Could someone please explain to me...

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Could someone please explain to me...

#1  Postby PairOfFeet » May 19, 2011 12:56 am

Could someone please explain why the labor theory of value was replaced? I'm kind of new to studying economics, but somehow in a way it makes sense. What about it fails to accurately describe capitalism?

Thanks
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Re: Could someone please explain to me...

#2  Postby sandinista » May 19, 2011 1:05 am

It hasn't been replaced. Still valid, perhaps slightly adjusted.
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Re: Could someone please explain to me...

#3  Postby tuco » May 19, 2011 1:19 am

Replaced, or rather supplemented, by technology. It fails to accurately describe economic and political realities of today's environment. When we talk about exploitation or even value we are beyond the scope of economy as science and we wander into political-economy, which is kind of funny as it is a part of economist' job to set value.

How much should I sell this for? I dunno, put it on eBay and start with 1 ..
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Re: Could someone please explain to me...

#4  Postby my_wan » May 19, 2011 2:15 am

It is not that it failed but in a modern economy the potential productivity is much higher than what labor consumption alone can consume as a matter of needs. Hence the majority of the value of a given commodity it predominately defined by innovation, image, or perception rather than labor. Perception is why people buy brand names over store brands when they often come off the same assembly line. When I was younger you could save huge money buying in bulk. Today they merely price and package bulk to look like a deal when it actually cost more a fair share of the time.

If the core functional value and the labor that went into its production was all that was traded we have in excess of 90% unemployment. Yet when we create employment through the production of luxury commodities there is more that people expect to be able to afford and prices of basic commodities based on the need of their producers to afford certain luxury commodities. The degree of this relative value verses labor has changed significantly in my life. In the days of the economic necessity of big companies big money could be made on very incremental labor saving innovations. If you made a penny on every stick of bubble gum sold you were a very rich person. And if your innovation saved more than that amount of labor not only did you get richer but you lowered cost for everybody else. So your money did not cost anybody anything, it made everybody wealthier.

Now the percentage of the cost of an item defined my labor is so low that it makes no sense to try to get 1% of 10% rather than 1% of 90% the retail price of a commodity. When the majority of production cost left labor it went into production cost, factory building etc. When the major cost left production it went into transportation cost, which I think is still considered the largest percentage of retail cost today. The "manufacturers suggested retail price" was based on this model. hence Wal Mart became a giant within my lifetime through a reduction of transportation and warehousing cost. When I went to school the accusation that your shoes was from Wal Mart was an insult, and mine usually did. Yet nobody pays "suggested retail" today unless they are shopping at certain places for the sake of image or brands that intentionally engineer their own scarcity for the sake of social standing. Just check out Gucci prices.

Now what is going to happen when the major cost of a commodity is no longer defined by transportation, manufacturing, or labor? It will go toward a premium on innovation, social, functional, rarity, or otherwise, like Gucci. Measures of value which have nothing to do with the labor or cost required to produce them. Much like antique collectors do not pay based on the original labor cost of production. The economy has been for many years now driven by factors only indirectly related to labor, and labor will only become less and less a factor in retail pricing as the economy grows. Of course we will still labor greatly in pursuit of these intangible values.
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Re: Could someone please explain to me...

#5  Postby Strontium Dog » May 19, 2011 2:46 am

PairOfFeet wrote:Could someone please explain why the labor theory of value was replaced?


The value of something is the worth someone else places on it, and not the quantity of labour that went into it.

Obvious when you think about it, really. I could take a piece of metal and spend 10 hours of labour making a decorative plate, or I could put 10 hours into making a pile of metal shavings. According to labour theory of value, my lovely plate and my useless metal filings have commensurate worth.

Now, over to the socialists to explain why metal shavings are worth as much as my decorative dish...
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Re: Could someone please explain to me...

#6  Postby PairOfFeet » May 19, 2011 3:24 am

Strontium Dog wrote:
PairOfFeet wrote:Could someone please explain why the labor theory of value was replaced?


The value of something is the worth someone else places on it, and not the quantity of labour that went into it.

Obvious when you think about it, really. I could take a piece of metal and spend 10 hours of labour making a decorative plate, or I could put 10 hours into making a pile of metal shavings. According to labour theory of value, my lovely plate and my useless metal filings have commensurate worth.

Now, over to the socialists to explain why metal shavings are worth as much as my decorative dish...

So for the theory to be correct, it would have to be for socially useful commodities as opposed to useless ones?
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Re: Could someone please explain to me...

#7  Postby laklak » May 19, 2011 4:02 am

Basically it was too simplistic. It doesn't take into consideration the value of capital or technology, or skill. Or even marketing or demand, for that matter. Of course, marketing isn't big in a Marxist economy, but the fact remains you can't account for the value of an iPad 2 without it. It's value is artificially inflated by Apple's marketing efforts and by their manipulation of the supply.
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Re: Could someone please explain to me...

#8  Postby my_wan » May 19, 2011 4:28 am

The ratio of labor returns to total returns, the Bowley ratio, has always been a bit of an economic mystery. It would be easy to presume, looking at individual sectors of industry, that return to capital would increase while returns to labor decreases. This is what happens in any particular sector. Yet for the economy as a whole this ratio remains essentially constant. So as capitalization returns increase so does return to labor in direct proportion overall, but not in any individual sector.

This seems kind of intuitive to me, and was alluded to in the last sentence of the long spill above. As the capital returns in the manufacturing sector grew, squeezing out the labor returns, these same returns are then spent in services sectors, computer sectors, etc., etc., that form the growth areas of the economy. The size and number of very large corporations has been steadily decreasing for many years now, while the self employed and small businesses have become the engines of the economy. This is a direct result of very low transaction cost (telecommunications). I well remember people dreaming of getting rich enough to own a cell phone. So the Bowley ratio for any given industry defines the growth areas of the economy, but growth means the labor returns in that industry are at a high and will get will tend decrease over time. Makes things a bit unstable from a career perspective.

Yet the fact remains, for the economy as a whole the ratio of labor returns to capital returns remains essentially constant.
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Re: Could someone please explain to me...

#9  Postby my_wan » May 20, 2011 3:47 am

The last post has a very insidious effect on public policy. If the Bowley ratio, ratio of labor returns to capital returns, is a constant then, even if labor taxes are zero and you tax only capital returns, the constant ratio requires labor returns to be reduced in order for the Bowley ratio to be constant. This does not mean the rich should not pay a tax premium on their high incomes, but should not be mistaken for a tax that does not have a cost to labor. Sounds Republican I know, but I am against the Republican ideologies that carries this to extremes, resulting in falsely justifying a lot of predatory practices in business. Business practices must be regulated! The fact that a given regulation may have an associated (money) cost does not mean the public fails to get any value for that cost, often well in excess of the cost itself. Money is *never* just about money but cannot be so outrageous as to bankrupt the system.

Here is a prime example. There is a wild card that trumps the Bowley ratio, which is tied to credit spending. The constancy of the Bowley ratio does not define the spread in the power law that applies to incomes distributions. So even though the power law in income distributions is unavoidable, the absolute spread from top to bottom is not a constant. Since the Bowley ratio is constant the causal factors lie outside the market factors defining this ratio, which comes down to credit spending, both at the personal and public level. Through interest payments labor returns must immediately be remitted back into capital returns with no tangible goods in return. Hence even though the labor returns were received and counted in the Bowley ratio, those returns were then remitted back to capital returns without any "tangible" value in return. Then taxed at a high rate as income from capital gains by the rich. Hence it is the level of all debt, public and private, that drives the spread in the income distributions. While also driving up the cost of investment debt for the sake of consumption debt.

These considerations put me at direct odds with the *policy* ideals of both Republicans and Democrats. While ideologically they both have seeds of validity the democrats are at least not so narrow in their ideology except when it comes to judging Republicans. Also, at least in modern times, the democrats have on the whole done better (at least in practice) policy wise, but this is not always the case.
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Re: Could someone please explain to me...

#10  Postby Daan » May 20, 2011 8:28 am

Strontium Dog wrote:The value of something is the worth someone else places on it, and not the quantity of labour that went into it.

Obvious when you think about it, really. I could take a piece of metal and spend 10 hours of labour making a decorative plate, or I could put 10 hours into making a pile of metal shavings. According to labour theory of value, my lovely plate and my useless metal filings have commensurate worth.

