Economics Questions

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Sun, 04 Mar 2012 18:28:33 GMT

So when it becomes "outdated" (demand falls) prices are adjusted downward? I thought you said supply and demand don't have an effect on prices.

If I said that, I probably shouldn't have. But being outdated means more than demand falling. It also means that it is not being produced anymore.

Anyway, I found something by Marx that shows his views on supply and demand (which I don't necessarily agree with). His view seems to be that supply and demand can affect price but don't affect value--that is, the equilibrium price.

...Now, in regard to wages and profits, Citizen Weston has not only failed to deduce such standard points from economical laws, but he has not even felt the necessity to look after them. He satisfied himself with the acceptance of the popular slang terms of low and high as something having a fixed meaning, although it is self-evident that wages can only be said to be high or low as compared with a standard by which to measure their magnitudes.

He will be unable to tell me why a certain amount of money is given for a certain amount of labour. If he should answer me, “This was settled by the law of supply and demand,” I should ask him, in the first instance, by what law supply and demand are themselves regulated. And such an answer would at once put him out of court. The relations between the supply and demand of labour undergo perpetual change, and with them the market prices of labour. If the demand overshoots the supply wages rise; if the supply overshoots the demand wages sink, although it might in such circumstances be necessary to test the real state of demand and supply by a strike, for example, or any other method. But if you accept supply and demand as the law regulating wages, it would be as childish as useless to declaim against a rise of wages, because, according to the supreme law you appeal to, a periodical rise of wages is quite as necessary and legitimate as a periodical fall of wages. If you do not accept supply and demand as the law regulating wages, I again repeat the question, why a certain amount of money is given for a certain amount of labour?

But to consider matters more broadly: You would be altogether mistaken in fancying that the value of labour or any other commodity whatever is ultimately fixed by supply and demand. Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that VALUE, we have therefore nothing at all to do with the temporary effects on market prices of supply and demand. The same holds true of wages and of the prices of all other commodities.

Re: Response to Paul Mattick's Criticism of STV

JackCuyler — Sun, 19 Feb 2012 17:03:37 GMT

Well, I think this would be a case where something is sold below its value. Value and price are not the same thing in Marx's view. But price tends towards value in a free market. If a commodity becomes outdated, then selling it below its value is simply a way for businesses to cut their losses.

So when it becomes "outdated" (demand falls) prices are adjusted downward? I thought you said supply and demand don't have an effect on prices.

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Sat, 18 Feb 2012 07:39:54 GMT

And if it's not still being reproduced? Why did the HTC Evo 4G drom $50-$100 in price the day the HTC Evo 3D come out? Why did the iPhone 3G drop $100 in price the day the iPhone 3GS came out and that one drop $150 the day the iPhone 4 came out?

It's not just limited to phones. Why do brand new cars drop in price substantially when the next year's models are released?

Well, I think this would be a case where something is sold below its value. Value and price are not the same thing in Marx's view. But price tends towards value in a free market. If a commodity becomes outdated, then selling it below its value is simply a way for businesses to cut their losses. The important thing here though is that the commodities are sold below the price of the new equivalents. The price of the new commodities, however, is not determined by the price of the old ones. So the theory avoids falling into circularity.

(I have not actually gotten to Capital, Vol. 3 yet, so I may be giving a slightly inaccurate description of Marx's views.)

I just noticed that Kapitalism101 has an interesting video critique of the STV.

Re: Response to Paul Mattick's Criticism of STV

JackCuyler — Sat, 18 Feb 2012 05:19:23 GMT

Why does the price of any given cell phone model drop over time?

Provided that it is still being produced, it is because the socially labor necessary time required to produce it decreases.

And if it's not still being reproduced? Why did the HTC Evo 4G drom $50-$100 in price the day the HTC Evo 3D come out? Why did the iPhone 3G drop $100 in price the day the iPhone 3GS came out and that one drop $150 the day the iPhone 4 came out?

It's not just limited to phones. Why do brand new cars drop in price substantially when the next year's models are released?

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Sat, 18 Feb 2012 03:25:00 GMT

BTW, I think this is the Mattick piece in question.

With the emergence of the subjective theory of value, which ultimately ended in a hypostatization of prices, the bourgeois theory of value cut itself loose from all its former ties with classical monetary theory. Clearly the theory of marginal utility is inapplicable to the exchange value of money, since it cannot be determined by the subjective needs of consumers, as can the exchange value of other commodities, but is in fact juxtaposed to these needs as an already given objective value. There have been attempts, most notably by Ludwig von Mises,[1] to give the objective exchange value of money a subjective foundation by assuming that whatever the objective exchange value of money at the given moment, it always rested on prior subjective evaluations, which may be verified by tracing the development of money historically back to moneyless barter. But the derivation of money from a moneyless economy convinced few, and the attempt to define the value of money subjectively was given up.

It was not long until the entire theory of marginal utility was abandoned, since it obviously rested on circular reasoning. Although it tried to explain prices, prices were necessary to explain marginal utility. It was then decided that economic analysis did not need a special theory of value after all and could restrict itself wholly to the empirical magnitudes of money and prices. It would suffice, so it was claimed, to transform “marginal utility,” with its psychological underpinnings, into a logic of choices or marginal analysis to reduce all market relations to an all-embracing common denominator. Just as every individual presumably ordered his income and expenditures rationally by means of marginal calculations so as to achieve the greatest measure of satisfaction of his needs, so the universal application of this “economic principle” would not only ensure the greatest returns from the least investment, it would also lead to a general economic equilibrium in which social demand matched overall supply. If one abstracts from all other social relations and views human beings solely as buyers and sellers, one may in fact construct a price system in which an equilibrium between supply and demand is achieved by virtue of the relations existing among prices. However, that is all one would have – a construct having nothing to do with reality, and no more than a rehashing, by the device of marginal analysis, of Say’s discredited postulate that every supply produces its own demand. Say’s theory referred to a barter economy and not to a capitalist money economy; following suit, pure price theory also relegated money to a subordinate and incidental role, since, as merely the expression of price relations, it was already taken into account in the analysis of equilibrium.

Re: Response to Paul Mattick's Criticism of STV

Malachi — Sat, 18 Feb 2012 01:58:51 GMT

That looks remarkably like rhetorical obfuscation.

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Sat, 18 Feb 2012 01:54:32 GMT

So the price goes down because the price (measured in wages) goes down? Circularity much?

No, that's not circular. The wages don't go down because the price of the product goes down. The wages (in totality) go down because the productivity of labor goes up.

Re: Response to Paul Mattick's Criticism of STV

Malachi — Thu, 16 Feb 2012 06:13:55 GMT

So the price goes down because the price (measured in wages) goes down? Circularity much?

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Thu, 16 Feb 2012 02:43:54 GMT

Why does the price of any given cell phone model drop over time?

Provided that it is still being produced, it is because the socially labor necessary time required to produce it decreases.

Re: Response to Paul Mattick's Criticism of STV

JackCuyler — Tue, 14 Feb 2012 13:22:25 GMT

Exactly. This is in fact why businesses don't adjust their prices as a result of changes in supply and demand.

Why does the price of any given cell phone model drop over time?

Re: Response to Paul Mattick's Criticism of STV

Esuric — Sun, 12 Feb 2012 05:38:36 GMT

I'm not sure I understand. How does the distribution of labor determine value under the LTV?

Value, and therefore objective exchange values, are determined by SNLT (socially necessary labor time) according to Marx.

For anyone, what is the difference between Neoclassical Price Theory and the STV?

Well, the term "neoclassical" is fairly problematic, but neo-walrasian price theory i.e., consumer choice, employs a mathematical method (constrained maximization) and refers to already established market prices (the budget line/price ratio) and preferences (utility functions/indifference curves). The "goal" for the consumer is to be on the highest possible indifference curve (I'm a bit rusty with intermediate microecon).

Austrian price theory (which is neoclassical in a sense) rejects the notion of indifference curves as nonsensical (impossible to act when you're indifferent) and doesn't refer to already established market prices. Grayson has an excellent post on Austrian price theory on the front page of the Mises institute.

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Sat, 11 Feb 2012 18:33:47 GMT

So if grant a machine which halves labor time required. Before that machine existed, 5 pairs of pants were made and sold at $500. Now that the machine exists 5 pair of pants are sold for $250. Suppose now that I burn 3 of those 5 pairs. Do the two remaining still sell for $50?

Yes, provided that competitors have the same machine and are selling pants for $50. If you have a monopoly on the machine, then you could sell them at anything up to the old labor time (I'm not entirely sure if this is because the socially necessary labor time hasn't decreased or because prices don't necessarily equal values).

I don't understand. Gradually? So if a machine makes 1000 basketballs, is the first one worthless but the last one valuable?

If the machine makes 1000 basketballs over the course of its lifetime, it would transfer 0.1% of its value to each one.

Subjective valuations of goods. Prices are just ratio's, and ultimately ratio's of goods. So when I work an hour, get paid $5 and then buy a $5 sandwich, the exchange looks like this G:Labour --> Money --> G:Sandwich. The sandwich in money terms is worth an hour of labor.

By subjective value theory, no one means to say that if I valued the Mona Lisa at $10 dollars I could buy it as such because value is subjective. What they do mean to say is that a good is priced by the subjective values of all that participate in its exchange to the extent that its exchange will support its own production. Actually I'm not sure if that's right. Anyone care to weigh in on that statement (FotH included).

