Sunday, March 29, 2009

"Capital," Part 1, Chpt. 1, Sec. 3: "The Form of Value or Exchange-Value"

In Section 3 Marx addresses the question "What is value?", or, you might say, "What is money?" He traces a pseudo historical development of money from a barter society to a fully formed money market economy. In doing so, he expressly rejects the notion that the value of things is merely an expression of their market price.
Our analysis has shown, that the form or expression of the value of a commodity orignates in the nature of value, and not that value and its magnitude originate in the mode of their expression as exchange-value. This, however, is the delusion . . . of the mercantilists and their recent revivers, Ferrier, Ganilh, and others, . . .the modern bagmen of Free-trade. . . The modern hawkers of Free-trade, who must get rid of their article at any price . . . For them there . . . exists neither value, nor magnitude of value, anywhere except in its expression by means of the exchange relation of commodities, that is, in the daily list of prices current.

To Marx, the value of things derives ultimatley from the labor that went into their creation, thus the proposition that value is nothing but the "daily list of prices" seems vulgar and incorrect.

Why incorrect? The most elementary form of value is to express one commodity as a relative value of another commodity: e.g. 20 yards of linen = one coat. Marx introduces a technical definition here: the linen in the example is the "relative value" (relative form of value), whereas the coat is the "equivalent form of value." These are the two forms of value. Every expression of the value of a thing entails the interplay between two things: the relative (linen in the example), and its equivalent (the coat). However, the value of a thing can be expressed like this in relation to an infinite number of other commodities. So, Marx asks, if a coat is worth 20 feet of linen, 100 pounds of coffee, the hind quarter of a cow, so much wheat, etc.--all at the same time--then what is the coat really worth? There must be some underlying, unifying common denominator of value that ties it all together. Marx thinks that the labor that went into the creation of each thing is this common denominator that gives meaning to the the myriad expresions of relative value.

A social relation, i.e. the trade in goods, is necessary for the notion of value because a thing's value cannot be expressed in terms of itself: "20 yds of linen = 20 yds of linen" is a tautology and meaningless. An exchange of commodities is thus essential to the concept of value. No matter how warm or beutiful the coat, the tailor's labor in creating the coat infuses the coat with value only in the moment when the coat is exchanged for something else.
"It is the expression of equivalence between different sorts of commodities that alone brings into relief the specific character of value creating labor, and this it does by actually reducing the differnt varieties of labor embodied in the different kinds of commodities to their common quality of human labor in the abstract. . . . Human labor creates value, but is not itself value. It becomes value only in its congealed state, when embodied in the form of some object. In order to express the value of the linen as a congelation of human labor, that value must be expressed as having objective existence, as being a something materially different from the linen itself, and yet a something common to the linen and all other commodities."

This same relationship holds true in our modern money world. We developed money as a matter of necessity because direct barter is a highly inefficient manner of trading. If you have cows but need a plough, you must find someone who not only has a plough but also wants meat. What if you find someone who wants meat but has no plough and can only offer you linen? To get your plough, you must then also find someone who has a plough and wants linen. What if you are looking for a commodity whose equivalent is less than a whole cow? How could you divide your cow to accomlish the exchange? From such necessity social conventions evolved towards common universally useful mediums of exchange: beaver pelts and dried corn in the American colonies, linen in pre-industrial Europe. These kinds of commodities were chosen for a number of reasons, but above all because they were widely desired, durable, portable and easily stored.

In later stages of economic development, gold became the commodity universally accepted as the medium (the "equivalent") of exchange. Later still, paper money backed by gold reserves served the same purpose, and later still just paper money backed by the full faith and credit of the state treasury. In each case, the socially accepted (and trusted) commodity is universally exchangeable with any other commodity. However, throughout, the value being expressed in the exchange is ultimately the labor that is incorporated in things.
When one commodity serves as the equivalent of another, such as linen (or gold currency), and coats consequently acquire the characteristic property of being directly exchangeable with linen (or the currency), we are far from knowing in what proportion the two are exchangeable. The value of the linen (the currency) being given in magnitude, that porportion depends on the value of the coat. . . . The magnitude of the coat's value is determined, independently of its value-form, by the labor-time necessary for its production."

