or disequilibrium? Prologue Compare Keynes . . . and disproving claim that Marx’s theory is logically incoherent hence allowing his other work to be considered seriously What this is about . . . in particular, falling rate of proﬁt as basis of capitalist crisis

It’s not about ‘correcting’ or ‘completing’ Marx neither new methods nor new solutions not proving Marx’s value theory correct

2013-07-08 especially not proving that everything he wrote was true emphatically not about re-interpreting Marx

Notes Fundamental principle of interpretation (hermaneutics): can the author be read in such a way as to make their argument make sense? Especially necessary when the text is incomplete or doubtful; vol.s II and III of Capital are both. Hence not about re-interpreting to ﬁt in with some other preferred perspective. Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Two quotations...... and two interpretations

If M. Proudhon admits that the value of products is determined by labour time, he should equally admit that it is the ﬂuctuating movement alone that in a society founded on individual exchanges makes labour the measure of value. There is no ready-made constituted ‘proportional relation’, but only a constituting movement.1

[T]he rate of proﬁt . . . seeks the ‘ideal’ mean position, i.e. a mean position which does not exist in reality. In other words, it tends to shape itself around this ideal as a norm.2

1The Poverty of Philosophy: 71 (emphases added) 2Capital Vol. III: 273 Two quotations. . . The (so-called) transformation problem . . . and two interpretations

If M. Proudhon admits that the value of products is determined by Prologue labour time, he should equally admit that it is the ﬂuctuating movement alone that in a society founded on individual exchanges makes labour the measure of value. There is no ready-made Two quotations. . . constituted ‘proportional relation’, but only a constituting movement.1 [T]he rate of proﬁt . . . seeks the ‘ideal’ mean position, i.e. a mean position which does not exist in reality. In other words, it tends to shape itself around this ideal as a norm.2 2013-07-08 1The Poverty of Philosophy: 71 (emphases added) 2Capital Vol. III: 273

Notes Both cited in Freeman (1995): each quotation supports both temporalist and probabilist interpretations 1. Temporalism, because Marx’s theory is dynamic, i.e. movement in time 2. Probabilism, because non-equalisation at any given t means we have to consider distributions of variables in cross-section as well as longitudinally, which is as far as the ‘gravitation’ school gets; see ergodicity below Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Value, price and proﬁt Can labour-time explain exchange value?

Marx simply speaks of ‘value theory’: is it ‘labour theory of value’? labour-time determines value x hours labour =⇒ y units of value ‘value theory of labour’? 3 ‘how come labour is represented by (exchange) value?’ rather than seen directly both, because the representation is both quantitative and qualitative the quantity of one kind of thing (ultimately, individual human activity) is represented by quantity of a quite different kind of thing (exchange value)

3as suggested by Diane Elson (1979) Value, price and proﬁt The (so-called) transformation problem Can labour-time explain exchange value? Marx simply speaks of ‘value theory’: is it ‘labour theory of value’? Prologue labour-time determines value x hours labour =⇒ y units of value ‘value theory of labour’? 3 ‘how come labour is represented by (exchange) value?’ Value, price and proﬁt rather than seen directly both, because the representation is both quantitative and qualitative the quantity of one kind of thing (ultimately, individual human activity) is represented by quantity of a quite 2013-07-08 different kind of thing (exchange value)

3as suggested by Diane Elson (1979)

Notes 1. Sometimes (often?) ‘law’ of value—but one that ’appears’ as a law of nature (Ch.1 of Capital—so how does it become a law? Answer to this in today’s Part 3. 2. Elson, Diane (1979) ‘The value theory of labour’ in Elson, D. (ed) Value: the representation of labour in capitalism, London: CSE Books. 3. There is a double transition here: individual human labours (arguably incommensurable) become ‘abstract labour’, quantities of which are (imperfectly) represented by various forms of value (exchange value, price of production, market price) Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Marx’s value theory 1 Commodity-owning society

All agents equal equally commodity-owners Workers own their ‘labour-power’ ‘free’ in double sense free to sell labour-power to highest bidder free of ownership of means of labour Capitalists own the means of labour ‘means of production’ Marx’s value theory 1 The (so-called) transformation problem Commodity-owning society

All agents equal Prologue equally commodity-owners Workers own their ‘labour-power’ Marx’s value theory 1 ‘free’ in double sense free to sell labour-power to highest bidder free of ownership of means of labour Capitalists own the means of labour ‘means of production’ 2013-07-08

Notes Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Marx’s value theory 2 Use-value and exchange-value

Exchange value determined by labour-time needed for (re-) production ‘use value’ merely pre-condition for exchange value Value of labour-power? exchange value determined by labour-time needed to produce workers’ consumption goods hence for reproduction of labour-power use value is labour-time extracted by capitalists Marx’s value theory 2 The (so-called) transformation problem Use-value and exchange-value

Exchange value Prologue determined by labour-time needed for (re-) production ‘use value’ merely pre-condition for exchange value Value of labour-power? Marx’s value theory 2 exchange value determined by labour-time needed to produce workers’ consumption goods hence for reproduction of labour-power use value is labour-time extracted by capitalists 2013-07-08

Workers sell labour-power for agreed time-span Capitalists get labour performed in that time Proﬁt A: (exchange) value of product determined by labour-time B: value of labour-power paid as wages; determined by value of wage-goods C: value of used-up means of production A − (B + C) = surplus-value = surplus labour-time Marx’s value theory 3 The (so-called) transformation problem Explaining proﬁts

Workers sell Prologue labour-power for agreed time-span Capitalists get labour performed in that time Proﬁt Marx’s value theory 3 A: (exchange) value of product determined by labour-time B: value of labour-power paid as wages; determined by value of wage-goods C: value of used-up means of production 2013-07-08 A − (B + C) = surplus-value = surplus labour-time

Notes Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised How to increase proﬁts? Install machinery A paradoxical claim, if labour is the sole source of value?

Q. How to increase surplus-value? A. Increase surplus labour-time

Increase total labour? (lengthen working day) limited by 24 hours Decrease necessary labour? raise productivity by introducing machinery workers replace the value of their wages more quickly Why labour-saving machinery does not shorten the working day (as much as it could) It saves the capitalist’s time, not the worker’s How to increase proﬁts? Install machinery The (so-called) transformation problem A paradoxical claim, if labour is the sole source of value?

Q. How to increase surplus-value? Why it matters: the falling rate of proﬁt A. Increase surplus labour-time Increase total labour? (lengthen working day) limited by 24 hours How to increase proﬁts? Install machinery Decrease necessary labour? raise productivity by introducing machinery workers replace the value of their wages more quickly Why labour-saving machinery does not shorten the working day (as much as it could) 2013-07-08 It saves the capitalist’s time, not the worker’s

Capital Result Rates of . . . c = constant 4 proﬁt s/(c + v) v = variable 5 s = surplus value exploitation s/v

1 More machinery =⇒ increasing the ‘organic composition of capital’ (c/v) 2 Keep your eye on s/v and c/v ...

4means of production 5wages Some notation . . . The (so-called) transformation problem . . . and some notes

Capital Result Rates of . . . Why it matters: the falling rate of proﬁt c = constant 4 proﬁt s/(c + v) v = variable 5 s = surplus value exploitation s/v

Some notation . . . 1 More machinery =⇒ increasing the ‘organic composition of capital’ (c/v) 2 Keep your eye on s/v and c/v ... 2013-07-08 4means of production 5wages

Notes Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Falling sideways? Deriving the LTFRP The Law of the Tendential Fall of the Rate of Proﬁt

rate of proﬁt s s/v =⇒ (1) c + v (c/v) + 1

. . . and suppose c/v increases? but counter-acting tendencies increasing rate of exploitation: s/v e.g. speed-up machinery cheapening variable capital: v cheapening constant capital: c all of which predicts . . . what? Falling sideways? Deriving the LTFRP The (so-called) transformation problem The Law of the Tendential Fall of the Rate of Proﬁt

rate of proﬁt s s/v Why it matters: the falling rate of proﬁt =⇒ (1) c + v (c/v) + 1

. . . and suppose c/v increases? Falling sideways? Deriving the LTFRP but counter-acting tendencies increasing rate of exploitation: s/v e.g. speed-up machinery cheapening variable capital: v cheapening constant capital: c

2013-07-08 all of which predicts . . . what?

Notes Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Falling upwards! Illustrating the LTFTG The Law of the Tendential Fall of Things in General

Obviously this does not refute the law of gravity Indeed, it conﬁrms the law by means of the counteracting tendencies Without LTFRP, no theory of crisis decline breakdown perennial crisis . . . or whatever Falling upwards! Illustrating the LTFTG The (so-called) transformation problem The Law of the Tendential Fall of Things in General

Obviously this does not Why it matters: the falling rate of proﬁt refute the law of gravity Indeed, it conﬁrms the law by means of the counteracting tendencies Falling upwards! Illustrating the LTFTG Without LTFRP, no theory of crisis decline breakdown perennial crisis 2013-07-08 . . . or whatever

Notes 1. Falling Upwards: how we took to the air, Richard Holmes (2013). Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised What’s New 3 Falling downwards! News from the Edge Key Themes 2011 Shift Index: Demonstrating the LTFRP

Exhibit 4: Return on Assets and U.S. Unemployment Rate, (1976–2010) Exhibit 4: ROA and U.S. Unemployment Rate (1976-2010)

’07-’10: Unemployment from ’81-’82: Unemployment from 7.6%-9.7% 4.6%-9.6% 12.0% ’82-’83: ROA from 2.7%-2.8% ’08-’10: ROA from 0.5%-1.7% 4.5%

’00-’03: Unemployment from 4.0%- 4.0% 10.0% 6.0% ’01-’06: ROA from 0.2%-2.2% 3.5%

8.0% 3.0%

2.5% 6.0% 2.0%

4.0% 1.5%

UnemploymentRate(%) ’91-’92: Unemployment from 6.8%- 7.5% 1.0% 2.0% ’92-’96: ROA from 1.6%-2.3% 0.5% (%) Return on AssetsOverall Economy

0.0% 0.0% 1976 1980 1984 1988 1992 1996 2000 2004 2008

Unemployment Rate ROA Source: U.S. Bureau of Labor Statistics, Compustat, Deloitte Analysis Source: U.S. Bureau of Labor Statistics, Compustat, Deloitte Analysis

performance. In these times, firms use layoffs as a release competitive economy, companies are seeking to preserve valve, triggering a spike in the unemployment rate. Exhibit profits at the expense of employment. This increasing 4 shows that following a short lag, Return on Assets rises reliance on layoffs is not a sustainable practice in the as well. However, all these efforts to be more efficient, long-run; in order to reverse declining performance, firms take people out, and drive productivity are proving cannot focus solely on short-term, reactive solutions. insufficient in the face of long-term trends. While the Labor Productivity metric has increased by almost 2.5 times from The Automation Paradox 1965 to 2010, firm performance has continued a steady We have argued here that the recent upturn in ROA decline. reflects short-term and largely unsustainable measures rather than the more fundamental changes required 4 While companies have long used layoffs as a means to cut to respond to the mounting pressures of the Big Shift. © 2011 Deloitte Touche Tohmatsu costs, the practice has become especially prevalent in more However, how does one reconcile this with the prevailing recent economic downturns. As explained in a McKinsey belief that automation is driving sustained productivity Global Institute report, management in the 1960’s and growth and making workers dispensable? 1970’s considered labor to be a ‘quasi-fixed’ resource since they had already invested in their training and workers held It is true that firms are finding ways to automate low firm-specific knowledge that was not easily transferable. In complexity, and increasingly, mid-complexity positions. tough times, firms were less likely to lay off large numbers; Indeed, the rapid adoption of self-checkout at retail they were instead willing to take a hit to profit and locations has shown that even some face-to-face customer productivity so that workers could drive recovery faster on interactions can be replaced with technology. However, the back end.5 as shown in Exhibit 6, Fixed Investment IT Spend in 2000 was almost three times as high as in 2010, whereas As shown in Exhibit 5, employment has constituted unemployment was only 4.0%, as compared to 9.6% in an increasingly larger portion of Real GDP loss in each 2010. Given these numbers, it would be difficult to make subsequent recession since the event of 1973-1975. the case that the significant recent increase in layoffs is GDP loss measures the severity of a downturn on a due to a sudden surge in automation. While IT spend macroeconomic level. Firms’ decisions whether or not to rose significantly between 2009 and 2010 in parallel with lay off workers during these recessions dictate the degree the unemployment rate, this increase marked a return to to which employment bears the brunt of the downturn pre-crash levels of investment. and the degree to which firms absorb GDP loss internally, taking a hit to productivity. As shown in a McKinsey Global Firms are seeking increased employment flexibility by 5 James Manyika et. all. “An Institute study, where once companies were shielding relying on short-term, part-time, or contract workers. Economy that Works: Job Creation and America’s Future.” McKinsey workers and absorbing losses themselves, in this globally In particular, routine and administrative tasks are being Global Institute Report. June 2011.

10 What’s New 3 Falling downwards! News from the Edge The (so-called) transformation problem Key Themes 2011 Shift Index: Demonstrating the LTFRP Exhibit 4: Return on Assets and U.S. Unemployment Rate, (1976–2010) Exhibit 4: ROA and U.S. Unemployment Rate (1976-2010)

’07-’10: Unemployment from ’81-’82: Unemployment from 7.6%-9.7% 4.6%-9.6% Why it matters: the falling rate of proﬁt 12.0% ’82-’83: ROA from 2.7%-2.8% ’08-’10: ROA from 0.5%-1.7% 4.5% ’00-’03: Unemployment from 4.0%- 4.0% 10.0% 6.0% ’01-’06: ROA from 0.2%-2.2% 3.5%

8.0% 3.0%

2.5% 6.0% Falling downwards! News from the Edge 2.0%

4.0% 1.5%

UnemploymentRate(%) ’91-’92: Unemployment from 6.8%- 7.5% 1.0% 2.0% ’92-’96: ROA from 1.6%-2.3% 0.5% (%) Return on AssetsOverall Economy

0.0% 0.0% 1976 1980 1984 1988 1992 1996 2000 2004 2008 2013-07-08

Unemployment Rate ROA Source: U.S. Bureau of Labor Statistics, Compustat, Deloitte Analysis Source: U.S. Bureau of Labor Statistics, Compustat, Deloitte Analysis

performance. In these times, firms use layoffs as a release competitive economy, companies are seeking to preserve valve, triggering a spike in the unemployment rate. Exhibit profits at the expense of employment. This increasing 4 shows that following a short lag, Return on Assets rises reliance on layoffs is not a sustainable practice in the as well. However, all these efforts to be more efficient, long-run; in order to reverse declining performance, firms take people out, and drive productivity are proving cannot focus solely on short-term, reactive solutions. insufficient in the face of long-term trends. While the Labor Productivity metric has increased by almost 2.5 times from The Automation Paradox 1965 to 2010, firm performance has continued a steady We have argued here that the recent upturn in ROA Notes decline. reflects short-term and largely unsustainable measures rather than the more fundamental changes required 4 While companies have long used layoffs as a means to cut to respond to the mounting pressures of the Big Shift. © 2011 Deloitte Touche Tohmatsu costs, the practice has become especially prevalent in more However, how does one reconcile this with the prevailing recent economic downturns. As explained in a McKinsey belief that automation is driving sustained productivity Global Institute report, management in the 1960’s and growth and making workers dispensable? 1970’s considered labor to be a ‘quasi-fixed’ resource since they had already invested in their training and workers held It is true that firms are finding ways to automate low 1. Deloitte Center for the Edge: The 2011 Shift Index, pagefirm-specific knowledge that was not 10, easily transferable. In complexity, and increasingly, mid-complexity positions. tough times, firms were less likely to lay off large numbers; Indeed, the rapid adoption of self-checkout at retail they were instead willing to take a hit to profit and locations has shown that even some face-to-face customer productivity so that workers could drive recovery faster on interactions can be replaced with technology. However, the back end.5 as shown in Exhibit 6, Fixed Investment IT Spend in 2000 was almost three times as high as in 2010, whereas exhibit 4. As shown in Exhibit 5, employment has constituted unemployment was only 4.0%, as compared to 9.6% in an increasingly larger portion of Real GDP loss in each 2010. Given these numbers, it would be difficult to make subsequent recession since the event of 1973-1975. the case that the significant recent increase in layoffs is GDP loss measures the severity of a downturn on a due to a sudden surge in automation. While IT spend macroeconomic level. Firms’ decisions whether or not to rose significantly between 2009 and 2010 in parallel with http://www.deloitte.com/us/shiftindex lay off workers during these recessions dictate the degree the unemployment rate, this increase marked a return to to which employment bears the brunt of the downturn pre-crash levels of investment. and the degree to which firms absorb GDP loss internally, taking a hit to productivity. As shown in a McKinsey Global Firms are seeking increased employment flexibility by 5 James Manyika et. all. “An Institute study, where once companies were shielding relying on short-term, part-time, or contract workers. Economy that Works: Job Creation and America’s Future.” McKinsey workers and absorbing losses themselves, in this globally In particular, routine and administrative tasks are being Global Institute Report. June 2011. 2. See also http://www.thepointhowever.org/index.php/10 the-big-idea/ 160-capitalism-s-achilles-heel-pt-ii Asset Pro!tability Tab Title Here Tab 2011 Impact Index

