Friday, September 19, 2014

Piketty and the Money View: A Reply to MisterMR

The last post got some very helpful comments from MisterMR (the regular commenter formerly known as Random Lurker) and Kevin Donoghue. Both of them raise issues that are worth posts of their own. I'll reply to MisterMR now, and perhaps to Kevin Donoghue later. Or perhaps not -- the biggest thing I've learned in four years of blogging is: Never make promises about future posts.

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MisterMR is coming from what I hope he won't mind my calling a classical Marxian perspective -- a perspective I'm simpatico with, tho I haven't been taking it here. One aspect of this perspective is the idea that capital can be understood in physical terms, as embodied labor. Now I agree that Marx does clearly say this, but I think this can be seen as a concession he is making to the orthodoxy of the day for the sake of the argument. Capital is subtitled "A Critique of Political Economy," and I think we should take that subtitle seriously. In effect, he is saying to Ricardo: OK, let's accept your way of thinking about capital, the system based on it is still conflictual, exploitative and in contradiction with its own conditions of existence.

I'm not sure how widely this view is held -- that Marx adopts the labor theory of value ironically. Anyway, that's not the argument I want to have here. What I want to do is clarify the perspective I'm offering in place of the labor theory. It's more in the spirit of the other core Marxian idea about capital, that it is a social relation between people.

MisterMR writes:
I think that there are 4 different kinds of capital assets (though in reality most capital assets are a mix of the four kinds). 
1) There are some capital goods that are stuff that is materially produced, such as factories. This stuff has a cost of production, that arguably has some relationship with its "value". This is what I would call "real" capital. The ambiguity in Piketty comes from the fact that he speaks as if all capital is "real" capital, and as if every money flow translates in "real" capital. 
2) There are some assets that are a finite resource that someone controls, like land. In fact, classical economists distinguished between "capital" and "land". The value of land can't be linked to the "cost of production" of land, because said cost doesn't exist. So arguably the value is just the cashflow derived from the asset divided by the normal rate of profit. I'd call this kind of assets simply "land". 
3) While land is certainly something that exists, there are some assets that have an economic value but that don't relate to something that clearly exists or that can be produced: for example, ownership on patents, or a famous brand that has an high market penetration and visibility etc. I think that these assets have dinamics that are similar to land, although they are mostly non material. 
4) Finally, there is credit. Credit also is a non material thing, and is different from all the 3 previous classes of capital for these reasons: 
4.1) It doesn't have a "cost of production";
4.2) It isn't related to any fixed resource, something that differentiates credit from both 2 and 3;
4.3) It has a fixed nominal value (which implies that the currency provider can literally print it out of existence).
4.4) It usually has a nominally fixed interest rate, something that can obviously cause chain bankruptcies. 
My problem with the "monetary view" is that it sounds like if assets of the 2 and 3 classes all are just a "montary" thing, as opposed to a "real stuff view" that sees all assets as if they were of the 1 class.
My response is that the money view is not a substantive claim about the nature of particular assets, but a way of looking at assets in general -- "real" capital goods as much as the more vaporous claims in categories 2 through 4. It does imply some kind of ontology, but in itself, the money view is just a choice to focus on money payments.

But I do want to explain the broader view of social reality that, for me at least, lies behind the money view.  Here's the way I want to look at things.

* * *

On the one hand, there is the human productive activity of collectively transforming the world and maintaining our conditions of existence, along with the conditions that make that activity possible. When you sit down and write a blog post, you are engaged in creative activity with the goal of building up our collective knowledge of the world, and you are also maintaining the network of social ties through which this kind of activity is carried out. Your ability to engage in this activity depends on a great number of objective conditions, ranging from your physical health to the infrastructure that communicates your words to the rest of the world. Many of these conditions are the result of past human activity.

Under capitalism, a subset of human productive activity gets marked off as "labor." Labor has a number of special characteristics, most obviously that it is carried out at the direction of a boss. But for current purposes, the most important distinctive characteristics of the activity that we call "labor"  are (a) it carries a price tag, the "wage," with labor that is somehow similar carrying a similar wage. And (b) labor becomes substantively more similar over time, with the disappearance of specific skills and increasing interchangeability among the human beings performing it; it follows from this that the wage also become uniform. To the extent that (a) is true, we can attribute a "cost" to some particular set of conditions and to the extent (b) is also true, that cost will correspond to the hours of labor expended maintaining those conditions. Of course all productive activity additionally requires many conditions, both natural and social, that are not reflected in labor hours. In particular, a great deal of passive social cooperation is required for any productive activity, especially when there is an extensive division of labor.