Observations

It does not appear that this is a prescription for doing away with free markets. The process here seems more descriptive than prescriptive. Marx is trying to come to grips with the fundamental source of value and he thinks the "bagmen of Free trade" have it muddled. He believes labor must be the common denominator of all the exchange equations that could be stated between one commodity and an infinite number of other commodities. In other words, the meaning underlying "1 coat = 20 yds of linen" is an expression of its value in terms of the labor used to produce it. In saying that "that's what the exchange equivalance means," Marx does not need to abandon the market. The market, of course, may get this valuation wrong on any given day in its "list of prices."

On the other hand, if we accept that the underlying source of value in any thing is some multiple of undifferentiated unskilled labor units, one might be inclined to set up an agency to scientifically study and investigate how much labor is in each thing directly, and to set what the labor will be worth; in other words to take the market out of it. Whether the free market (the invisible hand) can do a better job at accurately setting those values than some governmental agency may have been an open question in 1917. Today, I think we would say the experiment's been run, and that a governmental agency will not do a better job at this than the market. Nevertheless, this does not necessarily discredit Marx's observation about labor being an underlying source of value.

Wednesday, March 25, 2009

Marx, Capital, Part I, Chpt. 1, Section 2: The Two-Fold Character of Labor

In Section One Marx discussed how things have two qualities: the quality of being useful, and the quality of having value. A coat is useful because it keeps you warm. A coat has value because a weaver created the cloth, a designer conceived it, and a tailor or seamstress made it; in other words, it was worked on. Marx concluded that the true value of the thing (not necessarily its market price) corresponds with how much labor was used to create the coat.

In Section Two he discusses the flip side of this duality. First, every thing requires labor to be useful. The apple must be picked, the corn must be planted and reaped, the cotton must be picked and weaved, the coat must be sewn. Labor is what makes the thing useful. Second, labor has value, and it is labor that gives value to things.

The amount of unskilled labor used to create a thing is the basic measure of value. Skilled labor can be measured in unskilled labor units. Thus an hour of skilled labor is worth more than an hour of unskilled labor in accordance with social conventions.

A thing's useful value (as opposed to money value) has two components: (1) the raw materials that go into the thing; and (2) the labor that goes into shaping the raw materials into a useful thing or commodity. However, a thing has monetary value only to the extent that it was labored upon.
"Tailoring and weaving, though qualitativley different productive acitivies, are each a productive expenditure of human brains, nerves and muscles, and in this sense are human labor . They are but two different modes of expending human labor-power. . . . But the evalue of a commodity represents human labor in the abstract, the expenditure of human laobr in general. And just as in society, a general or a banker plays a great part, but mere man, on the other hand, a very shabby part, so here with mere humnan labor... Skilled labor counts only as a simple labor intensified, or rather, as multiplied simple labor, a given quanitty of skille being consdered equal to a greater quantity of simple labor.

Observations

Nature, it seems, is left out of the equation. Although raw materials are "useful", only labor adds value. Marx would say that when we buy lumber to build a house the price of the lumber is a function of the labor that went into cutting down the tree and shaping it into a 2x4. We are just now, I think, beginning to appreciate the value of natural resources (like clean air, stable envirionment, etc.).

The idea of a fungible unit of unskilled or basic labor, with an assumed baseline rate of productivety, seems like some type of Platonic form. Marx uses an example of a coat incorporating twice as much labor as the cloth of which it's made. The measure of this exact relationship would seem to be highly impractical,nay impossible to measure in practice. The same goes for determining the multiple to be applied to different forms of skilled labor. Marx mentions "social conventions." That sounds very much like the whole thing is still fundamentally market driven.

Sunday, March 22, 2009

Karl Marx: Capital: A Critique of the Political Economy Chpt. 1, Section 1

Capital: A Critique of the Political Economy
by Karl Marx.

Karl Marx published the first volume of Das Kapital in 1867. Marx died in 1883 before he had completed editing Volumes II and III, and these volumes were published by his friend and collaborator Friedrich Engels in 1885 and 1894 respectively. I’ve not read this book before. So without further advance research, without preconception (other than that it became an influential book for communist thought), I will dive in. In order to assure careful reading, and purely for my own discipline and pleasure, I will keep a log of this book at this blogspot. I hope you will find it entertaining and that my review will also prompt some thoughts along the line that the reader may care to share.