has been driven by companies’ inability to adapt to the average of 0.15% per year over the 45-year period. By long-term trends behind the Big Shift. While this decline contrast, the strongest performing industry, aerospace and has been influenced by trends in the banking industry, defense, only saw its ROA rise at an average rate of 0.02% this same declining trend in ROA has also consistently per year over the same period. While the bottom industries occurred across the rest of the economy. This decline is all are experiencing sharp declines in performance, the top the more noteworthy because of the increasingly favorable industry is just barely yielding better results over time (see tax environment and improvement efforts by individual Exhibit 89) companies. The effective corporate income tax rate has declined over the past 45 years and firms have engaged As part of our continued investigation into declining ROA, in a suite of efforts, including restructuring, outsourcing, we focused our attention on the role of the banking and mergers and acquisitions to improve performance. industry. There are two reasons why we were concerned The decline in ROA is significant because it has continued with the banking industry. First, the banking sector has in spite of these factors which we might have expected to come to constitute a large portion of the overall economy’s improve ROA. asset base. And second, the banking sector has also had historically low ROA levels. Taken collectively, these facts This year, our analysis confirmed that the decline in ROA yielded interesting results in our analysis of the declining is occurring consistently across almost all sectors of the ROA levels. economy. With the exception of aerospace and defense and health care services, all other industries in the economy Truly reversing this will require a profound shift in thinking Prologue The (so-called) transformation problem exhibited a downward trend in ROA. This suggests that the andWhy a strong it matters: grasp of the the falling forces rate — often of profit overlooked Marx the temporalist fundamental forces of the Big Shift are driving down Asset — facingThe problem modern posedfirms. In and particular, answered executives will Marx the probabilist Profitability across the entire economy. haveThe to problemfocus on capability problematised leverage and mobilizing the Asset Profitability resources of others to deliver more value (the numerator 2 TheOf these inexorable industries, the technology, rise media, and of capitalin the profitability ratio) rather than just focusing on cost Fallingentertainment downwards! and automotive News sectors from have theexperienced Edge 2 reduction as a driver of firm profitability. the steepest declines in ROA, with ROA declining at an Updated Exhibit 89: Asset Base ($, trillions), U.S. Economy and Banking Industry, (1965-2010) Exhibit 90: Asset Base ($, Trillions), U.S. Economy and Banking Industry (1965-2010)

100

30 Size of Industry ($, Trillions) ($, Industry of Size

0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Banking & Financial Institutions Other Industries Source: Compustat, Deloitte analysis

Source: Compustate, Deloitte Analysis

2011 Shift Index Measuring the forces of long-term change 121

has been driven by companies’ inability to adapt to the average of 0.15% per year over the 45-year period. By long-term trends behind the Big Shift. While this decline contrast, the strongest performing industry, aerospace and has been influenced by trends in the banking industry, defense, only saw its ROA rise at an average rate of 0.02% this same declining trend in ROA has also consistently per year over the same period. While the bottom industries occurred across the rest of the economy. This decline is all are experiencing sharp declines in performance, the top the more noteworthy because of the increasingly favorable industry is just barely yielding better results over time (see tax environment and improvement efforts by individual Exhibit 89) companies. The effective corporate income tax rate has declined over the past 45 years and firms have engaged As part of our continued investigation into declining ROA, in a suite of efforts, including restructuring, outsourcing, we focused our attention on the role of the banking and mergers and acquisitions to improve performance. industry. There are two reasons why we were concerned The decline in ROA is significant because it has continued with the banking industry. First, the banking sector has in spite of these factors which we might have expected to come to constitute a large portion of the overall economy’s improve ROA. asset base. And second, the banking sector has also had historically low ROA levels. Taken collectively, these facts This year, our analysis confirmed that the decline in ROA yielded interesting results in our analysis of the declining is occurring consistently across almost all sectors of the ROA levels. economy. With the exception of aerospace and defense and health care services, all other industries in the economy Truly reversing this will require a profound shift in thinking exhibited a downward trend in ROA. This suggests that the and a strong grasp of the forces — often overlooked fundamental forces of the Big Shift are driving down Asset — facing modern firms. In particular, executives will Profitability across the entire economy. have to focus on capability leverage and mobilizing the Asset Profitability resources of others to deliver more value (the numerator 2 TheOf these inexorable industries, the technology, rise media, and of capitalin the profitability ratio) rather than just focusing on cost Fallingentertainment downwards! and automotive News sectors from have theexperienced Edge 2 reduction as a driver of firm profitability. The (so-called) transformation problem the steepest declines in ROA, with ROA declining at an Updated Exhibit 89: Asset Base ($, trillions), U.S. Economy and Banking Industry, (1965-2010) Exhibit 90: Asset Base ($, Trillions), U.S. Economy and Banking Industry (1965-2010)

100 Why it matters: the falling rate of proﬁt 90 80

60 The inexorable rise of capital 50 40

30 Size of Industry ($, Trillions) ($, Industry of Size

2013-07-08 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Banking & Financial Institutions Other Industries Source: Compustat, Deloitte analysis

Source: Compustate, Deloitte Analysis

2011 Shift Index Measuring the forces of long-term change 121 Notes

89 © 2011 Deloitte Touche Tohmatsu 1. The 2011 Shift Index, page 121, exhibit 90. Tab2011 Impact Index Here Title Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist Asset Profitability The problem problematised 3 It’s not (just) ﬁnancialisation Falling downwards! News from the Edge 3 Updated Exhibit 90: Return on Assets for the U.S. Economy, (1965-2010) Exhibit 91: ROA for the U.S. Economy (1965-2010)

7.00% 6.5%

6.00% 5.6%

5.00% 4.9%

3.8% 4.00% 4.2%

3.00%

2.0% 2.00% Return onAssets (%) 1.7% 1.00% 0.6% 0.00% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

-1.00% Economy ROA Economy less Banking ROA Linear (Economy ROA) Linear (Economy less Banking ROA) Source: Compustat, Deloitte analysis

Source: Data from Compustat, Deloitte analysis ... ROA for the U.S. economy has been in only consider the (higher) ROA exhibited in the ‘economy less banking’ chart, it is imprudent to isolate banking steady decline for the past 45 years. We believe completely from the story of declining ROA because the banking industry has provided capital to the rest of the that this decline in ROA has been driven by economy at a low cost over the past 25 years. The cost of companies’ inability to adapt to the long-term capital has steadily declined and it has allowed companies to pursue growth at a relatively low cost. While we might trends behind the Big Shift. be able to isolate the depressive effect of banking on overall ROA, it is imperative that we still consider it as part As we can see from Exhibit 90, the banking industry’s share of the overall economy because of this power to stimulate 90 © 2011 Deloitte Touche Tohmatsu of the total asset base has grown swiftly, from 30% in growth throughout the entire economy. 1965 to 60% in 2010. Consequently, the banking industry has been an increasingly important determinant of the From 2008-2010, we have seen an uptick in ROA for all overall economy’s ROA. Secondly, the banking industry has but three industries (aerospace and defense, energy, and had historically low levels of ROA, trending from 0.75% in life sciences).;While some may see this rise as a source 1965 and declining to 0.55% in 2010. for encouragement, we believe it to be the result of short-term measures, such as workforce reduction, rather Collectively, these factors yielded two key insights into the than fundamental restructuring of business strategies to economy’s decline in ROA. As we can see from Exhibit 91, address the Big Shift. In short, we do not believe that these the inclusion of the banking industry signiﬁcantly lowers efforts to improve performance are sustainable in the the overall economy’s ROA consistently over the past 45 long run. For greater detail concerning our analysis of the years. More importantly, when the banking industry is relationship between layoffs and ROA, please refer to the excluded from our calculations, the overall economy’s ROA section “2011 Shift Index: Key Ideas.” experienced a slightly steeper decline. As evidenced by the trend lines in Exhibit 91, when we consider the rest of the economy apart from the banking industry, the rate of decline in ROA is even more severe. While it is tempting to

122 Tab2011 Impact Index Here Title Asset Profitability 3 It’s not (just) ﬁnancialisation The (so-called) transformation problem Falling downwards! News from the Edge 3 Updated Exhibit 90: Return on Assets for the U.S. Economy, (1965-2010) Exhibit 91: ROA for the U.S. Economy (1965-2010)

7.00% 6.5%

6.00% Why it matters: the falling rate of proﬁt 5.6%

5.00% 4.9%

3.8% 4.00% 4.2% It’s not (just) ﬁnancialisation 3.00% 2.0% 2.00% Return onAssets (%) 1.7% 1.00% 0.6% 0.00% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

-1.00%

2013-07-08 Economy ROA Economy less Banking ROA Linear (Economy ROA) Linear (Economy less Banking ROA) Source: Compustat, Deloitte analysis

Source: Data from Compustat, Deloitte analysis ... ROA for the U.S. economy has been in only consider the (higher) ROA exhibited in the ‘economy less banking’ chart, it is imprudent to isolate banking steady decline for the past 45 years. We believe completely from the story of declining ROA because the banking industry has provided capital to the rest of the that this decline in ROA has been driven by economy at a low cost over the past 25 years. The cost of companies’ inability to adapt to the long-term capital has steadily declined and it has allowed companies to pursue growth at a relatively low cost. While we might trends behind the Big Shift. be able to isolate the depressive effect of banking on Notes overall ROA, it is imperative that we still consider it as part As we can see from Exhibit 90, the banking industry’s share of the overall economy because of this power to stimulate 90 © 2011 Deloitte Touche Tohmatsu of the total asset base has grown swiftly, from 30% in growth throughout the entire economy. 1965 to 60% in 2010. Consequently, the banking industry has been an increasingly important determinant of the From 2008-2010, we have seen an uptick in ROA for all overall economy’s ROA. Secondly, the banking industry has but three industries (aerospace and defense, energy, and had historically low levels of ROA, trending from 0.75% in life sciences).;While some may see this rise as a source 1965 and declining to 0.55% in 2010. for encouragement, we believe it to be the result of 1. The 2011 Shift Index, page 122, exhibit 91. short-term measures, such as workforce reduction, rather Collectively, these factors yielded two key insights into the than fundamental restructuring of business strategies to economy’s decline in ROA. As we can see from Exhibit 91, address the Big Shift. In short, we do not believe that these the inclusion of the banking industry signiﬁcantly lowers efforts to improve performance are sustainable in the the overall economy’s ROA consistently over the past 45 long run. For greater detail concerning our analysis of the years. More importantly, when the banking industry is relationship between layoffs and ROA, please refer to the excluded from our calculations, the overall economy’s ROA section “2011 Shift Index: Key Ideas.” experienced a slightly steeper decline. As evidenced by the trend lines in Exhibit 91, when we consider the rest of the economy apart from the banking industry, the rate of decline in ROA is even more severe. While it is tempting to

122 2011 Impact Index ROA Performance Gap

Winning companies are barely holding on, while losers experience rapidly deteriorating performance

Introduction surprising, however, is how little winners have gained The ROA Performance Economy-wide, ROA is declining as competition intensifies during the past 45 years. Technology has enabled firms to Gap metric measures and consumers and talented workers gain market power. leverage talent in new and innovative ways and cut costs the percentage Yet we all know averages can be deceiving. Maybe good from operations on an unprecedented scale, however, difference in ROA companies are generating high returns, but the losers are even top quartile performers have failed to convert these between the top and losing big and dragging down ROA? What is happening at advances into ROA gains.152 The ROA for the top quartile of bottom quartiles and the company level? firms has actually declined gradually over the past 45 years reflects how value flows (see Exhibit 92), from 12.7% in 1965 to 9.9% in 2010. to (or from) “winners” The ROA Performance Gap is meant to shed light on what and “losers” in an might otherwise be obscured by averages. Over time, this These findings corroboratePrologue the research of our colleagues, The (so-called) transformation problem increasingly competitive metric will reveal trends in how value is distributed among Michael Raynor andWhy Mumtaz it matters: Ahmed, thein Deloitte’s falling rate of profit environment. Marx the temporalist 153 firms and quantify the true consequences of doing poorly Persistence Project.The While problem ROA for posed the top and 1% of answered firms Marx the probabilist or well in the Big Shift. has improved, ROAThe in the problem top decile problematised firms has only held ROA Perf Gap 1 This metric is a proxy for steady over the past 45 years.154 Only a very small group of firm performance. Observations and Implications companies has succeeded in improving ROA. FromThe ROA Performance him Gap that shows a bifurcation hath of winners not shall be taken away . . . Fallingand losers; downwards! this finding is by no Newsmeans new. fromWhat is the Edge 4 Updated Exhibit 91: Economy-wide ROA by quartile, (1965-2010) Exhibit 92: Economy-wide ROA by quartile (1965-2010)

20%

15% 12.7%

9.9% 10%

0% Top Quartile Linear (Top Quartile)

Return on Assets(%) 20% 1.3% 152 Source: Compustat, Deloitte 0% analysis. -9.9% 153 Deloitte’s Persistence Project was carried out to identify the manage- -20% ment practices that have most contributed to sustained, superior -40% corporate performance. Findings from this research were published -60% in a series of articles in 2010. 154 Raynor, Michael and Mumtaz -80% Ahmed. “Survival of the Fattest,” Deloitte Review. http:// www.deloitte.com/view/ -100% en_US/us/Insights/Browse-by- 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Content-Type/deloitte-review/ bfeebb8fda426210VgnVC- M100000ba42f00aRCRD.htm Bottom Quartile Linear (Bottom Quartile) Source: Compustat, Deloitte analysis 124 Source: Data from Compustat, Deloitte analysis

Winning companies are barely holding on, while losers experience rapidly deteriorating performance

Introduction surprising, however, is how little winners have gained The ROA Performance Economy-wide, ROA is declining as competition intensifies during the past 45 years. Technology has enabled firms to Gap metric measures and consumers and talented workers gain market power. leverage talent in new and innovative ways and cut costs the percentage Yet we all know averages can be deceiving. Maybe good from operations on an unprecedented scale, however, difference in ROA companies are generating high returns, but the losers are even top quartile performers have failed to convert these between the top and losing big and dragging down ROA? What is happening at advances into ROA gains.152 The ROA for the top quartile of bottom quartiles and the company level? firms has actually declined gradually over the past 45 years reflects how value flows (see Exhibit 92), from 12.7% in 1965 to 9.9% in 2010. to (or from) “winners” The ROA Performance Gap is meant to shed light on what and “losers” in an might otherwise be obscured by averages. Over time, this These findings corroborate the research of our colleagues, increasingly competitive metric will reveal trends in how value is distributed among Michael Raynor and Mumtaz Ahmed, in Deloitte’s environment. firms and quantify the true consequences of doing poorly Persistence Project.153 While ROA for the top 1% of firms or well in the Big Shift. has improved, ROA in the top decile firms has only held ROA Perf Gap 1 This metric is a proxy for steady over the past 45 years.154 Only a very small group of firm performance. Observations and Implications companies has succeeded in improving ROA. FromThe ROA Performance him Gap that shows a bifurcation hath of winners not shall be taken away . . . The (so-called) transformation problem Fallingand losers; downwards! this finding is by no Newsmeans new. fromWhat is the Edge 4 Updated Exhibit 91: Economy-wide ROA by quartile, (1965-2010) Exhibit 92: Economy-wide ROA by quartile (1965-2010)

20%

15% 12.7% Why it matters: the falling rate of proﬁt 9.9% 10%

0% From him that hath not shall be taken away . . . Top Quartile Linear (Top Quartile)