Even in the pure case, where labor is completely homogeneous and all production is carried out for profit, under identical conditions and with no barriers to competition, there will not in general be a unique mapping from labor hours to costs or relative prices. The best we can do is to reduce all the infinite possible sets of relative prices to variation along a single dimension, with one set of relative prices corresponding to each possible profit rate. (I think this is Sraffa's point.)

So the description of assets in group 1 is correct -- but only with respect to one particular way of describing one particular way of organizing production, not as statements about reality in general. The productive activity that takes place in a factory does, of course, require the past activity that resulted in the existence of the factory. But it requires lots of other activity as well, much of which is not counted as "labor." And the fact that "labor" is a measurable input at all only holds to the extent that the productive activity has been deskilled and homogenized, a sociological fact that is never completely true and is not true at all in most historical contexts.

The think you have to avoid is believing that quantities like "value" or "cost" have any existence outside the specific social relations of capitalism.

The next question is what it means to “own” some conditions for productive activity, like a factory. The beginning of wisdom here is to recognize that ownership is a legal relationship between persons, not a relationship with a physical object. To own a piece of land means you have certain legal rights with respect to other people — to exclude them from the use of that land, to receive some equivalent from them if you do permit use of the land, to transfer those rights to someone else — and that no one else has those rights with respect to you. However, that’s only the first step. Next, we have to recognize that what constitutes “use” of piece of an asset is not a physical fact, but a social one. (As in the old story, the baker can exclude others from eating his rolls, but not from enjoying the smell of them.) So it would be more accurate to say that ownership of a piece of property is simply a form of social authority — a bundle of rights over other people. Indeed, if we want to relate the world of money flows to broader social reality, the most fundamental fact is probably this: The person who receives a money payment labeled “profit” gives orders, and the people who receive money payments labeled “wages” have to follow them. To say you own a piece of property is simply to say there is a set of commands that, if you issue them, other people are compelled to obey. Those rights are metonymously referred to by a label which bears a picture of some tangible good, just like the insignia on an officer’s uniform bear a picture of a leaf or a bird.


When you say, here is a means of production, a factory, with a certain cost, you have already chosen: to ignore all the various conditions that make a certain form of collective productive activity possible, and let the existence of this one tangible object, the factory, stand in for all the rest; to ignore all the various forms of productive activity and social coordination that were necessary to bring the factory  (and the rest of the conditions of production) into existence, except for those we class as wage labor; to convert that wage labor to some common quantitative standard by measuring it in wage payments;  to assume some exogenously given profit rate, to give you the discount rate you need to add up wage payments made at different dates. Only then can you say the factory has a cost — and even then, this money cost is calculated by adding up a certain set of money payments.

At that point we have MisterMR's category (1) as a concrete social reality. We still have to establish the profit rate, since it cannot be reduced to a marginal physical product. Only then do the issues specific to the other three categories come into play.

I should be clear: the money view is not a complete account of the sphere of social reality we call the economy. (And again, I’ve adopted the term from Perry Mehrling, it’s not my invention.) The money view is defined by making the atomic units of analysis bundles of money payments. I would argue that it is logically consistent to think of any capital good as simply a bundle of income streams contingent on different states of the world, in a way that it is not logically consistent to think of it as a physical object producing a stream of physical outputs.

The fact that this is a logically consistent account doesn’t mean it’s sufficient. Obviously the money view doesn’t give a complete story, since we don’t know why the income streams attached to different assets are what they are, or why they change over time, or why assets in the monetary sense are attached to tangible goods or production processes, or for that matter why anyone cares about money payments in the first place. But by adopting a consistent story about money payments and assets, we get a clearer view of these other questions. We distinguish the questions that can be addressed with the formal techniques of economics from other questions that require a different approach. This is a step forward from the perspective that mixes up questions about money flows with questions about tangible productive activities and so can’t give a coherent story about either.


  1. [sorry for the super-long, not 100% relevant comment]

    Thanks for the very thoughtful answer! Also thanks for the "classical Marxist perspective" - this flatters me a lot.
    I now realise that I completely misunderstood what the "money view" is. In these terms I agree very much with it.

    Reading this post, it occurred to me that, in some sense, also the "labor theory of value" is a "money view". The reason is this: if we take a materialist view, we have situation like a fisherman who owns a boat and gets 5 tunas a day. How can we relate the tunas to the boat? Is the "efficiency" of the boat of five tunas/day? How can we relate this to a factory that produces 10 cars a day - is the factory more or less efficient than the boat? In these terms we can't answer, because all elements are eterogeneous. Marx, who believes in the sort of equilibrium theory that is the LTV, confronts the "values" of the tunas, cars, boats etc., not the things in themselves. Not only this, but since he uses "labor time" as a unit of measure, he is rooting (or trying to root) his theory in a view of social relations, for example if we say that a guy has a bank account that has a price equivalent to 150 labour hours, we are clearly speaking of a social relation of this guy with the rest of mankind, disguised as money (this of course doesn't negate your point about passive cooperation and all the other activities that are not monetized).