So without further ado . . . let’s get started.

PART I

Chpt. 1, Section 1: “The Two Factors of a Commodity: Use-Value and Value (i.e. the Substance of Value and the Magnitude of Value).

1. The wealth of society in capitalist system presents itself as the sum total of all commodities.

2. A commodity is a thing that satisfies some human want. I.e. a thing for which there is a market. Marx discusses, and seems to acknowledge that the exchange value for a thing (market price) is set by supply and demand, and that this exchange value is independent of both the objective usefulness of a thing and the labor that went into producing it.

3. Marx then posits a grand bartering scheme where a bushel of wheat can be exchanged for so much gold, so much iron or, so much milk, etc. ad infinitum. Each commodity a similar multitude of exchange values. Marx presents this as a problem: he suggests that there must be some common denominator to all these myriad different exchange values. For us, money comes to mind: the dollar or whatever currency you want to use. However, that’s not what Marx has in mind. Here is what he says:

“Let us take two commodities, e.g. corn and iron. The proportions in which they are exchangeable, whatever those proportions may be, can always be represented by an equation in which a given quantity of corn is equated to some quantity of iron. . . What does this equation tell us? It tells us that in two different things (x amount of corn and y amount of iron), there exists in equal quantities something common to both. The two things must therefore be equal to a third, which in itself is neither the one nor the other. Each of them, so far as it is an exchange value, must therefore be reducible to this third.”

Yes, the common currency, money, right? No . . . labor. All commodities take labor to produce. The labor used to create a commodity is a value independent of its exchange value. Whatever the exchange value (supply and demand) such value would not exist but for the labor that went into creating the thing. Therefore, the value of a commodity is equal to the labor hours required to produce it.

Marx here is clearly not speaking of market price value. Marx acknowledges that Market price value is a function of supply and demand and is completely independent of the labor that goes into it. Rather, Marx is postulating a grand normative, prescriptive, and entirely theoretical notion of value: the value of a thing in society should be measured by the number of hours of productive labor that is required to make the thing.
“[A ] useful article has value only because human labor in the abstract has been embodied or materialized in it. How then is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labor, contained in the article.”

A corollary of this position recognized by Marx is that as the means of production become more efficient, he mentions the power loom, the value of a thing decreases together with the reduction in labor required to produce it. Something useful, like air, water, oil in the ground, that requires no human labor has no value.

Marx concludes by emphasizing the normative nature of his conception: “If the thing is useless,” he says, and we might well ask “useless” in whose eyes, then “so is the labor contained in it; the labor does not count as labor, and therefore creates no value.”

Observations

This first section is couched in terms of a logical argument: that somehow the conclusion of labor being an irreducible value inherent in all things is compelled by logic. Marx provides no justification in this chapter why there should b e a connection between the amount of labor that goes into the production of a thing and its inherent social value. Although there is surely a connection between the cost of production and labor, the farther one gets from clearly useful and necessary commodities like iron, ore, copper, and agricultural products, the less self evident the thesis becomes. Although Marx imports a normative basis for this system of values, he does not yet begin to address how to determine the use-value of a thing and who gets to say so (if not the market).

The Renewal of Renewable Energy

Peak electricity demand in California is approximately 60,000 megawatts. In excess of 20% of this is imported, mostly from the Southeastern U.S. and the Pacific Northwest. Roughly half of this demand is fulfilled by natural gas, a little less than a fifth by nuclear plants, and a similar amount by hydroelectric power plants. Peak usage (which happens seldom) and peak capacity are about equal, which is why we flirt with black-out conditions on hot summer days.

For 20 plus years environmental lobbying on the one hand, and rate capping on the other hand, inhibited the construction of new power plants. We stood idly by as demand rose ‘til Enron and the partly real, partly manufactured energy crisis of 2001jolted us sufficiently to acknowledge that new capacity must be added. As Victor Rauch has pointed out, we have been able to delay the day of reckoning because our energy use has gotten much more efficient over that past 25 years. Although car mpg consumption has not improved much, our buildings, factories, and appliances are all much more efficient than they were in 1980. At this point, however, the jig's up: growing population and demand has outstripped capacity. We must increase our production of electricity or curtail our habits and potential for economimc growth.