2013-07-08 -80% Ahmed. “Survival of the Fattest,” Deloitte Review. http:// www.deloitte.com/view/ -100% en_US/us/Insights/Browse-by- 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Content-Type/deloitte-review/ bfeebb8fda426210VgnVC- M100000ba42f00aRCRD.htm Bottom Quartile Linear (Bottom Quartile) Source: Compustat, Deloitte analysis 124 Source: Data from Compustat, Deloitte analysis

91 © 2011 Deloitte Touche Tohmatsu Notes 1. Matthew 25:29: “From him that hath not shall be taken away even that which he hath.” 2. only top one per cent of ﬁrms have increased ROA; top decile has remained steady. 3. The 2011 Shift Index, page 124, exhibit 92. Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised The transformation problem 1 More notation—and assumptions and conditions

Production Market Capital Results Rates of . . . c = constant 6 w = value proﬁt: s/(c + v) p = price v = variable 7 s = surplus value exploitation: s/v π = proﬁt

Assumptions Competition equalises market proﬁt rate, π/(c + v) Equal rate of exploitation Conditions Total value equals total price Total surplus value equals total proﬁt 6means of production 7wages The transformation problem 1 The (so-called) transformation problem More notation—and assumptions and conditions

Production Market The problem posed and answered Capital Results Rates of . . . c = constant 6 w = value proﬁt: s/(c + v) p = price v = variable 7 s = surplus value exploitation: s/v π = proﬁt

The transformation problem 1 Assumptions Competition equalises market proﬁt rate, π/(c + v) Equal rate of exploitation Conditions Total value equals total price

2013-07-08 Total surplus value equals total proﬁt 6means of production 7wages

Notes

1. profit: there is is distinction to be explicated—ambiguity of meanings between firm/production/market] 2. s/(c + v) is a value expression at market level, NOT expression for firm-level profit, if c/v unequal 3. π/(c + v) is equal to value rate as “social” or “general” rate of profit, and maximum rate of self-expansion of capitalist sector Prologue The (so-called) transformation problem Why it matters: the falling rate of profit Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised The transformation problem 2 Disintegration of the Ricardo school

However, Value 6= price, especially 6= market price ∃ different ‘compositions of capital’ (c/v) in different industries =⇒ different ratios imply unequal proﬁt rates if labour time directly determines exchange value Ricardo aware of the problem, but neither he nor followers had an answer ‘93 per cent’ labour theory of value 8 Disintegration of Ricardo school 9 8Stigler t.b.a. 9Theories of Surplus Value Ch.20, ¶ 2(a) The transformation problem 2 The (so-called) transformation problem Disintegration of the Ricardo school However, Value 6= price, especially 6= market price The problem posed and answered ∃ different ‘compositions of capital’ (c/v) in different industries =⇒ different ratios imply unequal proﬁt rates The transformation problem 2 if labour time directly determines exchange value Ricardo aware of the problem, but neither he nor followers had an answer ‘93 per cent’ labour theory of value 8 9

2013-07-08 Disintegration of Ricardo school 8Stigler t.b.a. 9Theories of Surplus Value Ch.20, ¶ 2(a)

Notes 1. Marx’s commentary on James Mill’s method of solving the t-problem: ‘a much more difficult problem to solve than that of squaring the circle, which can be solved algebraically. It is simply an attempt to present that which does not exist as in fact existing.’ TSV Ch.20, ¶ 2(a) 2. James Mill’s method: ‘an attempt to present that which does not exist as in fact existing.’ 3. The t-problem: ‘more difficult . . . than . . . squaring the circle, which can be solved algebraically. This ought to be a clue: implies that t-problem cannot be (fully) ‘solved’ (better: ‘understood’) by algebra alone. Prologue The (so-called) transformation problem Why it matters: the falling rate of profit Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised The transformation problem Engels’ prize essay competition

Set in the Introduction to Capital II (1884) Winner: Peter Fireman Runner-up: Conrad Schmidt Booby prize: George Steibeling Notes for solution Two distinctions between value and price Qualitative: ways of measuring—labour-time and money ’Price, taken by itself, is only the monetary expression of value’ 10 Quantitative: ‘value produced’ vs. ‘value received’ value determined by labour-time price received for commodity in money

10Value, Price and Proﬁt: 29 The transformation problem The (so-called) transformation problem Engels’ prize essay competition Set in the Introduction to Capital II (1884) Winner: Peter Fireman The problem posed and answered Runner-up: Conrad Schmidt Booby prize: George Steibeling Notes for solution The transformation problem Two distinctions between value and price Qualitative: ways of measuring—labour-time and money ’Price, taken by itself, is only the monetary expression of value’ 10 Quantitative: ‘value produced’ vs. ‘value received’ value determined by labour-time 2013-07-08 price received for commodity in money

10Value, Price and Proﬁt: 29

Notes 1. Results announced in Preface to Capital III. 2. On Fireman, see Alain Alcouffe (2010), 14th Annual Conference of the European Society for the History of Economic Thought (ESHET), Amsterdam; note also: Highly commended: Werner Sombart 3. Engels on Steibeling: ‘when a man wants to deal with scientific questions he should above all learn to read the works he wishes to use just as the author had written them, and above all without reading anything into them that they do not contain’. Twentieth-century Marxists should take note. 4. ‘Notes for solution’: see RMC, page 24. 5. Value, Price and Profit: citation is to Progress Publishers edition (1947) under the title Wages, Price and Profit Prologue The (so-called) transformation problem Why it matters: the falling rate of profit Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Marx’s answer Capitalist communism

‘Prices of production’ re-distribute surplus value to equalise proﬁt rates

s π Branch c v s w π p c : v c+v c+v 1 54 6 12 72 15 75 9:1 20% 25% 2 16 4 8 28 5 25 4:1 40% 25% P 70 10 20 100 20 100 7:1 25% 25%

Three equalities: Total surplus value = total profit Total price = total value Value rate of profit = price rate of profit Marx’s answer The (so-called) transformation problem Capitalist communism

‘Prices of production’ The problem posed and answered re-distribute surplus value to equalise proﬁt rates s π Branch c v s w π p c : v c+v c+v 1 54 6 12 72 15 75 9:1 20% 25% Marx’s answer 2 16 4 8 28 5 25 4:1 40% 25% P 70 10 20 100 20 100 7:1 25% 25%

Three equalities: Total surplus value = total profit 2013-07-08 Total price = total value Value rate of profit = price rate of profit

Notes 1. having more productive process does not ‘create more value’: it allows you to appropriate value created by other capitalists (or rather, by their workers). Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Bortkiewicz’s problem Supposed proof of ‘internal contradiction’

s π Period Dept. r c v s w π p (c+v) (c+v) I 280 72 48 400 88 440 13.6% 25.0% 1 II 80 96 64 240 44 220 36.4% 25.0% III 40 72 48 160 28 140 42.9% 25.0% P 400 240 160 800 160 800 25.0% 25.0%

With sale at values simple reproduction is possible e.g., in Dept. I the value of output (w = 400) equals total quantity of used-up means of production: c = 400 But if Dept. I output sells at prices of production( p = 440) some will go unsold, since constant capital expenditure c = 400, and production will contract Bortkiewicz’s problem The (so-called) transformation problem Supposed proof of ‘internal contradiction’

s π Period Dept. r c v s w π p (c+v) (c+v) The problem problematised I 280 72 48 400 88 440 13.6% 25.0% 1 II 80 96 64 240 44 220 36.4% 25.0% III 40 72 48 160 28 140 42.9% 25.0% Bortkiewicz’s problem P 400 240 160 800 160 800 25.0% 25.0% With sale at values simple reproduction is possible e.g., in Dept. I the value of output (w = 400) equals total quantity of used-up means of production: c = 400 But if Dept. I output sells at prices of production( p = 440) 2013-07-08 some will go unsold, since constant capital expenditure c = 400, and production will contract

Notes 1. Department I: material elements of constant capital (means of production) Department II: material elements of variable capital (workers’ means of subsistence) Department III: luxuries (capitalist consumption) 2. ‘Period’ and ‘r’: see later slide . . . Prologue The (so-called) transformation problem Why it matters: the falling rate of proﬁt Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Bortkiewicz’s solution Walrasian ‘marxism’

Alfred Marshall said once of Ricardo: ‘He does not state clearly, and in some cases he perhaps did not fully and clearly perceive how, in the problem of normal value, the various elements govern one another mutually, not successively, in a long chain of causation.’ This description applies even more to Marx . . . [who] held ﬁrmly to the view that the elements concerned must be regarded as a kind of causal chain, in which each link is determined, in its composition and its magnitude, only by the preceding links . . . Modern economics is beginning to free itself gradually from the successivist prejudice, the chief merit being due to the mathematical school led by Leon Walras.11

11Bortkiewicz (1952:23-24) Bortkiewicz’s solution The (so-called) transformation problem Walrasian ‘marxism’

Alfred Marshall said once of Ricardo: ‘He does not state clearly, and in some cases he perhaps did not fully and clearly perceive how, in The problem problematised the problem of normal value, the various elements govern one another mutually, not successively, in a long chain of causation.’ This description applies even more to Marx . . . [who] held ﬁrmly to the Bortkiewicz’s solution view that the elements concerned must be regarded as a kind of causal chain, in which each link is determined, in its composition and its magnitude, only by the preceding links . . . Modern economics is beginning to free itself gradually from the successivist prejudice, the chief merit being due to the mathematical school led by Leon 11

2013-07-08 Walras.