    This shows a difference between Sraffa's view and Marx's view: Sraffa sees production as a material activity and calculates "value" in terms of a "standard commodity" that is a weighted basket of phisical stuff, whereas Marx calculates "value" in terms of a particular kind of social relation, that can be quantified in terms of labour time.
    Contra Piketty, Marx knows that there are productivity increases, in facts in the Grundrisse he states that tokens representing labour times couldn't work as money, and one of the reason is that this would be deflationary because of productivity growth (he says that tendetially all commodities depreciate vs. labour, but this is just another way of saying productivity growth). This shows IMHO that labour values in Marx are actually social values, not "real" values in the sense currently used in economics. [small totally irrelevant detail: while Sraffa and most economists see profits as a markup on the production costs, Marx defines labour values as the sum of the wage and the additional profit it generates. This doesn't change things but could cause some confusion.]


    1. There are some things that I was thinking about after I read Piketty, but couldn't explain very well, that I think I can explain using this concept of social value, so here I go:

      1) The most important difference IMHO between Marxian economics and other economic theories, is that Marx places a lot of importance on the idea that capitalists are wealth accumulators, not utility maximizers. if we think in terms of social value, we could say that capitalists accumulate wealth not to satisfy their needs (consumption) but to increase their social power (that in Marxian terms is represented in terms of labour value, which however is not a real thing but a social relation). In this sense the relationship between Marx and Ricardo is more something like: Yes, I agree that your economic theory is correct, but the whole system is based on the continuous increase of social power of capitalists, and only indirectly on the satisfacions of the needs of consumers.

      2) The r>g thing. Piketty poses this as an empirical observation, he doesn't try to explain it (other than with weird theories about the efficiency of capital). However if we think in terms of social value, and if we believe that capitalists try to increase their relative social power, not to increase their future consumption, it is natural that capitalists discount growth and want to increase their wealth in relative terms to total income, not just in "real" terms. In fact if we think in terms of the LTV, one hour of labour automatically "revaluates" times the productivity increase. This might seem a weird mathematic abstraction but in reality it makes sense: for example if guy A has a wage of 1000$, and a new iphone enters the market, A generally doesn't think "whoa my real wage just increased!", unless s/he is planning to buy a cellphone. For the same reason someone who has a bank account or some property won't think "the real value of my account/property just increased", s/he will be interested in the relative value, not the real one. If actually capitalists/wealth owners think in this "intuitive LTV" way, they will perceive rg, and that when r<g there are economic crises. As a consequence the Marxian theory of the tendential fall in the rate of profit is way more similar to Piketty's findings than usually assumed, and has nothing to do with a supposed tecnologic tendence to higer capital intensity. The problem is just that capitalist tend to continually ammass wealth, either in "money" or "asset" form (thus either by building more factories, pushing up the price of land, or buying bonds). Thus the story is the same but the causality is reversed: it's not that capital increases because it's very efficient and this causes an increase in the profit share, but rather that a capitalist system needs to constantly accumulate "assets" (or a crisis will ensue) and keep a certain profit rate (or volatility will become excessive), and this means that the profit share has to increase in time.

      4) Going back to my 4 kinds of capital, so is this true that we can ignore difference between "financial" and "real" capital? In my opinion, not so: the point is that "real" capital (type 1), in Marxian terms, is that capital that is actually produced by (paid) labour. This means that, if for some reason there is too much wealth accumulated in capital, and some is in bonds, some in high value of land, and some in factories with large overcapacity, the fall in value of land can be managed, the bonds can be inflated away, but if the factories have to close this will likely cause unemployment, unless something limits this effect (e.g. a shorter working week or strong limits on overtime).

    2. But no one ever really owns "real" capital beyond tiny household size enterprises. They own an equity contract that gives them certain rights of control and limits their liabilities. These really aren't so different than risky financial assets like junk bonds. It's interesting to think of equity as a liability.

  2. What a difficult project! Completely describe an(the) economic system!

    In the past, I have described an effort to describe an economic system as being similar to asking four blind men to describe an elephant: One will notice a thick, long, flexible tube, another a thin, hairy, long flexible tube, another a thick post that has one bend, and the fourth, a huge balloon mysteriously suspended in the air. We who see the whole elephant know that each is only describing the part of the elephant that they are feeling(experiencing).

    The lesson from the blind men is that a very complete understanding of the economy is necessary before an accurate description can be made.

