Political Economy ECON 3119 Notes

Lecture 1: Mainstream economics Free market solutions to economic problems are best Freely operating market forces (demand and supply) generate equilibrium outcomes that allocate resources efficiently (or more efficiently if Govt. intervention is minimised). Private sector enterprises are more efficient than those o ned by the state inflation more accurate

Price stability, i.e. zero inflation, is a oo! t"in # (lo description) -

!mplied policy bias to ards achieving "price stability# as opposed to "full employm ent# $mphasis on long%run neutrality of monetary and fiscal policy &i.e. Govt spending and changes in the money supply ill not affect real variables in the economy (e.g. real output' employment) in the "long run#' they ill only affect the general price level(

$inancial institutions an! ca%ital flo&s are best !ere ulate!.# )llo financial capital to be allocated to most profitable opportunities nationally and globally and markets to put a price on "risk# etc *o ever' important to realise mainstream economics is not homogenous +e,tbook economics may sometimes understate lack of consensus actually found to e,ist ithin mainstream economics '"at are some of t"e (ey com%onents of mainstream economics) -ignificant role for "market forces# (demand and supply determined prices) !ndividual rational ma,imising behaviour (challenged by behavioural eco and finance) $conomies are inherently stable and move to ards equilibrium (espesh in "long% run#) "Govt intervention# only desirable under prescribed circumstances (e.g. "market failure#) Price stability' efficiency' competitive markets (etc) key to economic performance Financial theory dominated by efficient market hypothesis (and related theories) .icroeconomic policy/ deregulation of markets normally supported (Govt

intervention may be required to counteract "market failure#) .acroeconomic policy/ tends to favour policy "rules# as opposes to "discretionary# policy "rules# as opposed to "discretionary# policy (e.g. use interest rates to achieve an inflation target (price stability)' balance Govt budgets ("across the business cycle#) and set to ma,imum govt0debt0G1P ratio $conomic stability and performance key to achieving "social goals#

*istorical bac( roun! Classical Economics (late 23th' early 24th centuries) )dam -mith 1avid 5icardo' 6.-..ill' .althus' .ar, 7haracteristics/ $,amined the determinates of gro th of an economy e.g. -mith/ specialisation associated ith division of labour (8productivity) 9 capital accumulation +he distribution of the economic surplus (particularly 5icardo) .ain actors/ classes ( orkers' capitalists' lando ners) labour theory of value/ labour as a source and measure of value 1+,-s: .Mar inal re/olution0 and emergence of "neoclassical# economics. (e.g. 6evons' .enger' .arshall (:)' ;alras. "<eoclassical# theory/ 1emand and supply determine equilibrium market prices. +heory based on individual optimising behaviour ith given initial endo ment of resources' institutions and social and political arrangements $mphasis on efficiency of resource allocation

=eynesian "revolution# (24>?#s 9) $mphasis on efficiency of resource allocation $mergence of "macroeconomics#' e,planation of persistent unemployment caused by lack of effective demand "<eoclassical synthesis/ attempt to reconcile =eynes insights ith neoclassical equilibrium analysis and re%establishment of some of the pre%=eynesian ideas (e.g. monetarisms etc) !nternational economics/ emphasis on "free trade# (or trade creating effects of economic unions bet een countries). *o ever' strategic trade theory challenges some of these conclusions 1evelopment economics/ emphasis placed on structural problems (including political) in developing countries

$nvironmental economics/ emphasises the need for market based schemes to overcome e,ternality and sustainability issues

More recently .icroeconomics/ challenge to the logic of general equilibrium theory' emergence of strategic behaviour models (game theory' e,perimental economics etc). *o ever' +e,tbook analysis still dominated by equilibrium analysis and individual optimising behaviour .acroeconomics/ attempt to develop "microeconomic foundations# combined ith "rational e,pectations# etc. <e 7lassical and <e =eynesian theories' emergence of "<e <eo% 7lassical -ynthesis# model' "<e Gro th +heory#' "1ynamic General $quilibrium .odels#. Met"o!olo y 7oncerned ith the choice of methods of analysis and ho competing theories (links ith philosophy of science) !s it possible to characterise different economic paradigms by the methodology that they adopt: <on%.ainstream )pproaches include/ .ar,ian political economy' !nstitutional and evolutionary economics' Post%=eynesian economics' )ustrian school' Feminist economics e choose bet een

Lecture 1: met"o! an! met"o!olo y Met"o!olo ical issues .ethodological !ssues .ethodology @ the choice of methods of analysis and ho competing theories ;ithin history and philosophy of science' many debates on "scientific method# 1eduction vs. induction )lternative positions adopted by Popper ("-cientific .ethod#)A =uhn ("paradigms#)' Bakatos' Feyerabend (")gainst .ethod#' "Fare ell to 5eason# etcA science as being essentially anarchistic) .ore recently (:)' much of this debate proceeds at the level of "epistemology# (analysing the nature of kno ledge) and "ontology# (study of the nature of being or reality...) Cuestions/ 7an e learn more about differences in economic analysis by e,amining the methodological foundations e,plicit or implicit in the analysis being presented: 7an a particular methodological approach characterise' define or unite a school of thought in economics: -hould arguments about methodology be left to philosophers: $,amples/

e choose bet een

.ainstream economics/ .ethodological approach often associated ith "!nstrumentalism#' related to Popper#s notion of "-cientific .ethod# +he role of "falsification# is the key to a "science# (as opposed to dogma etc) Falsifiable/ something is capable of being sho n to be false in the event that contrary e,amples or e,ceptions actually e,ist !n mainstream economics' "falsification# usually associated ith discovery of conflicting "empirical evidence# !n "mainstream economics#' "falsification# is usually associated ith econometric testing (time series and0or cross%section) D methodological defence of much of mainstream that asserts test of good theory is "predictability#' not "realism# of assumptions *o ever Popper sa falsification as conflict bet een theory and evidence and as resolved as a matter of collective Eudgment of scientists

Problems ith "falsification# application/ !f prediction based on comple, array of theories is false at least one premise false' but hich one: !s it possible to separate the theory being tested from the initial conditions and associated background theories: !t is not al ays clear that if evidence contradicts a hypothesis that this is a sign of fla s in the hypothesis rather than of fla s in the evidence Fbservation of phenomena is al ays theory dependent

)lternative .ethodological Positions for Political $conomy: Gabylonian mode Gabylonian .ode of +hought (associated ith -heila 1o ' possibly originating from =eynes# usage of the term in his challenge to the conventional vie !saac <e ton as a "rationalist#) +here is no single logical chain from a,ioms to theoremsA but there are several parallel' intert ined' and mutually reinforcing sets of chains' such that no particular a,iom is logically basic % approach is neither dualistic nor atomistic (1uals are all encompassing' mutually e,clusive categories ith fi,ed meaningA )tomistic implies reduction to individual independent categories) ".iddle ground# bet een "rationalism# and "relativism# (ho ever anti%"post modernism#) Gabylonian mode closely connected to uncertainty/ epistemologically its starting point is that full kno ledge is impossible to attain =eynes/ )s soon as one is dealing ith the influence of e,pectations and transitory e,perience' one is' in the nature of things' outside of the realm of the formally e,act. Gabylonian mode suggests a pluralist and multidisciplinary approach to economics 7ritical 5ealism 5ecently' some political economists have been attracted to "critical realism# &approach linked ith Ghaskar( as a methodological foundation $mpirical events are only the surface manifestation of real underlying and unobservable causal forces. !t is the task of science to uncover the causal factors +his requires "open system# theorising " henever H' then I has a tendency to that

happen#) )s opposed to "closed system# theorising (deterministic/ " henever H then I#) *ere e have e,planation vs. prediction

<otes/ Fpen system theorising0critical realism is not equivalent to' but in fact opposed to' "post modernism# ( hich tends to hold that there are no underlying causal factors to be e,plained (:)) $conometric testing for prediction purposes is not consistent ith critical realism

;hy not: +he notion of "empirical regularities# is questioned $conometric prediction e,trapolates from the past to the future/ time%series analysis/ hat occurred on average in the past is predicted to occur in the futureA fails to recognise the in% sample and out of sample prediction distinction Cuestion/ should critical realism be adopted as a "unifying principle# for political economists D greater coherence and unity: Fr take the Feyerabend "methodological anarchism# approach: (or plan for a "=uhnian revolution#:) 7riticism of $quilibrium analysis and mainstream theory $quilibrium' and comparative static analysis' is seen as a central organising concept in "neoclassical economics# ;hat is mainstream (neoclassical) economics: +he combined assumptions of ma,imising behaviour' market equilibrium' and stable preferences' used relentlessly and unflinchingly (Gary Gecker' prominent 7hicago % based <obel price% inner J neoclassical economist) 7entral interrelated and self%reinforcing elements therefore include/ )ssumption of rational' ma,imising behaviour by agents ith given and stable preference functions ) focus on attained' or movements to ards' equilibrium states +he absence of chronic informational problems

$quilibrium usage in mainstream economics/ ) balance reached bet een opposing forces (such as the forces of demand and supply)

1enotes outcomes that' if achieved' ould be characterised by the absence of any tendency for change in the absence of e,ogenous disturbing influences $conomic outcomes to ards hich the economy tends to gravitate ("persistent forces#)' or perhaps achieve under ideal or normal (natural) circumstances Galanced0steady state gro th (i.e. all variables gro at a constant rate)

$quilibrium analysis in neo%classical theory ) formal definition of equilibrium in neoclassical analysis/ Prices and input%output combinations are said to be equilibrium prices and input%output combinations if' hen they rule' no economic agent has any inducement to change his method of production' and no input is in e,cess demand (Frank *ahn again) 1ifferent types of equilibrium analysis/ partial vs. general equilibrium' short%run vs. long% run etc. +he difference bet een these approaches can be summarised in terms of hat is included in the ceteris paribus clause .uch of neoclassical analysis is based on the method of comparative statics +his involves the comparisons of values (e.g. prices and quantities) at different equilibrium positions 7omparative static analysis ould begin by assuming that an economy' or market(s) is (are) in equilibrium. ;e then allo for an e,ogenous shock to the system' or let the value of a parameter change. +he equilibrium price and input% output combinations are then re% calculated' such that a ne set of equilibrium price and input%output combinations are determined ) simple e,ample ith partial equilibrium/ 7onsider the market for butter. ;hat ould happen to the equilibrium price and quantity of butter if the price of margarine increased: )ns er/ assuming the goods are substitutes' the demand curve for butter ould shift to the right' and the equilibrium price and quantity for butter ould increase' holding everything else constant .uch of equilibrium analysis looks at the e,istence and stability of equilibrium positions. $,istence (and uniqueness) requires correspondence bet een "kno n and
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unkno ns# (mathematical properties) -tability/ if the system is not in equilibrium to begin ith' ill it gravitate to ards an equilibrium combination of prices and quantities: +he role of equilibrium analysis 2. Four vie s/ )nalyses economy in terms of static equilibrium position' allo s that economy may not al ays be in equilibrium/ viK. neoclassical theory +he analysis of out%of%equilibrium positions is relegated to minor importance' if discussed at all. Gy assuming that the equilibrium is stable' i.e. there are forces' hich push the economy back to equilibrium if it deviates from it. L. !n this case the issue of the actual path the economy may take is ignored. +he time taken to get from one equilibrium point to another may depend upon the nature of e,pectations and market rigidities $,ample/ most standard te,tbook theory +he economy is al ays in equilibrium $,ception/ temporary of random departures from equilibrium caused largely by lack of complete information. $.g. "<e classical macroeconomics#/ the combination of instantaneous market clearing and rational e,pectations' also related to "5eal Gusiness 7ycle +heory#' hich adds random e,ogenous supply side shocks >. ;hile an economy ill tend to ards equilibrium' final equilibrium position is path% determined. +here are at least t o interpretations of path determinacy a. ;here there are multiple equilibria' so that the one hich the system actually achieves is dependent on the path it takes hen not in equilibrium b. Path dependency associated ith hysteresis/ +he movement of the system hen it is out of equilibrium may change the data on hich the static equations hich define the equilibrium are based +hese equations ill change and determine a different equilibriumM +his means that the (set of) equilibrium point(s) is not independent of the dynamic movement of the system D path dependency Problem ith comparative statics/ even if it is possible that an economy can reached a (path% determined) equilibrium point' the analysis must primarily be concerned ith disequilibrium and tell a dynamic story of ho moved from one equilibrium to another the economy

)nalyse the path of the economy outside equilibrium/ the traverse $ach equilibrium has a unique history/ a unique capital stock and set of e,pectations

N. -

+he economy is never in equilibrium and does not tend to ards it +his vie is most directly associated ith Post =eynesian economics and $volutionary $conomics *ere equilibrium analysis can only be used in a very abstract form (e.g. to derive analytical techniques) or in a negative sense to sho been interpreted in this conte,t) hy equilibrium is not a characteristic of the system being analysed (.ar,#s reproduction models have

7umulative causation $,tremely destructive of the concept of equilibrium )ny movement a ay from an initial equilibrium position ill be amplified and generate further and further movements a ay from that initial equilibrium 7hange becomes progressive and propagates itself in a cumulative ay !dea developed from earlier ork (on increasing returns to scale) of )llyn Ioung/ <o analysis of the forces making for economic equilibrium' forces that e might say are tangential at any moment at time' ill serve to illumine this field' for movements a ay from equilibrium' departures from previous trends' are characteristic of it ($conomic 6ournal' -ept 24L3) !dea further developed by .yrdal (- eden' <obel PriKe inner) and =aldor (Gr Post =eynesian) etc. )pplied in particular to international trade' inequality' industrialisation' economic gro th/ *istorical vs. Bogical +ime 1istinction emphasised by Post%=eynesians (see -etterfield reading) =eynes on equilibrium one of these pretty' polite techniques hich tries to do deal ith the present by abstracting from the fact that e kno very little about the future 7ollected ;ritings' vol H!O' 22P) 6oan 5obinson (prominent pioneering Post% =eynesian economist)/ 7ritic of equilibrium )nalysis ) system of simultaneous equations need not specify any date and nor does its solution involve history. Gut if any proposition from it is applied to an economy inhabited by human beings' it immediately becomes self% contradictory. *uman life does not e,ist outside of history and no one has correct foresight of his o n future behaviour' let alone of the behaviour of all the

individuals' hich ill impinge upon his. ! do not think that it is right to praise the logical elegance of a system hich becomes self%contradictory hen it is applied to the questions that it is designed to ans er (5obinson' *istory versus $quilibrium 7ontributions to .odern $conomics. 2LQ). R+o move from one point to another e ould have either to re rite past history or to embark upon a long future.R 6. 5obinson. $conomic *eresies' 1ra s the distinction bet een closed deterministic models that operate in logical time' and open historical models hich operate in historical time *istorical time is irreversible' determined by events/ here e go depends on history' on here e have been/ future uncertain' e,pectations shaped by past and are themselves irreversible +he siKe and composition of the capital stock' together ith the set of economic' social and political institutions' is a reflection of irreversible decisions made in the past. )s time passes' individuals change not only ith respect to the kno ledge in their possession' but they also e,perience unforeseeable modifications in their economic endo ments and in their perceptions of e,ternal institutional structures' environments and the possibilities of action taken by others. $volutionary $conomics !n sum' the mechanistic metaphor &equilibrium( e,cludes kno ledge' qualitative change' and irreversibility through time. !t entraps economics in equilibrium schema here there are no systematic errors and no cumulative development. 7learly much is missing here. +he strength of the alternative' biological &evolution( metaphor is that a place can be found for these important features of economic life (*odgson $volution and !nstitutions' p.QN) +reats the economy as an evolving system' along the lines of 1ar in#s theory of evolution 1ifferent methodology and analytical techniques to mainstream economics -imilar attempts have been made in other social and physical sciences
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"universal 1ar inism# (e.g. 1a kins) E/olutionary /s. mainstream e2uilibrium economics: 1 /ie&s 2. L. $volutionary economics is supplementary to mainstream economics (-chumpeter) $volutionary economics is a preferred alternative to mainstream economics (Oeblen) +hese vie s often involve Eudgments as to the relative merits of mechanical and biological analogies in economics .odern biological sciences/ almost universal acceptance of 1ar in#s theory of evolutionary change assigned to principles of adaptation and natural selection' (bolstered by .endel#s theory of genetics)A there remains some dispute over the possible processes involved in evolutionary change (e.g. punctuated equilibrium to e,plain periods of rapid change alternating ith periods of relative stability (stasis)) *o can these biological concepts be applied to other sciences:

Guilding blocks 1iversity gives a range of possible solutions to challenges thro n up by the environment +he $nvironment interacts ith these diverse forms to favour some over others and feedback effects bet een it and ne ly emergent species may alter the environment itself )daptation occurs at the systematic level through the differential survival of these diverse forms hichA hile some die out' others prosper and thus their characteristics are passed on more strongly to subsequent generations. )daptations come about gradually' cumulatively and organisms inherit adaptations not to their o n environments but to those of previous generations' perhaps crucially different. +his implies that change does not lead to optimal configurations.

!n economics/ 1iversity @ heterogeneity of consumers and orkers' differential qualities of entrepreneurs and business managers' variety of products etc' $nvironment @ economy (endogenously created by actions of individuals' social groups' and corporations) )daptation @ structural change' innovation' ne products' ne institutions etc

1espite the "Sniversal 1ar inists# claims' it does not necessarily follo analogous changes being e,amined in the other sciences.

that the

biological processes of evolutionary change should correspond directly to the $volution' irrespective of the precise e,planations' invokes the notion of a slo process of change that does not envisage a predetermined or optimal outcome. 7hange is perceived to be an ongoing' endogenous and irreversible process' a process that cannot be reduced to mechanical la s. *o does this differ from $quilibrium analysis: $quilibrium analysis depicts a deterministic orld in hich economic agents can react (though markets) "rationally# to available information 7hange generally occurs as a result of economic agents reactions to e,ogenous shocks ne equilibrium positions 7hange is associated ith progress and optimality

Notes from rea!in s/ *istorical time and economic theory' .ark -etterfield )rgument/ the pervasive influence of history in determining long run economic outcomes cannot be overlooked' even though mainstream economic models overlook such Paper introduces historical time into economic models =eynes famous remark T "in the long run e are all dead# T there is a readily identifiable concern that current economic activity takes place in the present' bet een and uncertain future and an unchangeable past -imilar interest found by .ar,ian' institutional economics' marshal and Geogescu%5oegen '"at is "istorical time) ;hat is current' is in conte,t to hat has come before it T thus history of events may matter T effecting current or future outcomes +hus historical time is meaningful *istorical time is discontinuous T can#t really conceive "periods# of historical time Future cannot be predestined )t any moment in logical time' the past is determined Eust as much as the future T logical time in this sense can be thought of as mathematical space e,isting at a given point in historical time +oday is a break in time bet een an unkno n future and an irrevocable pastM movement can only be for ard. T time points one ay to the future Georgescu 5oegen 5eversible process/ eg. in any system ith a unique' stable equilibrium' a once% over shock may induce disequilibrium in the present period' but the removal of this shock ill facilitate the subsequent restoration of initial (equilibrium) conditions !rreversible T cannot be inverted to restore initial conditions !rreversible and reversible conditions e,ist in logical time but not historical time *istorical time is irrevocable % all current action is' of necessity' conducted in the conte,t of a set of given and immutable past actions' and this conte,t is inescapable. *icks *icks distinguishes bet een three types of causality % static' contemporaneous and sequential 7ontemporaneous causality is based on givens or permanencies ithin a period

6oan 5obinson/

7ontemporaneous causality found in =eynes % short run outcomes are determined by a given state of long run e,pectations' even though the state of e,pectations may vary bet een short runs