11Bortkiewicz (1952:23-24)

Notes 1. ‘Your writings, sir, have awakened in me a lively interest in the application of mathematics to political economy, and has pointed out to me the road to travel in my researches into the methodology of economic science.’ (Bortkiewicz to Walras, at the age of 19). 2. what about simultaneist prejudice? The words emphasised effectively define the problem, without attempt at justification, as simultaneist one—indeed define simultaneist approach as only possible one Prologue The (so-called) transformation problem Why it matters: the falling rate of profit Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised

s System Branch vpu c v s w c +v Value 1 1 96 10 14 120 13.2 2 1 12 20 28 60 87.5 Total 108 30 42 180 30.4

π Branch ppu c′ v′ π p c′ +v′ Bortkiewicz 1 1.75 168 7 35 210 20 2 0.70 21 14 7 42 20 Total 189 21 42 252 20

Moszkowska- 1 1.25 120 5 25 150 20 Winternitz 2 0.50 15 10 5 30 20 Total 135 15 30 180 20

`New and 1 1.50 144 6 30 180 20 improved’ 2 0.6 18 12 6 36 20 Total 162 18 36 216 20

s The (so-called) transformation problem System Branch vpu c v s w c +v Value 1 1 96 10 14 120 13.2 2 1 12 20 28 60 87.5 Total 108 30 42 180 30.4 The problem problematised π Branch ppu c′ v′ π p c′ +v′ Bortkiewicz 1 1.75 168 7 35 210 20 2 0.70 21 14 7 42 20 Total 189 21 42 252 20

Moszkowska- 1 1.25 120 5 25 150 20 Winternitz 2 0.50 15 10 5 30 20 Total 135 15 30 180 20

`New and 1 1.50 144 6 30 180 20

2013-07-08 improved’ 2 0.6 18 12 6 36 20 Total 162 18 36 216 20

Notes

1. RMC Table 9.2, p.159 2. circle-squaring literature: at best two equalities preserved, usually not the vital one—i.e. profit rate 3. Bortkiewicz preserves total surplus = total profit 4. Moszkowska-Winternitz preserves total value = total price 5. ‘New and improved’ preserves total capital advanced = total value produced—which =⇒ ‘profit’ is a pure mark-up 6. Sweezey’s endorsement, and ‘20th-century Marxism’ Prologue The (so-called) transformation problem Why it matters: the falling rate of profit Marx the temporalist The problem posed and answered Marx the probabilist The problem problematised Simultaneism =⇒ physicalism Steedman’s ‘physical quantities approach’

Simultaneism: requirement that per-unit input prices (or values) must equal per-unit output prices (or values) Physicalism: sole proximate determinants of values, relative prices, proﬁts, and rate of proﬁt are technology and real wages

Corn Price (or value) Capital Input 10 bushels $6/bushel $6 × 10 = $60 Output 12 bushels $5/bushel $5 × 12 = $60 Input 10 bushels $5/bushel $5 × 10 = $50 Output 12 bushels $5/bushel $5 × 12 = $60 Simultaneism =⇒ physicalism The (so-called) transformation problem Steedman’s ‘physical quantities approach’

Simultaneism: requirement that per-unit input prices (or values) The problem problematised must equal per-unit output prices (or values) Physicalism: sole proximate determinants of values, relative =⇒ prices, proﬁts, and rate of proﬁt are technology and real wages Simultaneism physicalism Corn Price (or value) Capital Input 10 bushels $6/bushel $6 × 10 = $60 Output 12 bushels $5/bushel $5 × 12 = $60 Input 10 bushels $5/bushel $5 × 10 = $50

2013-07-08 Output 12 bushels $5/bushel $5 × 12 = $60

Notes 1. physical rate of return clearly 20% in both cases 2. rate of proﬁt only = 20% by imposing simultaneous valuation (at any strictly positive price/value) 3. see RMC, Ch.5, for discussion Steedman (1977: p.72, pp.216–217) and Sraffa Samuelson’s ‘eraser method’ struggle over wage:proﬁt share 4. Incompatible with labour values since rising productivity ≡ lower labour values (C.I); see Okishio Theorem and LTFRP 5. physical quantities are the only ones unchanged by competitive process: altered prices, and both exchanges and use values are results of competition. The (so-called) transformation problem The Temporal Single System Interpretation Marx the temporalist Is Marx a temporalist? Marx the probabilist The Temporal Single System Interpretation Freeing economics from the simultaneist prejudice

Bortkiewiczian transformation problem is a problem because simultaneism leads to physicalism leaves out labour values either implies static economy or contrary to physics capitalists can’t go back in time to purchase new outputs at old values/prices contrary to second law of thermodynamics Take output prices (of production) as input values in next period Because capitalists lay out value in form of money to purchase inputs The Temporal Single System Interpretation Marx the temporalist Freeing economics from the simultaneist prejudice Bortkiewiczian transformation problem is a problem because simultaneism The Temporal Single System Interpretation leads to physicalism leaves out labour values either implies static economy The Temporal Single System Interpretation or contrary to physics capitalists can’t go back in time to purchase new outputs at old values/prices contrary to second law of thermodynamics Take output prices (of production) as input values in next period

2013-07-08 Because capitalists lay out value in form of money to purchase inputs

Notes The (so-called) transformation problem The Temporal Single System Interpretation Marx the temporalist Is Marx a temporalist? Marx the probabilist Bortkiewicz refuted Bringing back time—and giving up equilibrium

s π Period Dept. r c v s w π p (c+v) (c+v) I 280 72 48 400 88 440 13.6% 25.0% 1 II 80 96 64 240 44 220 36.4% 25.0% III 40 72 48 160 28 140 42.9% 25.0% P 400 240 160 800 160 800 25.0% 25.0%

I 66 308 66 54 428 102 476 14.4% 27.3% 2 II 44 88 88 72 248 48 224 40.9% 27.3% III 30 66 66 54 164 30 140 49.1% 27.3% P 140 440 220 180 840 180 840 27.3% 27.3%

r = residual proceeds (‘revenue’, in Marx) Bortkiewicz refuted Marx the temporalist Bringing back time—and giving up equilibrium

s π Period Dept. r c v s w π p (c+v) (c+v) The Temporal Single System Interpretation I 280 72 48 400 88 440 13.6% 25.0% 1 II 80 96 64 240 44 220 36.4% 25.0% III 40 72 48 160 28 140 42.9% 25.0% Bortkiewicz refuted P 400 240 160 800 160 800 25.0% 25.0%

I 66 308 66 54 428 102 476 14.4% 27.3% 2 II 44 88 88 72 248 48 224 40.9% 27.3% III 30 66 66 54 164 30 140 49.1% 27.3%

2013-07-08 P 140 440 220 180 840 180 840 27.3% 27.3%

r = residual proceeds (‘revenue’, in Marx)

Notes 1. see RMC discussion pp.151–2 2. Total price = total value 3. Period 1 output prices = Period 2 input prices 4. Total residual proceeds equal price of Dept. III output, so capitalists can buy luxury goods 5. Hence physical quantities are the same in each period, which is deﬁnition of simple reproduction The (so-called) transformation problem The Temporal Single System Interpretation Marx the temporalist Is Marx a temporalist? Marx the probabilist ‘It is always possible to go wrong’ . . . and many readers have

As the price of production of a commodity can diverge from its value, so [can] the cost price of a commodity, in which the price of production of other commodities is involved ... . It is necessary to bear in mind this modiﬁed signiﬁcance of the cost price ... if the cost price of a commodity is equated with the value of the means of production used up in producing it, it is always possible to go wrong. (Capital, Vol. III, p.309, New York, Vintage Books, 1981.) This supposedly licences simultaneism ...... because Marx is ‘confused’ ‘It is always possible to go wrong’ Marx the temporalist . . . and many readers have

As the price of production of a commodity can diverge from its value, Is Marx a temporalist? so [can] the cost price of a commodity, in which the price of production of other commodities is involved ... . It is necessary to bear in mind this modiﬁed signiﬁcance of the cost price ... if the cost ‘It is always possible to go wrong’ price of a commodity is equated with the value of the means of production used up in producing it, it is always possible to go wrong. (Capital, Vol. III, p.309, New York, Vintage Books, 1981.) This supposedly licences simultaneism ...... because Marx is ‘confused’ 2013-07-08

Notes The (so-called) transformation problem The Temporal Single System Interpretation Marx the temporalist Is Marx a temporalist? Marx the probabilist ‘It is always possible to go wrong’ . . . and many readers have

However . . . the price of production of a commodity that diverges in this way from its value enters as an element into the cost-price of other commodities ... [hence] ... a divergence from the value of the means of production consumed may already be contained in the cost price, quite apart from the divergence that may arise for the commodity itself from the difference between average proﬁt and surplus value 12

12Capital III: 309 ‘It is always possible to go wrong’ Marx the temporalist . . . and many readers have

Is Marx a temporalist? However . . . the price of production of a commodity that diverges in this way from its value enters as an element into the cost-price of other commodities ... [hence] ... a divergence from the value of the ‘It is always possible to go wrong’ means of production consumed may already be contained in the cost price, quite apart from the divergence that may arise for the commodity itself from the difference between average proﬁt and surplus value 12 2013-07-08

12Capital III: 309

Hence we are considering two different questions13 Marx what is the relation between values and prices in the same economy at two points in time? divergence ‘already contained in the cost-price’ (period 0) Bortkiewicz what is the relation between prices in two different economies at the same point in time? difference between the surplus value and proﬁt (period 1) See also a telling passage from Theories of Surplus Value14

13Freeman (1995) 14TSV Part. III, p.167 ‘It is always possible to go wrong’ Marx the temporalist . . . and many readers have Hence we are considering two different questions13 Marx what is the relation between values and prices in Is Marx a temporalist? the same economy at two points in time? divergence ‘already contained in the cost-price’ (period 0) ‘It is always possible to go wrong’ Bortkiewicz what is the relation between prices in two different economies at the same point in time? difference between the surplus value and proﬁt (period 1) See also a telling passage from Theories of Surplus Value14 2013-07-08 13Freeman (1995) 14TSV Part. III, p.167

Notes 1. “the cost-price of constant capital – or of the commodities which enter into the value of the newly produced commodity ... may likewise be either above or below its value. Thus ... the difference between cost-price and value, in so far as it enters into the price of the new commodity independently of its own production process, is incorporated into the value of the new commodity as an antecedent element” Theories of Surplus Value Part. III, p.167, Moscow, Progress Publishers, 1971. The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? Farjoun and Machover Giving up (empirical) proﬁt-rate equalisation

Dissolving the transformation problem Temporal Single System refutes claims of logical inconsistency in Marx’s theory Farjoun and Machover drop profit rate equalisation empirical approach, but also changes logic of problem demonstrate probabilistic correspondence of value and price categories appeal to statistical mechanics for hypothesis about profit rate distribution ...... which is that it should be gamma distribution Farjoun and Machover Marx the probabilist Giving up (empirical) profit-rate equalisation

Dissolving the transformation problem Dissolving the transformation problem Temporal Single System refutes claims of logical inconsistency in Marx’s theory Farjoun and Machover drop proﬁt rate equalisation Farjoun and Machover empirical approach, but also changes logic of problem demonstrate probabilistic correspondence of value and price categories appeal to statistical mechanics for hypothesis about proﬁt rate distribution ...

2013-07-08 . . . which is that it should be gamma distribution

Laws of Chaos (1983) large systems of independent agents sound like markets large systems of independent atoms sound like ideal gas use statistical mechanical concepts to think about market economies ‘econophysics’ terminology coined by Stanley et al. (1992) but priority of application evidently goes to Farjoun and Machover ideal gas laws are “emergent property” of interaction of atoms Farjoun and Machover Marx the probabilist Economics and physics

Laws of Chaos (1983) Dissolving the transformation problem large systems of independent agents sound like markets large systems of independent atoms sound like ideal gas use statistical mechanical concepts to think about market Farjoun and Machover economies ‘econophysics’ terminology coined by Stanley et al. (1992) but priority of application evidently goes to Farjoun and Machover ideal gas laws are “emergent property” of interaction of

2013-07-08 atoms

Notes The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist?

Comparing distributions: densities

Gaussian 1.0 exponential gamma 2 Pareto 1.75 0.8 log normal 0.6 0.4 Relative Frequency 0.2 0.0

0 2 4 6 8

Value of Random Variable Marx the probabilist Comparing distributions: densities

Gaussian 1.0 exponential gamma 2 Pareto 1.75 Dissolving the transformation problem 0.8 log normal 0.6 0.4 Relative Frequency 0.2 0.0

0 2 4 6 8

2013-07-08 Value of Random Variable

Notes 1. Gamma and Pareto distributions emphasised for reasons that will appear 2. lower bound of Pareto is 10−1 3. vertical lines at one and three standard deviations The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist?

Comparing distributions: Zipf plots

Gaussian

5 Gaussian exponential exponentialgamma 2 gammaPareto 2 1.75 log normal Pareto 1.75 4 log normal 3 2 log10(rank) 1 0

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

log10(value) Marx the probabilist Comparing distributions: Zipf plots

Gaussian

5 Gaussian exponential exponentialgamma 2 gammaPareto 2 1.75 log normal Pareto 1.75 Dissolving the transformation problem 4 log normal 3 2 log10(rank) 1 0

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

2013-07-08 log10(value)

Notes 1. data is simulated for comparability with empirical chart to follow 2. below horizontal line we are looking at the 100 largest values plotted individually (above, only 1 in 1,000 shown) 3. vertical lines at one and three standard deviations, as before 4. despite appearances, members of the exponential family do not have asymptotes The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist?

Time variation in Gillman 4 profit rate

6 1991 1992 1993 1994 5 1995 4 3 log10(rank) 2 1 0

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

log10(profit ratio) Marx the probabilist Time variation in Gillman 4 profit rate

6 1991 1992 1993 1994 Dissolving the transformation problem 5 1995 4 3 log10(rank) 2 1 0

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

2013-07-08 log10(profit ratio)

Notes 1. Gillman4 corresponds to Farjoun and Machover’s profit rate; see Joseph Gillman (1956) The falling rate of profit: Marx’s law and its significance to twentieth-century capitalism. 2. below horizontal line we are looking at approximately 10 per cent of the total capital 3. exponential above, power law tail below (compare simulated Pareto) 4. tail variation disrupted identification of gamma as distribution of Gillman4 The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? Profit rates and power-laws It’s the tails that matter, not the cats

Power-law tails found for all profit-rate definitions . . . also widely accepted as stylized fact about returns to financial assets . . . and for many key variables, such as wealth and income

[T]his reflects an underlying heterogeneity in the population . . . . The fat tails mean that a relatively small number of events, or people or something, have a big influence. And I think most of our theories of price changes, of changes in investment in response to different conditions are deficient because they don’t take account of the shapes of the distributions. (Kenneth Arrow15)

15Dubra 2005, pp 11–12 Proﬁt rates and power-laws Marx the probabilist It’s the tails that matter, not the cats

Power-law tails found for all profit-rate definitions Econophysics and complexity . . . also widely accepted as stylized fact about returns to financial assets . . . and for many key variables, such as wealth and income Profit rates and power-laws [T]his reflects an underlying heterogeneity in the population . . . . The fat tails mean that a relatively small number of events, or people or something, have a big influence. And I think most of our theories of price changes, of changes in investment in response to different conditions are deficient because they don’t take account of the 15

2013-07-08 shapes of the distributions. (Kenneth Arrow )