    Many rhetorical economic descriptions of the economy begin from a "labor theory", "capital theory", or other assumed framework. Perhaps this is necessary due to the brevity of human attention spans, but these descriptions each assume a view of the elephant that is very limited. It should be no surprise that discussion based on a partial description concludes with disjointed conclusions.

    Thus we see that conclusions resulting from rhetorical discussions based on the labor theory do not mesh at all well with conclusions resulting from rhetorical discussions based on capital theory. Both discussions were based on incomplete descriptions of the economy.

    1. Roger-

      That would be a difficult problem, but in some ways I'm suggesting just the opposite. I'm suggesting we should analyze the system of money payments independently of the other stuff we call "economic."

    2. Thanks for the clarifying comment. As I re-read your post and the MisterMR comments, I could see that my comment was not well focused.

      I picked up on this quote to better understand the thrust of this blog thread.

      " It's more in the spirit of the other core Marxian idea about capital, that it is a social relation between people."

      I hope I am getting the thrust correctly.

      I take the controversial position that money is property, that money is ALWAYS property. This stance frequently puts up a flag for many bloggers.

      If money is property, then it is also "capital". That association places money in the same category as land, factories and other means of production.

      Now, should we think of "capital" as having a social contractual arrangement with society? I would think 'yes', the whole question of ownership is a social decision. Someone always "owns" capital, whether the "someone" is an individual, a collection of individuals, or is state ownership. In every case, ownership;is ultimately a decision about who exactly (and specifically) makes decisions about the use of property.

      You are having an interesting discussion here. Thanks for making it visible in this blog.

  3. I'm going to be slightly off topic here. But as to whether Marx means his LTV ironically, I think it's a split decision. It, after all, takes him a full 3 volumes to work out his account. The difference between Marx and the Ricardan and Smithian accounts which provided the materials for his critique, is that his account is an extracted rather than an embodied account of "labor value" and the formation of "labor-value" occurs not through laboring processes, which produce and are use-values, but through market exchange-value relations, which do the extracting/abstracting of SNALT as a unit of account. SO I think the issues of costs and relative prices that you refer to, citing Sraffa, should be referred to the infamous "transformation problem", which the neo-classicals misread, causing a century of controversy. Contrary to Mister MR, I don't think that Marx was depending on an equilibrium account, but rather taking over the assumptions of balanced equilibrium reproduction precisely in order to undermine them in terms of the accumulation of long-run dynamic dis-equlibria, as the basis of his family of crisis tendencies. But still all "wealth", as paper claims on underlying production and production incomes, must "ultimately" be squared with the latter, so it does little good the slide and elide such signifieds under an endless accumulation of signifiers. Both land rents and credits depend upon the underlying productive base and its possible expansion, else they prove in the end entirely fictive. Picturing the "economic subsystem" entirely in terms of a "system of payments" in the manner of Luhmann, (which led Habermas astray, in the name of "communication"), simply won't do, since it ignores not just the distributional issues, which effect the level and composition of demand determining the "optimization" of the economy and the viability of its payments, but also the resource base upon which possible real production depends.

    One of Marx' basic, chronic complaints is that capitalism inverts the relation between means and ends, ( of Aristotelian origin, going back to the latter's criticism of the baunasoi), leading to the endless accumulation of means without regard for any "ultimate" or socially determined ends. IOW the generation and distribution of productive surpluses solely in terms of the social construction of private profits distorts the entire process of social development and the human and natural ends it is supposed to subserve. And the further issue arises, given that to economize means to produce more from less, or to produce the same unit output from fewer unit "resources", just what resources should be "economized" upon? Given the rampant environmental and resource crises we face, and the challenges that poses for the realization and coordination for the investment of "resources", just how relevant is any projection of the future accumulation and distribution of "wealth" in terms of monetary claims anyway? Shouldn't whatever "tools" of economic analysis that we can muster be focused on such "real" issues, rather than on the settlement of effectively fictitious monetary claims?

  4. The special RWER issue about Piketty is out. With regard to the money view the Fullbrook article is interesting. The whole issue can be read as a kind of filibuster about the evils and, worse, nonsense of marginalist thinking.

    An important influence on my article have been the posts on this blog about 'liquidity', thanks! My view is that 'capital is not neutral' in the sense (among others!) that innovations in liquidity (the stock market made equity and (the money view) expected future profits, i.e. the liability side of the balance sheet, a lot more liquid, up to that point you often had to sell assets to get money) often were mayor Schumpeterian innovations. As to misterMR: you really should check out the definitions of capital in the System of National Accounts! See also my slack wire inspired article.

    Merijn Knibbe