Now, over to the socialists to explain why metal shavings are worth as much as my decorative dish...


I don't think the value of something is entirely the result of what someone else puts into it. Drug addicts place an enormous value in their drug, but for society the value of this drug is negative. Their are a lot of goods and services, that might be wanted or forced on a individual, but which are harmful or meaningless for a society.
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Re: Could someone please explain to me...

#11  Postby Tyrannical » May 20, 2011 8:41 am

Cheap virtual slave labor has reduced the actual value added by labor so that it is no longer a major constituent of price. Raw materials are also often not major constituents of price when you consider such things as a box of cereal. Intellectual property be it a brand name or the research that goes into creating a product is often the higher cost.
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Re: Could someone please explain to me...

#12  Postby my_wan » May 20, 2011 9:55 am

The development of oil alone has given the average citizen the equivalent of about 8 traditional slaves.
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Re: Could someone please explain to me...

#13  Postby Barry Cade » May 20, 2011 10:16 pm

PairOfFeet wrote:Could someone please explain why the labor theory of value was replaced? I'm kind of new to studying economics, but somehow in a way it makes sense. What about it fails to accurately describe capitalism?

Thanks


The 'problem' with the labour theory of value is that it does accurately describe capitalism.
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Re: Could someone please explain to me...

#14  Postby epepke » May 20, 2011 10:23 pm

my_wan wrote:The development of oil alone has given the average citizen the equivalent of about 8 traditional slaves.


That few? My car alone is about 140 horses worth.
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Re: Could someone please explain to me...

#15  Postby PairOfFeet » May 20, 2011 11:50 pm

Barry Cade wrote:
PairOfFeet wrote:Could someone please explain why the labor theory of value was replaced? I'm kind of new to studying economics, but somehow in a way it makes sense. What about it fails to accurately describe capitalism?

Thanks


The 'problem' with the labour theory of value is that it does accurately describe capitalism.

Could you please explain why?
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Re: Could someone please explain to me...

#16  Postby my_wan » May 21, 2011 12:37 am

PairOfFeet wrote:
Barry Cade wrote:
PairOfFeet wrote:Could someone please explain why the labor theory of value was replaced? I'm kind of new to studying economics, but somehow in a way it makes sense. What about it fails to accurately describe capitalism?

Thanks


The 'problem' with the labour theory of value is that it does accurately describe capitalism.

Could you please explain why?

You actually get some disagreement on this even when the same economic model is considered. The Bowley ratio itself could be used to justify a labor theory of value, but only in part as defined by the ratio itself. A huge proportion of what used to be labor production is now fully automated. Yet the Bowley ratio requires that an overall average constant of return profits must go to capital, not labor. Else we merely consume the value of the capital and end back up at square one. Even if we save to replace the capital we are forever stuck with the same technologies and efficiency.

I had a Jr high history teacher explain to the class how much cheaper cars could be if they quiet redesigning a new model every year. Yet if that was the case we would still be driving the same gas guzzling smoke belching pieces of crap sold back then. The gas alone today would cost more than the dollars he was talking about saving. So even though labor returns cannot go below a certain amount via the Bowley ratio, which requires some labor value, a significant portion of cost is associated with non-labor value.
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Re: Could someone please explain to me...

#17  Postby epepke » May 21, 2011 2:34 am

The responses here seem to focus on Marx's' LTV rather than Smith's, though not quite on Marx's. Smith's idea was about the labor of acquiring something, not producing it. This seems to be more resilient to technological advances than Marx's idea. Marx probably wouldn't have liked technological advances anyway:

[quote="Karl Marx"}The worker becomes all the poorer the more wealth he produces, the more his production increases in power and range. The worker becomes an ever cheaper commodity the more commodities he creates.[/quote]
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Re: Could someone please explain to me...

#18  Postby my_wan » May 21, 2011 3:14 am

epepke wrote:The responses here seem to focus on Marx's' LTV rather than Smith's, though not quite on Marx's. Smith's idea was about the labor of acquiring something, not producing it. This seems to be more resilient to technological advances than Marx's idea.