15Dubra 2005, pp 11–12

Notes 1. Power-law tails: as found long ago by Madelbrot, forgotten by Fama, overlooked by LTCM, revived by econophysicists; see Wells (2013) Fat Cats, also discussion in Mirowski (2004) The effortless economy of science? Chapters 11 and 12 2. Shapes: compare Marx . . . The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? Econophysics and complexity | Probabilistic marxism

Complex systems: order an ‘emergent property’ of large systems of independent agents features can’t be deduced from rules power law tails an indicator of ‘criticality’ system can rapidly re-organise in face of a shock

Classical Econophysics (Cottrell et al. 2009) The Social Architecture of Capitalism (Wright 2005) agent-based modelling: simple rules of exchange; only ‘built-in’ structure is employers/employees/unemployed generates stylised facts about many economic variables: distributions of wealth, income, ﬁrm size, ﬁrm life-span, and so on Marx the probabilist Econophysics and complexity | Probabilistic marxism Complex systems: order an ‘emergent property’ of large systems of independent agents Econophysics and complexity features can’t be deduced from rules power law tails an indicator of ‘criticality’ system can rapidly re-organise in face of a shock

Econophysics and complexity | Probabilistic marxism Classical Econophysics (Cottrell et al. 2009) The Social Architecture of Capitalism (Wright 2005) agent-based modelling: simple rules of exchange; only ‘built-in’ structure is employers/employees/unemployed generates stylised facts about many economic variables:

2013-07-08 distributions of wealth, income, ﬁrm size, ﬁrm life-span, and so on

well-known that aim is to justify human free-will against determinism less appreciated: that method is to praise Epicurus’s views on chance in particular, the ‘swerve of the atom’ spontaneous deviation, deduced dialectically from concept of the atom Early years Marx the probabilist The doctoral dissertation

Is Marx a probabilist? well-known that aim is to justify human free-will against determinism less appreciated: that method is to praise Epicurus’s views Early years on chance in particular, the ‘swerve of the atom’ spontaneous deviation, deduced dialectically from concept of the atom 2013-07-08

The true law of political economy is chance, from whose movement we . . . isolate certain factors arbitrarily in the form of laws.16 . . . it is precisely these ﬂuctuations [in supply and demand] that force the price to conform to the cost of production. In the totality of this disorderly movement is to be found its order.17 If M. Proudhon admits that the value of products is determined by labour time, he should equally admit that it is the ﬂuctuating movement alone that in a society founded on individual exchanges makes labour the measure of value. There is no ready-made constituted ‘proportional relation’, but only a constituting movement.18

16‘Notes on James Mill’ 17Wage Labour and Capital 18The Poverty of Philosophy: 71 (emphases added) Early years Marx the probabilist First steps in political economy The true law of political economy is chance, from whose movement we . . . isolate certain factors arbitrarily in the form of laws.16 Is Marx a probabilist? . . . it is precisely these ﬂuctuations [in supply and demand] that force the price to conform to the cost of production. In the totality of this disorderly movement is to be found its order.17 Early years If M. Proudhon admits that the value of products is determined by labour time, he should equally admit that it is the ﬂuctuating movement alone that in a society founded on individual exchanges makes labour the measure of value. There is no ready-made constituted ‘proportional relation’, but only a constituting movement.18

2013-07-08 16‘Notes on James Mill’ 17Wage Labour and Capital 18The Poverty of Philosophy: 71 (emphases added)

Notes 1. On Mill: this is the concluding sentence of the ﬁrst para. of Marx’s notes. . . 2. anti-Proudhon developed further in Grundrisse The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? Grundrisse: complexity and emergent properties

. . . as much as the individual moments of this movement arise from the conscious will and particular purposes of individuals, so much does the totality of the process appear as an objective interrelation, which arises spontaneously from nature. . .

Their own collisions with one another produce an alien social power standing above them, produce their mutual interaction as a process and power independent of them. ...

Circulation as the ﬁrst totality among the economic categories is well suited to bring this to light. 19 (emphases added: ‘alien’ is Marx’s emphasis)

19Grundrisse pp.196–197 Marx the probabilist Grundrisse: complexity and emergent properties

. . . as much as the individual moments of this movement arise from the conscious will and particular purposes of individuals, so much Is Marx a probabilist? does the totality of the process appear as an objective interrelation, which arises spontaneously from nature. . .

Their own collisions with one another produce an alien social power standing above them, produce their mutual interaction as a process Grundrisse: complexity and emergent properties and power independent of them. ...

Circulation as the ﬁrst totality among the economic categories is well suited to bring this to light. 19 (emphases added: ‘alien’ is Marx’s emphasis) 2013-07-08

19Grundrisse pp.196–197

on the ‘equalization’ of proﬁt rates Between those spheres that approximate more or less to the social average, there is again a tendency to equalization, which seeks the ‘ideal’ mean position, i.e. a mean position which does not exist in reality. In other words, it tends to shape itself around this ideal as a norm. 20 introduces extended discussion that is verbal description of probability density

20Capital III: p.273 Marx the probabilist Probability density functions: Capital Volume III

on the ‘equalization’ of proﬁt rates Is Marx a probabilist? Between those spheres that approximate more or less to the social average, there is again a tendency to equalization, which seeks the ‘ideal’ mean position, i.e. a mean position which does not exist in Probability density functions: Capital Volume III reality. In other words, it tends to shape itself around this ideal as a norm. 20 introduces extended discussion that is verbal description of probability density 2013-07-08

20Capital III: p.273

Edmund Burke, that famous sophist and sycophant, goes so far as to make the following assertion, based on his practical observations as a farmer: that ‘in so small a platoon’ as that of ﬁve farm labourers, all individual differences in the labour vanish . . . Compare Quetelet´

But if the 12 men are employed in six pairs, by six different ‘small masters’, it will be entirely a matter of chance whether each of these masters produces the same value, and consequently whether he secure the general rate of surplus-value. . . . The inequalities would cancel out for the society as a whole, but not for the individual masters. 21, emphasis added???

21Capital I: p.xxx Marx the probabilist The central limit theorem: Capital Volume I

Edmund Burke, that famous sophist and sycophant, goes so far as to make the following assertion, based on his practical observations as Is Marx a probabilist? a farmer: that ‘in so small a platoon’ as that of ﬁve farm labourers, all individual differences in the labour vanish . . . Compare Quetelet´

But if the 12 men are employed in six pairs, by six different ‘small The central limit theorem: Capital Volume I masters’, it will be entirely a matter of chance whether each of these masters produces the same value, and consequently whether he secure the general rate of surplus-value. . . . The inequalities would cancel out for the society as a whole, but not for the individual masters. 21, emphasis added??? 2013-07-08

21Capital I: p.xxx

Notes 1. Central limit theorem—used in astronomy, and by Quetelet, but not yet either named or proved (details here) The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? Marx and Quetelet

citations are scanty—but highly signiﬁcant inﬂuence seems great, although little noticed concrete evidence: two notebooks, one noting Quetelet’s Treatise, another dealing with a later work inferential evidence ‘Peuchet’ on suicide: Quetelet and ‘statistical fatalism’? letter to Kugelmann Marx the probabilist Marx and Quetelet

Is Marx a probabilist? citations are scanty—but highly signiﬁcant inﬂuence seems great, although little noticed concrete evidence: two notebooks, one noting Quetelet’s Marx and Quetelet Treatise, another dealing with a later work inferential evidence ‘Peuchet’ on suicide: Quetelet and ‘statistical fatalism’? letter to Kugelmann 2013-07-08

Notes The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? What Marx saw in Quetelet Marx the probabilist What Marx saw in Quetelet Is Marx a probabilist? What Marx saw in Quetelet 2013-07-08

Notes 1. Quetelet (1848) Du systeme` social et des lois qui le regissent´ : 80 The (so-called) transformation problem Dissolving the transformation problem Marx the temporalist Econophysics and complexity Marx the probabilist Is Marx a probabilist? Conclusion

Marx’s value theory is dynamic, non-equilibrium theory Marx’s critics are entitled to their own theories, but not to claim that his is inconsistent Marx’s probabilism should inspire 21st century marxists Marx the probabilist Conclusion Is Marx a probabilist? Marx’s value theory is dynamic, non-equilibrium theory Marx’s critics are entitled to their own theories, but not to Conclusion claim that his is inconsistent Marx’s probabilism should inspire 21st century marxists 2013-07-08

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