+he importance of historical time in economic theory -

Lecture 3: Mar3ian 4%%roac"es to Economics 1. 5ac( roun! =arl .ar, (2323%233>)/ Philosopher' Political' $conomist' 5evolutionary !t is foolish to refuse to learn from the ideas of an economist hose ideology e dislike. !t is equally un ise to rely upon the theories of one hose ideology e approve 5obinson' 6. (24PP) .ar,' .arshall and =eynes/ +hree Oie s of 7apitalism' 6. 5obinson (24Q3) 7ontributions to .odern $conomics' p. Q2). P"iloso%"ical 6nfluences +he dialectical method and historical orientation of *egel *egel/ )ll real phenomena changes according to the dialectical pattern of thesis T antithesis T synthesis. -ynthesis conserves thesis and antithesis and transcends both of them e.g. in .ar, capitalist T orkers D socialism *istorical materialism is the e,tension of the principles of dialectical materialism to the study of social life' and of its history. 5eEection of *egel#s #idealism#A instead influenced by Feuerbach (+he $ssence of 7hristianity) and Gruno Gauer $ngels +he 7ondition of the ;orking 7lass in $ngland in 23NN led .ar, to conceive of the historical dialectic in terms of class conflict .aterialism .ethodological approach to the study of society' economics and history +he material ay and economy orks T economics is the basis of society -lavery' feudalism' capitalism T system hich pushed obEectives for ards Tthe more they did this the more they undercut their system Sltimately the system leads to their o n do nfall +he orld of our senses has an obEective reality and is the sole reality (matter precedes thought) -ociety has an economic base % $conomic relations shaped social' cultural' legal and other relations +he mode of production in material life determines the general character of the social' political and spiritual processes of life. !t is not the consciousness of men that determines their social e,istence' but on the contrary their social e,istence determines their consciousness (Preface to the 7ritique of Political

$conomy). .ar, also influenced by French socialists (e.g. 5ousseau) (early philosophical ritings included +he Poverty of Philosophy' a reaction to Proudhon#s +he Philosophy of Poverty reflecting split bet een the "anarchists# and the ".ar,ists#) here does profit come from: !f people e,change goods equally must happen in production not in the e,change market the value of anything is the hours it takes to produce: T basic amount to keep living is the amount capitalists pay them 5evolutionary/ Philosophers have only interpreted the orldM.A the point ho ever is to change itR' ;hat the bourgeoisie therefore produces' above all' are its o n grave%diggers. !ts fall and the victory of the proletariat are equally inevitable Providing activists ith the tools to understand historical change J to play an active part in it "scientific socialism# based on the discovery of the "la s of history# unlike "utopian socialism# (based on belief that the course of history can be changed by personal preferences' ithout regard to the "scientific la s# of social change) L. Political $conomy $,pressed most completely in the > vols of "7apital#' but scattered repetitiously and unsystematically through' 7ritique of Political $conomy' +heories of -urplus Oalue' 7ritique of the Gotha Programme' German !deology' 7ommunist .anifesto 1eveloped from a critique of classical political economy (based on "labour theory of value#)' especially )dam -mith and 1avid 5icardo .ethodology .ar,#s method as e,plicitly historical in the sense that it focused on the changing structure of social relations as the result of the historical unfolding of capitalism. +he obEect of study is #the la s of motion of capitalism#. (1o ) *istory can be e,plained in terms of hat as happening in the economy' particularly in terms of class struggle. (+he history of all hitherto e,isting society is the history of class struggles) -cience according to .ar, must not be satisfied ith surface appearances. !t

must dig beneath to unveil hat lies behind those appearances D theory of value rather than a theory of market prices is the starting point $conomists kno the price of everything and the value of nothing' quote sometimes incorrectly attributed to Fscar ;ilde( 7apitalism is dominated by commodity relations rather than human or personal relations. )ll transactions reduce to an e,change of commodities' including the hire of labour. )lienation/ labour treated as Eust another commodity D separable from the orker +his is related to "commodity fetishism# (things that people produce' commodities' appear to have a life and movement of their o n to hich humans and their behavior merely adapt.) 3. Mar30s .Political Economy0: 5asic 7oncepts Oalue/ Babour +heory of Oalue Sse value/ related to the #utility# of a commodity/ a necessary condition for value in e,change. *o ever' a use value has (e,change) value only because human labour in the abstract has been embodied or materialiKed in it (!' 2/2) $,change value and -ocial <ecessary Babour +ime/ +he value of a commodity is determined by the socially necessary labour% time contained in it -ocial <ecessary Babour +ime @ the time required for production under normal conditions ith average degree of skill and intensity' using modern machinery. +he greater the productivity of labour' the less is the labour%time' and the less the value of the commodity. Fur task has been to get behind the phenomenon e see' that is' e,change value' to the value that lies behind it' socially necessary labour%time. $ach individual commodity...is to be considered an average sample of its class. 7ommodities' therefore' in hich equal quantities of labour are embodied' or hich can be produced in the same time' have the same value $,ploitation (of labour) Oalue is created not out of the harmony of e,change as pictured by classical and neoclassical economists but out of class struggle. Babour enters the realm of production' producing commodities allo ing capitalists to realiKe surplus%value as profit. 7ost of labour po er @

subsistence age. ;ages kept at subsistence level due to "reserve army of the unemployed# e,ploitation/ +he profit gained by the capitalist is the difference bet een the value of the product made by the orker and the actual age that the orker receivesA i.e. capitalism functions on the basis of paying orkers less than the full value product of their labour. .ar,#s arguments emphasises the distinction bet een pure commodity e,change and a monetary economy. 7apitalism is about creating and accumulating value/ happens not during the circulation % e,change but during the production process. !n the realm of production' money is the beginning and the end. 7apitalists buy factors of production and combine them to form some finished product' hich is sold for its value. Final product is orth more than its constituent parts. . D 7 D 7U D .U (. @ money' 7 @ 7ommodity)

+echnical composition of capital/ 7onstant 7apital &c( +hat portion of the value of machinery and materials used up in production and added to the value of the product 1oes not undergo any quantitative changes in value during the production process .easured in terms of "indirect labour#

Oariable capital/ &v( @ labour po er +he capitalist is obliged to pay for labour po er only the value hich (like that of any commodity) is fundamentally determined by the labour%time necessary for its production (and reproduction). !ts value is equal to its subsistence (defined as a cultural minimum plus the e,penses of education and training.) -urplus value &s( @ source of capitalist profits Frigin/ the value of labour po er is only its subsistence. Babour' combined ith Vc' is able to earn the value of its subsistence (i.e. age) ith only a fe hours ork' the value of its output for the remainder of the orking day is appropriated by the capitalist as surplus value (i.e. orkers receive subsistence age' but contribution to value of output e,ceeds this)

Fverall value of a commodity ( ) 7an be decomposed into constant capital' variable capital and surplus value @c9v9s @s0v(

5ate of -urplus Oalue -

surplus labour0necessary labour) ) "measure# of e,ploitation 5ate of Profit (r) @ ratio of surplus value (s) to total capital (c9v) @ s 0 (c 9 v)

Frganic composition of capital/ @ c 0 v )s capital accumulates' the technical composition of capital changes c / v i.e. capital accumulation leads to more capital intensive technology Oalues and .arket Prices ;hatever may be the ay in hich the prices of the various commodities are fi,ed or mutually regulated' the la of value al ays dominates their movements. !f the labour%time required for production of these commodities is reduced' prices fallA if it is increased' prices rise' other circumstances remaining the same +he assumption that the commodities of the various spheres of production are sold at their values implies' of course' only that their value is the centre of gravity around hich prices &market values( fluctuate' and around hich their rise and fall tend to ards equilibrium &!!! 2?( N. -ome Predictions from Mar30s Political $conomy 2. L. 7apitalism is a historically specific temporary mode of production Gro th of big business/ related to increasing c0v <ote/ .ar, assumes #competition#A but this is different than competitive markets in "neoclassical theory# <eo%classical/ a large number of small firms selling identical productsA freedom of entry and e,it to and from marketsA perfect kno ledge D absence of market po er 7lassical0.ar,ian/ freedom of capital to move bet een different uses0industries D equalisation of rate of profit in the economy >. 7risis as an inherent characteristic of capitalism

7apital 7risis/ can take the follo ing forms/ a. +endency for the rate of profits to fall 5ecall r @ s 0 (c 9 v) @ (s0v) 0 (c0v 9 v0v) !mplies 8s0v D 8r A 8c0v D Wr 5ecall also that .ar, concluded c0v tends to increase through time (more capital intensive technology) !f s 0 v remains constant D W r +herefore unless 8s0v by increasing rate of e,ploitation or increasing labour productivity' there ould be a tendency for the rate of %rofit to fall t"rou " time 7 crisis in capitalism *o ever' .ar, identified countervailing tendencies/ .+here must be some counteracting influences at ork hich th art and annul the effects of the general la ' leaving it merely the character of a tendency0 7heapening in the elements of constant capital (i.e.W c) !ncreasing in rate of e,ploitation (8s0v) by prolonging the orking day or reducing ages or increasing ork intensity 5elative overpopulation D 8 reserve army of unemployment Foreign trade (may' for e,ample' reduce cost of ra materials D Wc) or cost of subsistence goods !ncrease in the stock of capital may lead to increased industrial concentration leading to economies of scale in usage of capital (Wc) 1ecrease in ages belo e,ploitation (s0v) 2X b. +he disproportionality bet een different branches of production .ar, developed L sector model 1epartment 2 produces the means of production (i.e. constant capital) 1epartment L produces consumption goods for orkers and capitalists (v 9 s) the value of labour po erA equivalent to raise rate of

1 = 1 + 1 + 1 2 = 2 + 2 + 2

-imple reproduction/ no economic gro th occurs/ For the system to be maintained' 1epartment 2 must produce sufficient constant capital for both departments @ 1 + 2

1epartment L must produce sufficient consumption goods for orkers 1 + 2

and capitalists 1 + 2 +herefore e require

1 + 1 + 1 = 1 + 2 2 + 2 + 2 = 1+ 2 + 1 + 2

Goth of these require cL @ v2 9 s2 +his is required for simple reproduction Fther ise disproportionality problem arises However, there is nothing in Marxs scheme that ould ensure this condition is met +he logic of capitalism' especially due to competition' imposed an imperative to firms to gro and to accumulate capital D e,panded reproduction. +he conditions for non%problematic gro th' in terms of flo s bet een the L departments' become comple, and e,tremely unlikely to eventuate (see numerical e,ample in )ppendi, 2) in Bucarelli)

instability and disequilibrium gro th c. 5ealiKation of surplus value into profits and problems of effective demand 5elated to (b) and includes an attack on "-ays Ba # (Vmetaphysical equation of sales and purchases) -ays Ba / there can be no general overproduction (5icardo/ no man produces but ith a vie to consume or sell' and he never sells but ith an intention to purchase some other commodity)

7risis emerges because of the inability of society to consume hat it produces D overproduction (under consumption) due to the nature of capitalism +he process of making profits involves L stages' separated in time and space/ 2. L. +he creation of surplus value through production -ale of commodities on the market

Problem/ (L) is limited by the consuming po er of society. +he process of e,ploitation and competitive struggle over accumulation (more capital intensive production) D consuming po er kept lo

5esult/ Periodically' overproduction of necessities reduces the realiKation of the surplus%value +hrough the disEunction bet een the direct production process and the circulation process' the possibility of crisis hich became apparent in the simple metamorphosis of the commodity is once more and further developed. ;hen these t o processes do not pass from one to the other in a continuous stream' but become independent of each other' the crisis is there. V+he

economists ho deny crises therefore insist only on the unity of these t o phases (+heories of -urplus Oalue' 7/ !!' Nc) +he conditions of direct e,ploitation and those of the realisation of surplus% value are not identical. +hey are separated logically as ell as by time and space. +he first are only limited by the productive po er of society' the last by the proportional relations of the various lines of production and by the consuming po er of society (7apital .ar, 234N/ HO' !' LNN). $conomic crisis reaches its peak as e reach monopoly capitalism/ certralisation of capital less demand for labour (reduction in consumption po er) D increased misery' oppression and revolt D V+he knell of the capitalist private property sounds. +he e,propriators are e,propriated (!' >2). L2 P. $valuation 7riticisms of .ar,ian $conomics !nclude/ =ey forecasts about the development of capitalism have been rong Cualification/ must recognise .ar,#s "countervailing tendencies# 5easons for #failure# Failed to foresee forces that developed ithin capitalism hich permit the increasing ealth produced by capitalist societies to be shared among the population rather than being entirely appropriated and monopolised by the capitalists i.e. failure to recognise capitalism0s propensity to change0evolve

Bogical and operational problems ith labour theory of value +he #transformation problem#/ (studied in 7hapter 4 of 7apitalUs Oolume !!! through a set of numerical e,amples) @ problem of finding a set of functions that transform the ratios bet een amounts of embodied labour into relative prices. )pplicability/ Babour theory of value difficult to apply in a quantifiable manner in central planning models (i.e. calculating prices' also ho as a cost of capital:) Basting Begacy +heory of 7risis/ foreshado ed (often in a much more sophisticated ay) much of hat political economists have emphasised as the inherent instability in capitalist economies. do e treat interestA