That actually don't sound all that far off from the LTV. It seems like we are always comparing things to labor time. We way the choice of buying things against the choice of building them ourselves.

Because you gave new money to B?

But each one only gets $100 a month when the service already costs that. If it goes up, they can't afford it. People won't save up for something they know they will have to cancel the following month. Even if they did, the cell phone's sales would drop to 0 for the first month that it raised prices. According to supply/demand price theory, the company would then lower its prices again. Then everyone could afford it. But then the prices would go up again and everyone would have to cancel. Such a cycle doesn't sound like very good business.

So when someone is able to produce more of a good than his competitors, he does not reduce the price?

No. He reduces his prices if he can produce each good at a lower cost--regardless of how many he produces.

When someone buys a cheeseburger from McD and not BK, they are not bidding up McD? and not not bidding up BK? Do you think that, as a trend, people buy more the more expensive A or the less expensive B, despite same quality?

No, how could you bid up the price of something you already bought? Are you saying that if I buy a McD burger for $1, the person that goes to buy one after me will necessarily be willing to spend more than $1 on it?

You only bid on something when you communicate how much you're willing to spend before you buy it.

Re: Response to Paul Mattick's Criticism of STV

Jargon — Thu, 09 Feb 2012 04:32:32 GMT

Fool on the Hill:

Jargon: What is socially necessity?

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time. The introduction of power-looms into England probably reduced by one-half the labour required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labour represented after the change only half an hour’s social labour, and consequently fell to one-half its former value.

So if grant a machine which halves labor time required. Before that machine existed, 5 pairs of pants were made and sold at $500. Now that the machine exists 5 pair of pants are sold for $250. Suppose now that I burn 3 of those 5 pairs. Do the two remaining still sell for $50?

According to Marx, the machine would gradually transfer its value into its products.

I don't understand. Gradually? So if a machine makes 1000 basketballs, is the first one worthless but the last one valuable?

You're just comparing prices with each other. But what determines those prices in the first place? When I said demand determines prices, I was assuming supply remained constant.

Subjective valuations of goods. Prices are just ratio's, and ultimately ratio's of goods. So when I work an hour, get paid $5 and then buy a $5 sandwich, the exchange looks like this G:Labour --> Money --> G:Sandwich. The sandwich in money terms is worth an hour of labor.

By subjective value theory, no one means to say that if I valued the Mona Lisa at $10 dollars I could buy it as such because value is subjective. What they do mean to say is that a good is priced by the subjective values of all that participate in its exchange to the extent that its exchange will support its own production. Actually I'm not sure if that's right. Anyone care to weigh in on that statement (FotH included).

Wait, how will either group be able to afford phones if the price goes up?

Because you gave new money to B?

I'm not negating the passage of time. The $60 is the monthly service fee. If one only makes $50 a month, one could not afford it. Sure, they could save a month's worth of wages and then be able to afford it next month. But then they'll have to cancel the month after that.

Yes.

Exactly. This is in fact why businesses don't adjust their prices as a result of changes in supply and demand.

No one would expect a business to change his price so that he operated at a loss for any significant period of time. No one would expect a business to raise his price so as to be routed by competitors for any significant period of time either.

So when someone is able to produce more of a good than his competitors, he does not reduce the price?

Laborers don't simply assign a price to their labor and then sell it to the first person who buys it. Employers essentially bid on the price of each worker. Consumers don't bid on the price of each cheeseburger.

When someone buys a cheeseburger from McD and not BK, they are not bidding up McD? and not not bidding up BK? Do you think that, as a trend, people buy more the more expensive A or the less expensive B, despite same quality?

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Thu, 09 Feb 2012 03:40:32 GMT

My cell phone scenario could also be reversed.

Let’s assume 100 customers each paying $50/month. Now let’s suppose 50 of those customers would spend $60/month if they had to. But the other 50 couldn’t spend more than $50/month. Now say that the government taxes the second group at $25/month and simply removes the money from circulation. The service provider finds itself with 50% less sales. If supply and demand determine prices, the company will lower its prices. However, it has to lower them all the way to $25 in order to get back the old customers. It would then be making the same amount as if it did nothing with the price, and if it did nothing it would only have to supply half of the commodity. On the other hand, if it raised the price of the service to $60, it would increase its revenue, which wouldn’t have been true before the government intervention and diminution of the money supply. So a decrease in demand says nothing about what a company should do with its prices either.

Re: Response to Paul Mattick's Criticism of STV

Fool on the Hill — Thu, 09 Feb 2012 03:32:02 GMT

Esuric: The distribution of labor amongst varying productive employments determines their (objective exchange) value...

I'm not sure I understand. How does the distribution of labor determine value under the LTV?

For anyone, what is the difference between Neoclassical Price Theory and the STV?