Luckily, we don't have to add this new capacity by building more nuclear or gas fired plants. High crude oil prices, stimulus dollars, and global warming are making renewable energy sources more viable and attractive than ever. Advances in technology since we last subsidized renewable energy (wind power at Altamont Pass, Tehachepi, and San Gorgonio, early generation solar heat in the Mojave, and solar panels for swimming pools) promise that this time round, renewable energy will be economically sustainable on a large scale. California utilities are mandated to achieve 20 percent renewable energy by 2017, and this appears eminently achievable.

BrightSource Energy of Oaklan is one company at the forefront of this renewal of renewable energy. They have contracts to develop 2,000 megawatts of solar power (heat generation technology) for California’s two major utilites: Pacific Gas & Electric and Southern California Edison. These contracts all by themselves represent a 4 percent increase in the state’s electrical power capacity.

My brother-in-law, David, an early adopter of everything cool, has a 3.5kw solar panel installation on his roof. If 3 million California households (26% of total households) had similar installations, that would add up to an additional 10,000 megawatts of renewable power. Assuming an installation cost of $11,000 each, that would represent a cost of $3,100/kw, which I believe would be very competitive with building new nuclear power plants ($3,500 - $4,000 per kw).

We've seen the future and it's renewable energy. As Arnold would say, Go Kalifornia!

Supercatialism: superbig, superefficient, superbad?

What is Walmart good for? Walmart is good for investors (100 fold return on 1987 investment) and Walmart is good for consumers ($300 20" flatscreen TV's). What is Walmart not good for: Mainstreet shops, American manufacturers of products, and employees of both. The same can be said for Amazon, Barnes & Noble, Starbucks, McDonalds, and most of American business today: good for investors and consumers, bad for wage earners . . . and bad for politics.

Robert Reich, who served as Secretary of Labor under Clinton, in his 2007 book "Supercapitalism" gives a very readable and persuasive explanation of the transformation of American business from the post World War II decades to the 1999 WTO protests in Seattle (not an event addressed in the book). In 1960 the giants of American business were few and relatively unchallenged by competition. This allowed for a truce between managmenet and labor. Unions were strong, wages were high and rising, and business could pass along the cost to consumers. The middle class was strong. The distribution of wealth was more and more balanced between rich and poor. The lack of competition allowed for luxuries of inefficiency, and relativelyh high production costs. In this equilibrium between top companies and the middle class, what was good for IBM was perceived, and was, good for the country. However, consumers lost out in the quality, selection, and price of products, as well as in their choice of entertainment. Censorship on three available television channels enforced conformity and limited choice. Investors also lost out, because profits, although stable, were not maximized.

Reich describes how the advent of the computer, the bar code, global supply chains, and easy access to capital has changed everything. The world was rearranged and the playing field has tipped, radically, in favor of consumers and investors. Global supply chains and lots of competition has raised the quality of goods, while lowering prices. The losers have been wage earners and citizens. With his long experience in Washington D.C. politics Reich describes vividly how increased competition between businesses has resulted in the lawyers, lobbyists, consultants and money that have come to bear on politics in an effort to gain competitivbe advantage for one business over another. The legitimate concerns of citizens are drowned out in the resulting clamour and noise. Intense competition among businesses calls for superstar business leaders who are paid like sports stars. Price competition requires lower wages. Equality of income has suffered. As in all such efforts, Reich's description is better than the presecription.

Reich can seem a bit churlish in his advocacy of government regulation/legislation and dismissal of all other options, and he fails to explore the merits of citizens exercising their power as consumers for political ends. Notably, in his discussion of wage stagnation and growing income inequalities, he fails to note or discuss the fact that the purchasing power of those wages has increased dramatically over the past 40 years. That $300 Walmart television would have cost $3,000 without the changes. He naively, I think, and without sufficient discussion, takes up the cause that corporations should not be recognized as persons, and that corporations should not pay taxes (a Scott Thurow idea). I highly recommend the book for the insights it provides in viewing a broad spectrum of changes that have occurred in our economy, body politic, and society through the lens of the consumer and the investor.