But if the labor of acquiring something exceeds the labor of producing it by too much the it will not be acquired. Hence the capital owners cannot sell it at a profit to pay labor. In fact industrialization made it possible for the labor of acquiring it to be less than the labor of producing it yourself. Hence the employees got payed at least part of that extra productivity so that their labor of acquiring something was cheaper than their labor of producing that thing themselves. Can anybody here make a pen for 25 cents each and make a living from it? But with industrialization that 25 cents not only makes money but makes some people very wealthy. Yet to do that, even at 25 cents, they still have to make the cost of acquiring it higher than the cost of producing it, however much less that is than the labor cost of producing it for yourself.

epepke wrote:Marx probably wouldn't have liked technological advances anyway:

Karl Marx wrote:The worker becomes all the poorer the more wealth he produces, the more his production increases in power and range. The worker becomes an ever cheaper commodity the more commodities he creates.

Marx could not have imagined any such thing as a Bowley ratio. Much less that a free market would hold such a ratio essentially at a constant.
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Re: Could someone please explain to me...

#19  Postby epepke » May 21, 2011 5:03 am

my_wan wrote:
epepke wrote:The responses here seem to focus on Marx's' LTV rather than Smith's, though not quite on Marx's. Smith's idea was about the labor of acquiring something, not producing it. This seems to be more resilient to technological advances than Marx's idea.

But if the labor of acquiring something exceeds the labor of producing it by too much the it will not be acquired. Hence the capital owners cannot sell it at a profit to pay labor.


That isn't really to the point, and it's not really true anyway, because scarcity (which increases acquisition value) can come from a lot of sources other than high labor costs,. Fashion and deliberately limited runs can crank up the price you can get. Of course, you're sunk if someone underbids you, but there are enough different things that people want to provide markets. There are also patents that can be used to make something scarce.

Hence the capital owners cannot sell it at a profit to pay labor. In fact industrialization made it possible for the labor of acquiring it to be less than the labor of producing it yourself. Hence the employees got payed at least part of that extra productivity so that their labor of acquiring something was cheaper than their labor of producing that thing themselves. Can anybody here make a pen for 25 cents each and make a living from it? But with industrialization that 25 cents not only makes money but makes some people very wealthy. Yet to do that, even at 25 cents, they still have to make the cost of acquiring it higher than the cost of producing it, however much less that is than the labor cost of producing it for yourself.


Which is probably one of the reasons that we shouldn't be fixated on economic ideas that are rather old.

All that means, though, is that an individual is unlikely to make a quick profit from entering the cheap ballpoint market at the present time. They might, however, be able to make a decent living on machined fountain pens, or light saber models, or wooden keyboards.

Marx could not have imagined any such thing as a Bowley ratio. Much less that a free market would hold such a ratio essentially at a constant.


Right, and so why, then, do people continue to pay so much attention to him, or Smith even? It seems more than a bit silly.

Have you ever seen The Man in the White Suit? It's a fun little movie from 1951, but by 1980 or so its fabulous economic commentary seemed terribly naive (though some socialists I knew couldn't see that). Same with Atlas Shrugged, though that didn't even have the advantage of being fun.

Or take computer software. It takes a lot of labor to produce one copy and scarcely more to make a million. How would that fit into economic theories of just a few decades ago?
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Re: Could someone please explain to me...

#20  Postby Barry Cade » May 21, 2011 6:03 am

PairOfFeet wrote:
Barry Cade wrote:
PairOfFeet wrote:Could someone please explain why the labor theory of value was replaced? I'm kind of new to studying economics, but somehow in a way it makes sense. What about it fails to accurately describe capitalism?

Thanks


The 'problem' with the labour theory of value is that it does accurately describe capitalism.

Could you please explain why?


For a number of reasons, but most obviously because it locates the production of value in labour-power. It therefore posits an irreconcilable antagonism between capital and labour, which may change in intensity over time, but never goes away. The labour theory of value, in Marx's iteration of it, cannot be separated from the issue of class. The theory also leads to a view of capitalism as essentially crisis-ridden, rather than a system tending towards equilibrium, which is a rather uncomfortable conclusion for those who see markets as some sort of self-regulating mechanism for optimising resource allocation and economic efficiency.
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