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Thursday, February 7, 2013


Before answering the question I posed at the end of yesterday's installment [I do feel, sometimes, as though I am writing episodes of that old movie serial thriller, "The Perils of Pauline," which I would watch goggle-eyed each Saturday at the Main Street Theater in Kew Gardens Hills, along with two feature films, a raft of cartoons, and The News of the Week in Review], there is an arcane technical matter that I need to address.  This is really, really important, but has somewhat the feel of inside baseball, so those of you who don't much like Economics will have to be patient.

The classical economists assumed that there was, at any given historical moment, a single dominant technique for the production of each commodity, which could be characterized by listing the quantities of labor and non-labor inputs required per unit of output.  There would of course be some old-fashioned less efficient techniques hanging around, in use by some manufacturers, but competition in the marketplace would pretty quickly eliminate them, for the capitalists using those old techniques would have higher costs but be forced to sell at whatever was the going rate in the market.  There were usually also a couple of hotshot manufacturers trying out innovative techniques, and if any of those proved to be super-efficient, those manufacturers would have an edge in the market.  They would be able to undersell the competition and still make a profit.  Once again, as word got round, their competitors would be forced to switch to the new technique.  Abstracting from these temporary complications, the classicals conceived of an economy as consisting of a number of industries in each of which one technique ruled.  Ricardo and the others did not themselves use mathematics to analyze this situation, but in the twentieth century [thanks, in the first instance, to the great Russian-American economist Wassily Liontief], economists found that the Classical approach to economics could be captured quite nicely by systems of simultaneous linear equations.  That is why, when I began my four decades long engagement with the thought of Karl Marx, my first task was to acquaint myself with Linear Algebra.

In the 1870's, when Karl Menger, Léon Walras, and Stanley Jevons transformed Economics by introducing considerations of marginal productivity and such, economists did a complete flip.  Instead of simplifying and idealizing the object of their study by positing a single dominant production technique for each commodity, they chose the opposite simplification and posited an infinity of alternative production techniques, each represented by a different quantitative combination of inputs.  To make their lives simple and their theories exciting, they assumed that the relationship between a set of inputs and a quantity of output was a continuous twice differentiable production function, and Economics was off to the races.  Before long, they were talking about supply and demand curves, marginal productivities, general equilibria, and all manner of sexy technical innovations that allowed them to suppose that they were not humanists at all, but scientists.  [Okay, okay, so I am not the most sympathetic and enthusiastic student of modern economic theory.]

One of the consequences of this shift in theoretical model building, not exactly unintentionally, by the way, was that the class struggle over the division of the social product, which had been the centerpiece of Classical Political Economy, completely disappeared from view, to be replaced by anodyne theoretical discussions of Pareto Optimality and production frontiers.

Well, enough talk.  It is time to introduce some mathematics.  I am going to make this as easy and stress free as possible.  Let us imagine a very simple economy -- one in which only three goods are produced:  corn, iron, and theology books.  With not the slightest attention to the real conditions under which these three goods could actually be produced [thus showing myself to be a true economist!], I shall assume that the chart displayed below represents the amounts of each input required for the production of a certain amount of output.  If the idea of an economy with only three commodities strains your credulity, you may think of this as a model of an economy with an agricultural sector, and industrial sector, and a luxury goods sector. [The theology books are thought of here as luxury goods produced for the amusement and edification of the moneyed classes, the assumption being that the capitalists are upstanding Puritans of the sort studied by Max Weber in his classic work, the Protestant Ethic and the Spirit of Capitalism.] 

Corn, Iron, Theology Books System

                                      Labor     Corn     Iron     Books                Output

                                      Input      Input     Input   Input


          Labor                                    42          21        0                          210

          Corn Sector           100            2          16        0                          300

          Iron Sector              90            9          12        0                            90

          Books Sector            20            1           2         2                            40

          Total Input            210           54          51        2

Since I am going to draw very deep and important conclusions from this little model, let me take a moment to make sure everyone understands what it says.  Look first at the Corn Sector.  The chart tells us that it takes one hundred units of labor, two units of corn, sixteen units of iron, and no theology books at all, to produce in this economy three hundred units of corn.  Analogous conclusions can be drawn from examining the numbers in the Iron Sector and the Books Sector.  The line labeled "Labor" says that the workers must consume forty-two units of corn and twenty-one units of iron to "produce" two hundred ten units of labor [which is to say, to enable them to labor for two hundred and ten units of time, inasmuch as labor is measured in minutes, hours, weeks, months, or years.]

The first thing we see is that Books are not required by inputs in any industry save the one in which they themselves are produced.  This, as it happens, marks a fundamental distinction between what Sraffa called "basic" and "non-basic" commodities.

The second thing we notice is that a physical surplus of corn, iron, and theology books is produced in the economy.  That is to say, when we take the annual product and subtract from it what is needed to run the system at the same level of operation the next year, a good deal of stuff is left over -- to be precise, there is a surplus of 246 units of corn, 49 units of iron, and 38 units of books.  This way of conceptualizing the economy immediately presents us with three simple questions.  The three questions are: 

1.  Who Gets the Surplus?
2.  How do the Surplus Getters get the Surplus?  and
3.  What do the Surplus Getters do With the Surplus After They Get It?

A little reflection will convince you that a good deal of Theology, Philosophy, History, Political Science, Sociology, Anthropology, and of course Economics is devoted to answering these three questions.


1 comment:

Ian J. Seda Irizarry said...

As complementary material, I would recommend this exquisite video of Prof. Stephen Resnick (1938-2013) explaining capitalist competition for his undergraduate course on Marxian economic theory: