by Mi chael Abouzel of A thesis submitted to the faculty of The Uni versi t y of Ut ah in partial fulfillment of the requi rement s for the degree of Mast er of Science Depart ment of Economi cs The University of Ut ah May 2010 THEORIES OF VALUE AND ECONOMIC CRISES: REVISITING MAURICE DOBB by Michael Abouzelof A thesis submitted to the faculty of The University of Utah in partial fulfillment of the requirements for the degree of Master of Science Department of Economics The University of Utah May 2010 Copyri ght Mi chael Abouzel of 2010 All Ri ght s Reserved Copyright Michael Abouzelof2010 All Rights Reserved THE UNIVERSITY OF UTAH GRADUATE SCHOOL SUPERVISORY COMMITTEE APPROVAL of a thesis submitted by Michael Abouzelof This thesis has been read by each member of the following supervisory committee and by majority vote has been found to be satisfactory. 1 \ \C \ \ 0 , \ i L\\\ \0
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. . . . - ,- , THE UNIVERSITY OF UTAH GRADUATE SCHOOL FINAL READING APPROVAL To the Graduate Council of the University of Utah: I have read the thesis of Michael Abouzelof in its fnal form and have found that (1) its format, citations, and bibliographic style are consistent and acceptable; (2) its illustrative materials including fgures, tables, and charts are in place; and (3) the fnal manuscript is satisfactory to the supervisory committee and is ready for submission to The Graduate School. Date t E.K. Hunt Chair: Supervisory Committee Approved for the Major Department Peter Philips Chairl Dean Approved for the Graduate Council oar es A. Ight Dean of The Graduate School ABSTRACT Thi s paper revi ews t wo areas of Mauri ce Dobb' s contributions to the history of economi c t hought , specifically his essay The Requirements of a Theory of Value and various writings on the classical perspectives of economi c crises. The first section provi des a bi ography of Dobb, the second exami nes the requi rement s Dobb felt a t heory of val ue must fulfill to be considered adequat e, followed by a historical recount of the origins of the t wo mai n compet i ng theories, the Labor Theory and the Utility Theory, as well as a discussion of how each t heory succeeded or failed to meet these requi rement s. The third section discusses how economi c crises were vi ewed by political economi st s from Adam Smi t h to Karl Marx, wi t h special attention paid to the rate of profit, proportionality, and specific characteristics of capitalism that make it an ideology prone to periodic disruptions. ABSTRACT This paper reviews two areas of Maurice Dobb' s contributions to the history of economic thought, specifically his essay The Requirements of a Theory of Value and various writings on the classical perspectives of economic crises. The first section provides a biography of Dobb, the second examines the requirements Dobb felt a theory of value must fulfill to be considered adequate, followed by a historical recount of the origins of the two main competing theories, the Labor Theory and the Utility Theory, as well as a discussion of how each theory succeeded or failed to meet these requirements. The third section discusses how economic crises were viewed by political economists from Adam Smith to Karl Marx, with special attention paid to the rate of profit, proportionality, and specific characteristics of capitalism that make it an ideology prone to periodic disruptions. I woul d like to recognize the friends who hel ped me t hrough this period of life Mi ke Brown, Aym Berges, Rory Mul here, Annabel l e Tran I coul dn' t have done it wi t hout you. I would like to recognize the friends who helped me through this period of life: Mike Brown, Aym Berges, Rory Mulhere, Annabelle Tran I couldn' t have done it without you. CONTENTS ABSTRACT iv BI OLOGI CAL PORTRAI T OF MAURI CE DOBB 1 Bi ography 2 THE REQUI REMENTS OF A THEORY OF VALUE 11 Introduction 12 The Requi rement s of a Theory of Val ue 13 Classical Political Economi st s and the Labor Theory of Val ue 19 Jevoni an Revol ut i on and the Utility Theory of Val ue 26 The Probl em of Surpluses 29 Cont emporary Theori es and Critiques of the Classicalists 31 Concl usi ons 37 ECONOMI C CRI SES 41 Introduction 42 Classical Perspectives of Economi c Crises Before Mar x 43 Underconsumpt i on 47 Marx and Capital Accumul at i on 49 Proportionality 54 Capitalism Is 56 The Industrial Reserve Ar my 58 In Defense of Marx 60 Concl usi ons 64 SELECTED BI BLI OGRAPHY 67 CONTENTS ABSTRACT ......... .... .... ... ... .... ......... ... .... .... .... ....... ..... .... ... ........ ... ............ ... .......... ....... ...... iv BIOLOGICAL PORTRAIT OF MAURICE DOBB .... ............................................ .. .... ..... 1 Biography ..................... ...... ..... ..... .. .... ..... ... .... ........ ......... ............ .... ...... ..... .. ....... .... 2 THE REQUIREMENTS OF A THEORY OF VALUE ......................................... . .. .... .... 11 Introduction ..... ....... ........................................................... ........ ............................. 12 The Requirements of a Theory of Value ....... .... ...... .... ............ ...... ......... ..... .... ...... 13 Classical Political Economists and the Labor Theory of Value .... .. ... ........ ..... .. .... 19 levonian Revolution and the Utility Theory ofValue .......... ................. .......... ...... 26 The Problem of Surpluses .......... ....... ... ...... ... .... .... ........... .............. ......... .. ....... .... .. 29 Contemporary Theories and Critiques of the Classicalists ... .......... ... ... ... ....... ...... . 31 Conclusions ...... ... ........................... ........... ..... ........... .... .................. ..... ... ............... 37 ECONOMIC CRISES ...... ......... .. ............ ...................................................................... .... 41 Introduction ... ...... ... ...... ...... ....... ........... ... .............. ............... .... .... ..... ... ...... ..... ....... 42 Classical Perspectives of Economic Crises Before Marx ... ..... .... ..... .... ....... ... ...... .43 U nderconsumption ... .......... ........... ... ...... ... ... ...... ........ ... ............ .. ................ ... ........ 47 Marx and Capital Accumulation ...... ................. ....... .. .. .......... ... .. ........ ... .. ... ........... 49 Proportionality ....... ... ... ......... .. ..... .... .......... .......... .... .... .......... .. ........... ............ ....... 54 Capitalism Is ...... ............................... ......... ... ... .... .......... ..... ........ ....... ... ......... ... .. ... 56 The Industrial Reserve Army ... ......... ............. ...... ........... ... ............ ... .. ............ .. ..... 58 In Defense of Marx ........ .............. .......... ....... ...... .... ........... ........................ .... ....... . 60 Conclusions ..... ... ... ... ..... .. .. ...... ...... ... .... ...... ...... ....... ... ................. .. ... ...... ... ....... ...... 64 SELECTED BIBLIOGRAPHy ... ... ........ ... ... ..... ..... .... ... ... ... .......... ........... ....... ..... ...... ... .. .. 67 B I O G R A P H I C A L P O R T R A I T O F MA U R I C E D O B B BIOGRAPHICAL PORTRAIT OF MAURICE DOBB 2 Bi ogr aphy Mauri ce Dobb was born on July 24 t h , 1900 in a suburb of N. W. London. Hi s father, who had inherited the family busi ness, was a retail draper, while his mot her came from a poor Scot t i sh-merchant ' s family. Dobb' s upbri ngi ng appears to have been fairly ' ordi nary' for the t i me in that his background was bot h religious and conservat i ve. 1 As a child, Mauri ce showed little interest in academi cs whi l e attending public schools until around the age of 17, when he was allowed to specialize in history. His success in the field provi ded hi m wi t h the i mpet us to pursue further education, and Dobb decided to study for a Scholarship Exami nat i on at Cambri dge University. Dobb was unabl e to procure a full scholarship, but he did manage to get into Cambri dge wi t h an Exhi bi t i on. 2 Dobb spent the next three quarters of a year bet ween school and college exploring things outside of mai nst ream academia. It was during this t i me that he first came into contact wi t h t hemes like the Labor Movement , socialism, the ideas of the Russian Revol ut i on (then only a year old), as well as the works of unort hodox writers such as Karl Marx. Thi s t i me period greatly impacted Dobb; a large number of the ideas he was exposed at this age later became main t hemes in his scholarly career. The growt h of his interest in socialism mi ght seem surprising at first, especially when one consi ders the political climate surroundi ng Dobb at the t i me. Perhaps it was in response to the predomi nat el y pro-military students acting blindly on the fervor of patriotism t hroughout the Cambri dge campus. He was heavily influenced by an idealistic lecture given by Professor Gilbert Murray, who spoke of the need for permanent peace. 1 Nonconformist-Presbyterian and forced to read patriotic books. 2 An Exhibition is similar to a scholarship in that it is a financial award granted on grounds of merit, but it is typically for a substantially lesser amount. 2 Biography Maurice Dobb was born on July 24 1 \ 1900 in a suburb ofN.W. London. His father, who had inherited the family business, was a retail draper, while his mother came from a poor Scottish-merchant's family. Dobb's upbringing appears to have been fairly 'ordinary' for the time in that his background was both religious and conservative.' As a child, Maurice showed little interest in academics while attending public schools until around the age of 17, when he was allowed to specialize in history. His success in the field provided him with the impetus to pursue further education, and Dobb decided to study for a Scholarship Examination at Cambridge University. Dobb was unable to procure a full scholarship, but he did manage to get into Cambridge with an Exhibition? Dobb spent the next three quarters of a year between school and college exploring things outside of mainstream academia. It was during this time that he first came into contact with themes like the Labor Movement, socialism, the ideas of the Russian Revolution (then only a year old), as well as the works of unorthodox writers such as Karl Marx. This time period greatly impacted Dobb; a large number of the ideas he was exposed at this age later became main themes in his scholarly career. The growth of his interest in socialism might seem surprising at first, especially when one considers the political climate surrounding Dobb at the time. Perhaps it was in response to the predominately pro-military students acting blindly on the fervor of patriotism throughout the Cambridge campus. He was heavily influenced by an idealistic lecture given by Professor Gilbert Murray, who spoke of the need for permanent peace. 1 Nonconformist-Presbyterian and forced to read patriotic books. 2 An Exhibition is similar to a scholarship in that it is a financial award granted on grounds of merit, but it is typically for a substantially lesser amount. 3 The speech, delivered on the day the war ended, convinced Dobb of the necessity of logical pl anni ng. He started buyi ng radical pamphl et s and read books r ecommended to hi m by a second-hand bookseller of leftist material. He j oi ned a local branch of the Independent Labor Party, and participated to the point of speaking on a street-corner meet i ng at least once. The large labor strikes staged in the post war period of rapid inflation caught Dobb' s attention, and his interest in economi cs grew. Dobb' s political leanings compel l ed hi m to j oi n the University Socialist Society as soon as he began his studies at Cambri dge in October 1919. Other member s of this illustrious society included H. D. Di cki nson, Ki ngsl ey Martin, R. B. Brai t hwai t e, and Al l en HuttC The group was fairly small, and they generally read theoretical papers before openl y discussing t hem. Wi t hi n a year or t wo, Dobb assisted in forming the Cambri dge University Labor Cl ub, whi ch had wi der scope than the Socialist Society, and engaged in more public activities. Hi s i nvol vement in the club increased as he was elected Secretary, and by his final year, he was elected chai rman. The young Dobb also took part in political debates in the Cambri dge Uni on Society, and for a short t i me edited a student paper called Youth. He was a member of a pacifist society called the Uni on of Democrat i c Control. Thi s society was opposed by angry ex-servi cemen, who violently broke up the soci et y' s first meet i ng, and almost destroyed Dobb' s room in his dormitory. In his second or third year as a student, Dobb helped organize and address a public meet i ng in London by the University Socialist Federation, who were in support of the so-called Triple Alliance st ri ke-movement (a general strike of Mi ners, Rai l wayman, J According to Cambridge Journal of Economics, H.D. Dickinson became an economist and author of The Economics of Socialism, Kingsley Martin became the editor of the New Statesman, R.B. Braithwaite became a Professor of Philosophy at Cambridge, and Allen Hutt became the chief typographer and sub editor for the Daily Worker for several decades, p. 117 3 The speech, delivered on the day the war ended, convinced Dobb of the necessity of logical planning. He started buying radical pamphlets and read books recommended to him by a second-hand bookseller of leftist material. He joined a local branch of the Independent Labor Party, and participated to the point of speaking on a street-corner meeting at least once. The large labor strikes staged in the postwar period of rapid inflation caught Dobb's attention, and his interest in economics grew. Dobb's political leanings compelled him to join the University Socialist Society as soon as he began his studies at Cambridge in October 1919. Other members of this illustrious society included H.D. Dickinson, Kingsley Martin, R.B. Braithwaite, and Allen Hutt. 3 The group was fairly small, and they generally read theoretical papers before openly discussing them. Within a year or two, Dobb assisted in forming the Cambridge University Labor Club, which had wider scope than the Socialist Society, and engaged in more public activities. His involvement in the club increased as he was elected Secretary, and by his final year, he was elected chairman. The young Dobb also took part in political debates in the Cambridge Union Society, and for a short time edited a student paper called Youth. He was a member of a pacifist society called the Union of Democratic Control. This society was opposed by angry ex-servicemen, who violently broke up the society's first meeting, and almost destroyed Dobb's room in his dormitory. In his second or third year as a student, Dobb helped organize and address a public meeting in London by the University Socialist Federation, who were in support of the so-called Triple Alliance strike-movement (a general strike of Miners, Railwayman, 3 According to Cambridge Journal of Economics, H.D. Dickinson became an economist and author of The Economics o[Socialism, Kingsley Martin became the editor of the New Statesman. R.B. Braithwaite became a Professor of Philosophy at Cambridge, and Allen Hutt became the chief typographer and sub- editor for the Daily Worker for several decades, p. 117 Dockers, and other transport workers). Afterwards, both Dobb and H. D. Di cki nson were invited by the Unempl oyed Wor ker ' s Council to a three week intensive speaki ng and organizing movement ai med at a badly depressed part of Bi rmi ngham. Dobb later spoke and canvassed for the labor candidate in By-El ect i ons for Parliament in Cambri dge t own, providing hi m wi t h opportunities to meet figures like Bernard Shaw and G. D. H. Col e whi l e attending "Summer School s" organized by a left-wing organization known as the Labor Research Depart ment . In these ways, Dobb managed to obtain practical experience in bot h politics and the worki ng class movement . Regardi ng his academi cs, Dobb studied economi cs first and foremost, but never abandoned his interest in history. He considered hi msel f a disciple of Marx and a supporter of the Socialist Revol ut i on in Russi a early on, even t hough there was very little of Marxi st writing available in England, save Kapital and Leni n' s State and Revolution. He di dn' t show much affinity for Marshal l , and was barely able to make hi s way t hrough his Principles of Economics, a text required for testing. He became a member in Keynes' s Political Economy Cl ub in his second or third year, where he read a paper on Marx that Keynes had personally approved of. Dobb was further influenced by the writings of Webbs and Labriola, Georges Sorel, Bertrand Russell, the Guild Socialists, and Cr oce' s essay on historical materialism. He received first class honors in bot h parts of the Economi c Tri pos; after graduating, he was offered a Studentship for Research at the London School of Economi cs. 4 It was around his first year as a research student (1922) that Dobb officially j oi ned the Communi st Party, an organization founded the previ ous year. He started participating 4 The Economic Tripos is a mandatory exam testing understanding and ability before allowing a student to move up to the next level of study. 4 Dockers, and other transport workers). Afterwards, both Dobb and H.D. Dickinson were invited by the Unemployed Worker's Council to a three week intensive speaking and organizing movement aimed at a badly depressed part of Birnlingham. Dobb later spoke and canvassed for the labor candidate in By-Elections for Parliament in Cambridge town, providing him with opportunities to meet figures like Bernard Shaw and G.D.H. Cole while attending "Summer Schools" organized by a left-wing organization known as the Labor Research Department. In these ways, Dobb managed to obtain practical experience in both politics and the working class movement. Regarding his academics, Dobb studied economics first and foremost, but never abandoned his interest in history. He considered himself a disciple of Marx and a supporter of the Socialist Revolution in Russia early on, even though there was very little of Marxist writing available in England, save Kapital and Lenin's State and Revolution. He didn't show much affinity [or Marshall, and was barely able to make his way through his Principles of Economics, a text required for testing. He became a member in Keynes's Political Economy Club in his second or third year, where he read a paper on Marx that Keynes had personally approved of. Dobb was further influenced by the writings of Webbs and Labriola, Georges Sorel, Bertrand Russell, the Guild Socialists, and Croce's essay on historical materialism. He received first class honors in both parts of the Economic Tripos; after graduating, he was offered a Studentship for Research at the London School of Economics. 4 It was around his tirst year as a research student (1922) that Dobb officially joined the Communist Party, an organization founded the previous year. He started participating 4 The Economic Tripos is a mandatory exam testing understanding and ability before allowing a student to move up to the next level of study. 5 in the intellectual branch before transferring to the branch reserved for the worki ng class. He spoke to CP branches, wor ker s' circles, etc., and became active in the educational movement called the Council of Labor Col l eges. For a short t i me he edited and wrote for a mont hl y magazi ne called Plebs, a periodical focused on t eachi ng Marxi st s principles. In his t wo years as a research student, Dobb worked under the supervision of Professor Edwi n Cannan on a thesis about the history and theory of capitalist enterprise. He received a Ph. D. for this work, whi ch he subsequently formed into the basis of a rather unsuccessful book called Capitalist Enterprise and Social Progress (1925). Thi s book basically attempted to combi ne the theories of Marshal l wi t h concept s such as surplus- val ue and exploitation, as well as addressing some of the historical evolution of economi cs that he woul d elaborate on in later books. Dobb returned to Cambri dge in 1924 after bei ng appointed as Lecturer in Economi cs in the Faculty of Economi cs and Politics. He visited the Soviet Uni on the following year, staying on in Moscow as a teacher of English. There he gained privileges as a visitor to the Bi cent enary Celebrations of the Academy of Sciences and was present at a famous meet i ng bet ween Keynes and Gospl an economi st s, where Keynes was presented with a copy of the first ' control number s' fresh from the printer. Thi s period stimulated Dobb' s interest in the devel opment of the Soviet economy, l eadi ng hi m to write a work on their first ten years called Russian Economic Development Since the Revolution (1928). He visited the Soviet Uni on again in bot h 1929 and 1930 during the begi nni ng of the First Five Year Plan, an extremely ambi t i ous and t umul t uous period for 5 Gosplan economists refer to Soviet State Planning officials. 'Control numbers' refers to the annual economic plans the Gosplan economists were expecting/aiming to achieve. 5 in the intellectual branch before transferring to the branch reserved for the working class. He spoke to CP branches, workers' circles, etc., and became active in the educational movement called the Council of Labor Colleges. For a short time he edited and wrote for a monthly magazine called Plebs, a periodical focused on teaching Marxists principles. In his two years as a research student, Dobb worked under the supervision of Professor Edwin Cannan on a thesis about the history and theory of capitalist enterprise. He received a Ph.D. for this work, which he subsequently formed into the basis of a rather unsuccessful book called Capitalist Enterprise and Social Progress (1925). This book basically attempted to combine the theories of Marshall with concepts such as surplus- value and exploitation, as well as addressing some of the historical evolution of economics that he would elaborate on in later books. Dobb returned to Cambridge in 1924 after being appointed as Lecturer in Economics in the Faculty of Economics and Politics. He visited the Soviet Union the following year, staying on in Moscow as a teacher of English. There he gained privileges as a visitor to the Bicentenary Celebrations of the Academy of Sciences and was present at a famous meeting between Keynes and Gosplan economists, where Keynes was presented with a copy of the first 'control numbers' fresh from the printer. 5 This period stimulated Dobb's interest in the development of the Soviet economy, leading him to write a work on their first ten years called Russian Economic Development Since the Revolution (1928). He visited the Soviet Union again in both 1929 and 1930 during the beginning of the First Five Year Plan, an extremely ambitious and tumultuous period for 5 Gosplan economists refer to Soviet State Planning officials. 'Control numbers' refers to the annual economic plans the Gosplan economists were expecting/aiming to achieve. 6 the Soviets. On return to Engl and, Dobb wrote several pamphl et s and gave various lectures about the USSR. Duri ng the General Strike in 1926, most students left school in an effort to break the strike. In response, Dobb and a few friends organi zed a publicity service for strikers under the local Labor and Trades Counci l , an assembl y acting as a local strike commi t t ee. When the Trade Uni on Congress started its own national newspaper, The British Worker, Dobb helped organize its collection and regional distribution. Dobb' s t i me from the early 1930s to the out break of Worl d War II was largely spent engaged in political activities and pol emi cal writing. Thi s t i me peri od was marked with the rise of Fasci sm and the war danger, along wi t h a growi ng interest among intellectuals in the tenets of Marxi sm. He organized and became secretary of a local Ant i -War Council of Labor, whose mai n achi evement was organi zi ng a portable Ant i - War Exhibition that toured the country. In 1936 Dobb actively organized a commi t t ee for aid to Spain, raising funds to send a shipload of food to the war torn country. Around this t i me, the Ant i -War Council changed its name to the Cambri dge Peace Counci l , effectively broadeni ng its appeal to a wi der audience. For a whi l e, Dobb was also a commi t t ee member of the Nat i onal Peace Counci l . His political activity largely separated hi m from focusing on mai nst ream theoretical work, as well as stigmatized his theories to more traditional economi st s. Dobb seemed to undert ake the bare mi ni mum of his academi c duties, and took virtually no part in the theoretical discussions among Cambri dge economi st s at the t i me. His lectures concerned t hemsel ves with applied probl ems (such as poverty, unempl oyment , social probl ems, etc.) instead of conjectural ones. He wrote an el ement ary st udent s' the Soviets. On return to England, Dobb wrote several pamphlets and gave various lectures about the USSR. 6 During the General Strike in 1926, most students left school in an effort to break the strike. In response, Dobb and a few friends organized a publicity service for strikers under the local Labor and Trades Council, an assembly acting as a local strike committee. When the Trade Union Congress started its own national newspaper, The British Worker, Dobb helped organize its collection and regional distribution. Dobb's time from the early 1930s to the outbreak of World War II was largely spent engaged in political activities and polemical writing. This time period was marked with the rise of Fascism and the war danger, along with a growing interest among intellectuals in the tenets of Marxism. He organized and became secretary of a local Anti-War Council of Labor, whose main achievement was organizing a portable Anti- War Exhibition that toured the country. In 1936 Dobb actively organized a committee for aid to Spain, raising funds to send a shipload of food to the war torn country. Around this time, the Anti-War Council changed its name to the Cambridge Peace Council, effectively broadening its appeal to a wider audience. For a while, Dobb was also a committee member of the National Peace Council. His political activity largely separated him from focusing on mainstream theoretical work, as well as stigmatized his theories to more traditional economists. Dobb seemed to undertake the bare minimum of his academic duties, and took virtually no part in the theoretical discussions among Cambridge economists at the time. His lectures concerned themselves with applied problems (such as povcrty, uncmployment, social problems, etc.) instead of conjectural ones. He wrote an elementary students' t ext book on Wages for a series called the Cambri dge Economi c Handbook and actively took part in the debate amongst economi st s about socialist economi esbut generally arguing wi t h a polemical and pessimistic t one. His book Political Economy and Capitalism (1937) criticized the Subjective Theory of Val ue while explaining and defending Marxi an approaches and the labor theory of val ue. This work was conspi cuousl y Marshal l i an in form, as it was intended to convey an argument to t hose more familiar wi t h the Marshal l i an tradition t han with heretical met hodol ogy. But the book was written too impatiently and not based deeply enough on theoretical thinking, maki ng much of it superficial, as well as somewhat unconstructive from the stance of theoretical analysis. Dobb found hi msel f stuck bet ween a proverbial rock and a hard place; he was too pol emi cal and negative for mai nst ream academi c economi st s, and too academi c and Marshal l i an for hard-line Mar xi st s. 6 Dobb underwent a period of intense academi c study after the war ' s end, resulting in the creation of t wo books, Studies in the Development of Capital (1946) and Soviet Economic Development Since 1917 (1948). The latter was an enl argement of the former, and it appears these work were instrumental in his belated promot i on to a Fel l ow and Lecturer of Trinity Col l ege, Cambri dge in 1948. Dobb also began his collaboration wi t h Pierro Sraffa at this t i me, editing the 10 vol ume edition of Works and Coorespondence of David Ricardo, as well as writing several editorial Not es and Introductions (including the 6 In the words of Amartya Sen, "Maurice Dobb, who was an astute Marxist economist, was often thought by Keynesians and neo-Keynesians to be 'quite soft' on 'neo-classical' economics.... Not surprisingly, when the Marxist Dobb defeated Kaldor in an election to the Faculty Board, Kaldor declared it to be a victory of the perfidious neo-classical economics in disguise. 'Marginal utility theory has won,' Kaldor told Sraffa that evening, in commenting on the electoral success of a Marxist economist!" Les Prix Nobel (1998). 7 textbook on Wages for a series called the Cambridge Economic Handbook and actively took part in the debate amongst economists about socialist economies--but generally arguing with a polemical and pessimistic tone. His book Political Economy and Capifalism (1937) criticized the Subjective Theory of Value while explaining and defending Marxian approaches and the labor theory of value. This work was conspicuously Marshallian in form, as it was intended to convey an argument to those more familiar with the Marshallian tradition than with heretical methodology. But the book was written too impatiently and not based deeply enough on theoretical thinking, making much of it superficial, as well as somewhat unconstructive from the stance of theoretical analysis. Dobb found himself stuck between a proverbial rock and a hard place; he was too polemical and negative for mainstream academic economists, and too academic and Marshallian for hard-line Marxists. 6 Dobb underwent a period of intense academic study after the war's end, resulting in the creation of two books, Studies in the Development of Capital (1946) and Soviet Economic Development Since 1917 (1948). The latter was an enlargement of the fonner, and it appears these work were instrumental in his belated promotion to a Fellow and Lecturer of Trinity College, Cambridge in 1948. Dobb also began his collaboration with Pierro Sraffa at this time, editing the 10 volume edition of Works and Coorespondence of David Ricardo, as well as writing several editorial Notes and Introductions (including the 6 In the words of Amartya Sen, "Maurice Dobb, who was an astute Marxist economist, was often thought by Keynesians and neo-Keynesians to be 'quite soft' on 'neo-classical' economics .... Not surprisingly, when the Marxist Dobb defeated Kaldor in an election to the Faculty Board, Kaldor declared it to be a victory of the perfidious neo-classical economics in disguise. 'Marginal utility theory has won,' Kaldor told Sraffa that evening, in commenting on the electoral success of a Marxist economist!" Les PrLt Nobel ( 1998). 8 intro of the first vol ume) . 7 He visited India in 1951 as a visiting professor at the University of Delhi School of Economi cs, lecturing extensively t hroughout the country. This period stoked his interest in the economi c probl ems of underdevel oped countries; specifically, he was interested in the growt h and devel opment of these states, a topic he woul d later write several papers about, including the booklet An Essay on Economic Growth and Planning (1960). Dobb attended the International Economi c Conference in Moscow in 1952 as a member of the English delegation, and in 1956 went to Pol and wi t h a party of invited Engl i sh economi st s. Here he witnessed the ' Poznan event s' a series of events often considered to be the first clear economi c contraction of a socialist economy. He participated intensely in discussions wi t h British Communi st s and left wi ng circles about the event s in Hungary later that year, and in 1957 made a speech secondi ng an amendment to the mai n resolution of the Congress of the British CP that stated dogmat i sm was the mai n danger to be combat ed. The Polish economi st s' discussion in 1956 revived Dobb' s interest in the probl ems of pricing-policy in a socialist country, as well as the need for experi ment i ng wi t h more decentralized model s. Al t hough he was still insistent on the necessity of pl anni ng ' macro-rel at i ons' in socialist economi es, experience had convi nced hi m to look at the role of prices and economi c incentives in a positive light. He focused his studies on current Soviet di scussi ons, penni ng articles for the periodicals Soviet Studies and Science and Society, and later writing his Essay on Economic Growth and Planning (1960). 7 George Stigler famously said, "Ricardo was a fortunate man.... And now, 130 years after his death, he is as fortunate as ever: he has been befriended by Sraffa." He would have been more correct if he had said, "...befriended by Sraffa and Dobb." 8 Predictably, the amendment was defeated. 8 intro of the first volume). 7 He visited India in 1951 as a visiting professor at the University of Delhi School of Economics, lecturing extensively throughout the country. This period stoked his interest in the economic problems of underdeveloped countries; specifically, he was interested in the growth and development of these states, a topic he would later write several papers about, including the booklet An Essay on Economic Growth and Planning (1960). Dobb attended the International Economic Conference in Moscow in 1952 as a member of the English delegation, and in 1956 went to Poland with a party of invited English economists. Here he witnessed the 'Poznan series of events often considered to be the first clear economic contraction of a socialist economy. He participated intensely in discussions with British Communists and left wing circles about the events in Hungary later that year, and in 1957 made a speech seconding an amendment to the main resolution of the Congress of the British CP that stated dogmatism was the main danger to be combated. 8 The Polish economists' discussion in 1956 revived Dobb's interest in the problems of pricing-policy in a socialist country, as well as the need for experimenting with more decentralized models. Although he was still insistent on the necessity of planning 'macro-relations' in socialist economics, experience had convinced him to look at the role of prices and economic incentives in a positive light. He focused his studies on current Soviet discussions, penning articles for the periodicals Soviet Studies and Science and Society, and later writing his Essay on Economic Growth and Planning ( 1960). 7 George Stigler famously said, "Ricardo was a fortunate man .... And now, 130 years after his death, he is as fortunate as ever: he has been befriended by Sraffa." He would have been more correct ifhe had said, " ... befriended by Sratfa and Dobb." 8 Predictably, the amendment was defeated. 9 Dobb became a member of the Editorial Board of Modern Quarterly and later of Marxism Today, and for a t i me sat on the board of the historical j ournal Past and Present. In 1959 he was appointed a reader in economi cs, a grade bet ween lecturer and full professor. To give scope, Dobb' s cont emporary Readers included Reddaway, Kaldor, and Joan Robi nson. In 1964 he was awarded an honorary degree as Doct or of Economi c Science at the Charl es University of Prague. He continued writing al ong the t heme of pl anni ng for undevel oped economi es wi t h his Papers on Capitalism, Development, and Planning (1967) and Welfare Economics and the Economics of Socialism (1969). Revisiting his work with Sraffa, Dobb wrot e an article for De Economist in 1970 called u The Sraffa System and the Critique of the Neoclassical Theory of Distribution, expressi ng his opi ni on that Piero Sraffa had provi ded the groundwork for calling much of neoclassical rhetoric into question. Later that same year, he turned his critical eye t owards socialist economi es in a book called Socialist Planning: Some Problems (1970). In 1972, Dobb was awarded an Honorary Doct orat e of Letters from the Uni versi t y of Leicester, a degree that was considered warrant ed based on his record of publ i shed work and conspi cuous ability, not to ment i on originality. 9 In his last book, Theories of Value and Distribution Since Adam Smith (1973), Dobb readdressed one of his original inquiries, the history of classical economi st s and their theories of val ue. He believed the appearance of Sraffa' s The Production of Commodities by Means of Commodities (1960) represented a crucial turning-point in the history of economi c thought, and one that paralleled his own interpretation of the classical tradition as t wo distinct and opposi ng traditions generally grouped under one headi ng. This book allowed Dobb to readdress some of the mai n t hemes found in his 9 The same degree was given to Samuel Clemens, though he received his from Oxford. 9 Dobb became a member of the Editorial Board of Modern Quarterly and later of Marxism Today, and for a time sat on the board of the historical journal Past and Present. In 1959 he was appointed a reader in economics, a grade between lecturer and full professor. To give scope, Dobb's contemporary Readers included Reddaway, Kaldor, and Joan Robinson. In 1964 he was awarded an honorary degree as Doctor of Economic Science at the Charles University of Prague. He continued writing along the theme of planning for undeveloped economics with his Papers on Capitalism, Development, and Planning (1967) and We{fare Economics and the Economics of Socialism (1969). Revisiting his work with Sraffa, Dobb wrote an article for De Economist in 1970 called "The Sraffa System and the Critique of the Neoclassical Theory of Distribution, expressing his opinion that Piero Sraffa had provided the groundwork for calling much of neoclassical rhetoric into question. Later that same year, he turned his critical eye towards socialist economies in a book called Socialist Planning: Some Problems (1970). In 1972, Dobb was awarded an Honorary Doctorate of Letters from the University of Leicester, a degree that was considered warranted based on his record of published work and conspicuous ability, not to mention originality.9 In his last book, Theories of Value and Distribution Since Adam Smith (1973), Dobb readdressed one of his original inquiries, the history of classical economists and their theories of value. He believed the appearance ofSraffa's The Production ( ~ f Commodities by Means of Commodities (1960) represented a crucial turning-point in the history of economic thought, and one that paralleled his own interpretation of the classical tradition as two distinct and opposing traditions generally grouped under one heading. This book allowed Dobb to readdress some of the main themes found in his 9 The same degree was given to Samuel Clemens, though he received his from Oxford. 10 earlier work, Political Economy and Capitalism (1937), in a far more mat ure and thoughtful manner. Upon Dobb' s death in 1976, Cambri dge Journal of Economi cs devoted a memori al issue to hi m, as t hey did wi t h other notable cont emporari es of Dobb' s such as Joan Robi nson and Piero Sraffa. Since then, his wor k has largely been relegated to dusty sections of academi c libraries, and his name has fallen out of the lingua franca of mai nst ream economi st s. His reputation within het erodox circles still exists however, and his influence can still be felt t hroughout the field of the history of economi c thought. earlier work, Political Economy and Capitalism (1937), in a far more mature and thoughtful manner. 10 Upon Dobb' s death in 1976, Cambridge Journal of Economics devoted a memorial issue to him, as they did with other notable contemporaries ofDobb' s such as Joan Robinson and Piero Sraffa. Since then, his work has largely been relegated to dusty sections of academic libraries, and his name has fallen out of the lingua franca of mainstream economists. His reputation within heterodox circles still exists however, and his influence can still be felt throughout the field of the history of economic thought. T H E R E Q U I R E ME N T S O F A T H E O R Y OF V A L U E THE REQUIREMENTS OF A THEORY OF VALUE 12 I nt r oduct i on The search for t he meani ng of value has remai ned a human conundrum since the dawn of recorded history. What and why is val ue? Is value an objective entity, or is it subjective? The study of value began as an ethical question, but by the nineteenth century, the subject was treated scientifically under the assumpt i on that empirical evidence could provi de an answer. In the field of economi cs, value was expressed in monet ary form, and t hus the questions posed took on a monet ary quality. Why were things exchanged at the rates they were exchanged for? Why were some peopl e too i mpoveri shed to survive whi l e others lavished in extraordinary weal t h? What was to be said about the movement s of soci et y' s fictional creation, the economy? When Mauri ce Dobb opened his book Political Economy and Capitalism wi t h his essay The Requirements of a Theory of Value, he set the tone for an unort hodox exami nat i on of the perspectives of classical political economi st s. Cont emporary economi st s had generally dismissed the need for such a theory in their own hypot heses by the twentieth century, relegating value to the fields of sociology and phi l osophy. Nonet hel ess, commodi t i es seemed to be exchanged at relative values that had not been fully account ed for. By revi ewi ng the historical devel opment of classical perspect i ves t owards theories of val ue, Dobb attempted to remi nd his fellow economi st s that the probl em of concept ual i zi ng economi c value still existed. He thus posed the relevant question; if a theory of val ue is to be considered adequat e, what are the requi rement s it must first fulfill? Dobb did not explicitly list the requi rement s he deemed necessary. Instead, he i nt erwove the requi rement s within the text, maki ng it somewhat difficult for the novi ce to 12 Introduction The search for the meaning of value has remained a human conundrum since the dawn of recorded history. What and why is value? Is value an objective entity, or is it subjective? The study of value began as an ethical question, but by the nineteenth century, the subject was treated scientifically under the assumption that empirical evidence could provide an answer. In the field of economics, value was expressed in monetary form, and thus the questions posed took on a monetary quality. Why were things exchanged at the rates they were exchanged for? Why were some people too impoverished to survive while others lavished in extraordinary wealth? What was to be said about the movements of society's fictional creation, the economy? When Maurice Dobb opened his book Political Economy and Capitalism with his essay The Requirements of a Theory of Value, he set the tone for an unorthodox examination of the perspectives of classical political economists. Contemporary economists had generally dismissed the need for such a theory in their own hypotheses by the twentieth century, relegating value to the fields of sociology and philosophy. Nonetheless, commodities seemed to be exchanged at relative values that had not been fully accounted for. By reviewing the historical development of classical perspectives towards theories of value, Dobb attempted to remind his fellow economists that the problem of conceptualizing economic value still existed. He thus posed the relevant question; if a theory of value is to be considered adequate, what are the requirements it must first fulfill? Dobb did not explicitly list the requirements he deemed necessary. Instead, he interwove the requirements within the text, making it somewhat diHicult for the novice to 13 decipher. Thus it is a wort hwhi l e endeavor to compi l e and clarify Dobb' s requi rement s. The paper will follow with an exami nat i on of the historical devel opment of the t wo mai n compet i ng theories of value, specifically the labor theory and the utility theory. How did each t heory fulfill, or fail to fulfill, Dobb' s requi rement s? Mor e importantly, is a t heory of economi c val ue still a relevant topic for political economi st s? Thi s paper will attempt to answer these questions. The Requi r ement s of a Theor y of Val ue Dobb thought theories of value had specific guidelines that must be satisfied before t hey could be deemed formally adequate. By formal adequacy, Dobb meant the condi t i ons whi ch a theory must fulfill if it is to be considered "capabl e of sustaining corollaries of a certain t ype of general i t y. . . the relationships bet ween proposi t i ons and the forecasts whi ch can be built upon t hem" . 1 0 Such a theory must contain a set of statements that is capable of accurately describing and predicting economi c phenomenon. Dobb considered the adequacy of a theory of value to be "the condi t i ons whi ch such a set of statements must fulfill if it is to be compet ent to determine the equi l i bri um or movement of the system as a whol e". 1 1 Dobb identified four distinct requi rement s: 1) Theor i es of val ue mus t have an ' ear t hl y' c ha r a c t e r 2) They mus t be capabl e of sol vi ng t he pr obl em of di s t r i but i on/ commodi t y- val ues 1 0 Dobb, Political Economy and Capitalism, p. 4. 1 1 Ibid., p. 5. 13 decipher. Thus it is a worthwhile endeavor to compile and clarify Dobb's requirements. The paper will follow with an examination of the historical development of the two main competing theories of value, specifically the labor theory and the utility theory. How did each theory fulfill, or fail to fulfill, Dobb's requirements? More importantly, is a theory of economic value still a relevant topic for political economists? This paper will attempt to answer these questions. The Requirements of a Theory of Value Dobb thought theories of value had specific guidelines that must be satisfied before they could be deemed formally adequate. By formal adequacy, Dobb meant the conditions which a theory must fulfill if it is to be considered "capable of sustaining corollaries of a certain type of generality ... the relationships between propositions and the forecasts which can be built upon them". 10 Such a theory must contain a set of statements that is capable of accurately describing and predicting economic phenomenon. Dobb considered the adequacy of a theory of value to be "the conditions which such a set of statements must fulfill if it is to be competent to determine the equilibrium or movement of the system as a whole".ll Dobb identified four distinct requirements: 1) Theories of value must have an 'earthly' character 2) They must be capable of solving the problem of distribution/commodity- values 10 Dobb, Political conomy and Capitalism, p. 4. II Ibid., p. 5. 14 3) They mus t be quant i t at i ve in f or m, exi st i ng as equat i onal syst ems wi t h det er mi ni ng i ndependent val ue- const ant s. 4) They mus t be abl e to ans wer t he quest i ons t hey seek t o ans wer Let us now exami ne these conditions in detail. To sustain forecasts concerning the real worl d the theory must have not only form but also content. It must have not only elegance but also 12 "earthliness. The word "eart hl i ness" rests here in quot es. By usi ng this term, Dobb was i mpl yi ng that economi es exist in a tangible reality. Al t hough economi c relations are a social creation, it cannot be denied that they have an impact on reality. Economi cs often rests as the difference bet ween life and death. ' Eart hl i ness' is required as a consequence of the material nature of the subject. Dobb sees t heori es of val ue as attempting to model real economi c phenomena, and therefore he thinks they should be j udged on their ability to model the real worl d. This first prerequisite had profound effects upon the rest of Dobb' s requi rement s. It is the first approxi mat i on that all other approxi mat i ons must satisfy. In other words, they must continually fulfill the ' eart hl y' condition as well as their own particular prerequisites. For Dobb, ' eart hl i ness' was the fundamental requi rement all other requi rement s were j udged by. . . . an essential condition of a theory of value is that it must solve the probl em of distribution (/. e. determine the price of labor-power, of capital and of land) as well as the probl em of commodi t y- val ues. 1 3 A theory of val ue must be able to account for distribution and commodi t y-val ues. Dobb considered this "essent i al " due to the practical quest i ons that political economy attempts to answer. Distribution and commodi t y-val ues are determinately linked, maki ng it 1 2 Ibid., p. 5. 1 3 Ibid., p. 9. 3) They must be quantitative in form, existing as equational systems with determining independent value-constants. 4) They must be able to answer the questions they seek to answer Let us now examine these conditions in detail. To sustain forecasts concerning the real world the theory must have not only form but also content. It must have not only elegance but also "earthliness. 12 14 The word "earthliness" rests here in quotes. By using this term, Dobb was implying that economies exist in a tangible reality. Although economic relations are a social creation, it cannot be denied that they have an impact on reality. Economics often rests as the difference between life and death. 'Earthliness' is required as a consequence of the material nature of the subject. Dobb sees theories of value as attempting to model real economic phenomena, and therefore he thinks they should be judged on their ability to model the real world. This first prerequisite had profound effects upon the rest ofDobb's requirements. It is the first approximation that all other approximations must satisfy. In other words. they must continually fulfill the 'earthly' condition as well as their own particular prerequisites. for Dobb, 'earthliness' was the fundamental requirement all other requirements were judged by . ... an essential condition of a theory of value is that it must solve the problem of distribution (i.e. determine the price oflabor-power, of capital and of land) as well as the problem of commodity-values. 13 A theory of value must be able to account for distribution and commodity-values. Dobb considered this "essential" due to the practical questions that political economy attempts to answer. Distribution and commodity-values are determinately linked, making it 12 Ibid., p. 5. 13 Ibid., p. 9. 15 i mpossi bl e to det ermi ne one without the other as well as erroneous to treat either as an isolated system. Any theory of distribution must concern itself wi t h the creation and distribution of surplus value, as well as wi t h accurate descriptions of the different met hods each class uses to generate i ncome. If a t heory of val ue cannot explain the allocation of wealth, it is inadequate for solving the probl em of distribution, and should therefore be considered an i ncompl et e theory. It seems clear, from the nature of its subject-matter and the type of statement whi ch it is required to make, that an economi c theory must be quantitative in f or m. 1 4 Dobb t hought that it obvi ous that an economi c theory must be quantitative based on the nature of the subject-matter. He did not qualify specifically what nature he was referring to. He sees an economi c theory existing as an equational system wi t h defined relationships that connect all the variables wi t hi n the structure. Equational syst ems al l ow one to exami ne economi cs mat hemat i cal l y, a platform that abstracts all worldly characteristics of the el ement s. Thi s is not to say that any set of numbers will suffice; the necessity of ' eart hl i ness' requires quantitative relationships to be perceptible. All quantitative el ement s within the system must be translatable into actual and observabl e el ement s in reality. An equational system means that certain relationships are defined whi ch govern, or connect, all the variables within the syst em. 1 5 Equational syst ems refer to a mat hemat i cal organization of mul t i pl e, interrelated modus operandi. Such syst ems require the number of known el ement s to be equal to the number of unknown variables the system ai ms to det ermi ne. This is essential for mat hemat i cal l y calculating a unique solution. Equational syst ems also imply the presence of certain 1 4 Ibid., pp. 10-11. 1 5 Ibid., p. 6. impossible to determine one without the other as well as erroneous to treat either as an isolated system. Any theory of distribution must concern itself with the creation and distribution of surplus value, as well as with accurate descriptions of the different methods each class uses to generate income. If a theory of value cannot explain the allocation of wealth, it is inadequate for solving the problem of distribution, and should therefore be considered an incomplete theory. It seems clear, from the nature of its subject-matter and the type of statement which it is required to make, that an economic theory must be . . . c 14 quantitatIve III lorm. Dobb thought that it obvious that an economic theory must be quantitative based on the 15 nature of the subject-matter. He did not qualify specifically what nature he was referring to. He sees an economic theory existing as an equational system with defined relationships that connect all the variables within the structure. Equational systems allow one to examine economics mathematically, a platform that abstracts all worldly characteristics of the elements. This is not to say that any set of numbers wi 11 suffice; the necessity of 'earthliness' requires quantitative relationships to be perceptible. All quantitative elements within the system must be translatable into actual and observable elements in reality. An equational system means that certain relationships are defined which govern, or connect, all the variables within the system. 15 Equational systems refer to a mathematical organization of multiple, interrelated modus operandi. Such systems require the number of known elements to be equal to the number of unknown variables the system aims to determine. This is essential for mathematically calculating a unique solution. Equational systems also imply the presence of certain i4 Ibid., pp. 10-1 I. i) Ibid., p. 6. 16 constants whi ch, when known, al l ow one to calculate the position of the unknown variables. Dobb considered these constants to be the key to provi di ng ' numeri cal val ues to the whol e ' . 1 6 Wi t hout these constants, any relationships within the equational system lack precise meani ng. It is necessary for el ement s to be reducible to a common t erm if any full quantitative statements are to be made. A principle of val ue is not adequat e whi ch merel y expresses value in t erms of some one or other particular val ue: the determining constants must express a relationship with some quantity which is not itself a value. 17 One mai n feature of t hese constants is their i ndependence from the rest of the variables, where the unknowns are expressed t hrough their relation to the constants. These constants must be unequi vocal l y exclusive; they cannot be expressed as a function of any dependent variable. They are brought in, as it were, from outside the syst em. The quantity t hey represent is det ermi ni ng but not determined. In the case of a theory of value, the det ermi ni ng constants cannot be values t hemsel ves, but must exist as some distinctly aut onomous unit. One can construct equational systems about event s, and make t hem coherent and solvable, merel y by observi ng the formal rules and inventing the necessary constants whi ch are required to det ermi ne the whol eby assumi ng certain things to be independent, whet her they are in fact so or not . 1 8 Dobb' s choice of the phrase "formal rul es" implies the existence of informal rules. It appears Dobb was referring to the need for economi c equational syst ems to fulfill not j ust the formal rules of mat hemat i cs, but the ' eart hl y' requi rement as well. It is all too easy to devise an abstract model that satisfies all the necessary requi rement s, regardless of its validity in model i ng the real world. There are no ' isolated syst ems' in the real worl d of 1 6 Ibid., p. 6. 1 7 Ibid., p. 10 (Dobb's italics). 1 8 Ibid., pp. 7-8. 16 constants which, when known, allow one to calculate the position of the unknown variables. Dobb considered these constants to be the key to providing 'numerical values to the whole' .16 Without these constants, any relationships within the equational system lack precise meaning. It is necessary for elements to be reducible to a common tern1 if any full quantitative statements are to be made. A principle of value is not adequate which merely expresses value in terms of some one or other particular value: lhe determining constants must express a relationship with some quantity which is not it,s'ef! a value. 17 One main feature of these constants is their independence from the rest of the variables, where the unknowns are expressed through their relation to the constants. These constants must be unequivocally exclusive; they cannot be expressed as a function of any dependent variable. They are brought in, as it were, from outside the system. The quantity they represent is determining but not detern1ined. In the case of a theory of value, the determining constants cannot be values themselves, but must exist as some distinctly autonomous unit. One can construct equational systems about events, and make them coherent and solvable, merely by observing the formal rules and inventing the necessary constants which are required to determine the assuming certain things to be independent, whether they are in fact so or not. IS Dobb's choice of the phrase "formal rules" implies the existence of informal rules. It appears Dobb was referring to the need for economic equational systems to fulfill not just the formal rules of mathematics, but the 'earthly' requirement as well. It is all too easy to devise an abstract model that satisfies all the necessary requirements, regardless of its validity in modeling the real world. There are no 'isolated systems' in the real world of 16 Ibid., p, 6, 17 Ibid., p. 10 (Dobb's italics). 18 Ibid., pp. 7-8. 17 course, and to attempt to model reality in the abstract can only give approxi mat i ons at best. When trying to discover generalizations about any system, it is necessary to isolate the syst em away from its interconnected position in reality; thus a certain level of abstraction is essential. In the abstract, it is quite possible to create any number of isolated, equational syst ems wi t h various i ndependent constants. However, if a theory of value is to be regarded as adequate, the equational syst ems must represent the reality of economi c relationships, where el ement s are dependent and interconnected. The truth of an economi c principle must lie in whether, in maki ng abstraction of certain aspects of the probl em, it does so in order to focus upon features whi ch are in fact crucial and fundamental features of that slice of the real worl d to whi ch the theory is intended to appl y. 1 9 Thi s statement suggests one can j udge the ' t rut h' of an economi c principle by the el ement s it abstracts out. As a sagacious professor once told me, "Ockham' s Razor is a powerful tool, provi di ng it doesn' t cut too deepl y. " The risk of a deep cut refers to potentially removi ng relevant layers that mi ght need to be included in a model . Any representation of the real worl d must inherently be abstract in form; but if the abstraction does not relate to reality, it cannot be considered an accurate representation. Often generalizations are made wi t h specific condi t i ons in mi nd, rendering t hem unabl e to make general forecasts for other parts of the whol e. It is much easier to find a fit for a smaller generality than for overly encompassi ng ones, as particular probl ems assume more constants than general probl ems. The probl em of det ermi ni ng results is relatively easy once one knows enough about the surroundi ng condi t i ons. Hence it becomes simple to predict a certain result, given a simple enough set of conditions. But as more constants become unknowns, the simple results break down, compl i cat i ng the equat i ons. One is at 1 9 Ibid., p. 18. 17 course, and to attempt to model reality in the abstract can only give approximations at best. When trying to discover generalizations about any system, it is necessary to isolate the system away from its interconnected position in reality; thus a certain level of abstraction is essential. In the abstract, it is quite possible to create any number of isolated, equational systems with various independent constants. However, if a theory of value is to be regarded as adequate, the equational systems must represent the reality of economic relationships, where elements are dependent and interconnected. The truth of an economic principle must lie in whether, in making abstraction of certain aspects of the problem, it does so in order to foeus upon features which are in fact crucial and fundamental features of that slice of the real world to which the theory is intended to apply.19 This statement suggests one can judge the 'truth' of an economic principle by the elements it abstracts out. As a sagacious professor once told me, "Ockham's Razor is a powerful tool, providing it doesn't cut too dceply." The risk of a deep cut refers to potentially removing relevant layers that might need to be included in a model. Any representation of the real world must inherently be abstract in form; but if the abstraction does not relate to reality, it cannot be considered an accurate representation. Often generalizations are made with specific conditions in mind, rendering them unable to make general forecasts for other parts of the wholc. It is much easier to find a fit for a smaller generality than for overly encompassing ones, as particular problems assume more constants than general problems. The problem of determining results is relatively easy once one knows enough about the surrounding conditions. Hence it becomes simple to predict a certain result, given a simple enough set of conditions. But as more constants become unknowns, the simple results break down, complicating the equations. One is at 19 Ibid., p. 18. 18 liberty to use a simple expl anat i on for uncompl i cat ed isolated systems, but as compl exi t y increases, the number of variables that can be considered constants necessarily decreases. Vari abl es that were treated as i ndependent in the first approxi mat i on mi ght become dependent in the second approxi mat i on. The ultimate criterion of a l aw of val ue to be the requi rement s of practice: the type of practical question whi ch one requires to answer, the purpose of the inquiry at hand. At first glance, it appears that Dobb t hought the ' ul t i mat e' requi rement of a theory of value is its ability to accurately predict what it is ai mi ng to do. This seems to be a proverbial t rump card. Such a statement could be interpreted as weakeni ng the need for a theory of val ue. If one could accurately predict economi c movement s wi t hout it, does that make a theory of value irrelevant? Presumabl y, Dobb t hought practical economi c forecasts could not be made wi t hout a theory structured al ong his outlined requi rement s. Even if a theory of val ue was able to satisfy all the necessary conditions, formal or ot herwi se, they must be j udged on their ability to answer the questions they pose. In the case of an economi c theory, this means the model must be able to make accurate predictions and sufficiently explain the relationships bet ween various el ement s within the system. If it cannot do so, t hen it must be regarded as i nadequat e, regardless of its composi t i on. It appears that this ' ul t i mat e criterion' is really referring to Dobb' s aforementioned ' eart hl y' quality. If the purpose of the inquiry is seen as explaining movement s within political economy, it must find a practical answer. Thi s represents all of Dobb' s requi rement s for a theory of val ue. Summari zed once again, Dobb identified four distinct requi rement s: Ibid., p. 8. 18 liberty to use a simple explanation for uncomplicated isolated systems, but as complexity increases, the number of variables that can be considered constants necessarily decreases. Variables that were treated as independent in the first approximation might become dependent in the second approximation. The ultimate criterion of a law of value to be the requirements of practice: the type of practical question which one requires to answer, the purpose of the inquiry at hand?O At first glance, it appears that Dobb thought the 'ultimate' requirement of a theory of value is its ability to accurately predict what it is aiming to do. This seems to be a proverbial trump card. Such a statement could be interpreted as weakening the need for a theory of value. If one could accurately predict economic movements without it, does that make a theory of value irrelevant? Presumably, Dobb thought practical economic forecasts could not be made without a theory structured along his outlined requirements. Even if a theory of value was able to satisfy all the necessary conditions, formal or otherwise, they must be judged on their ability to answer the questions they pose. In the case of an economic theory, this means the model must be able to make accurate predictions and sufficiently explain the relationships between various clements within the system. I r it cannot do so, then it must be regarded as inadequate, regardless of its composition. It appears that this 'ultimate criterion' is really referring to Dobb's aforementioned 'earthly' quality. Ifthe purpose of the inquiry is seen as explaining movements within political economy, it must find a practical answer. This represents all of Dobb's requirements for a theory of value. Summarized once again, Dobb identified four distinct requirements: 20 Ibid., p. 8. 19 1) Theor i es of val ue mus t have an ' e a r t hl y' c ha r a c t e r 2) They mus t be capabl e of sol vi ng t he pr obl em of di s t r i but i on/ commodi t y- val ues 3) They mus t be quant i t at i ve in f or m, exi st i ng as equat i onal syst ems wi t h det er mi ni ng i ndependent val ue- const ant s. 4) They mus t be abl e t o ans wer t he quest i ons t hey seek to ans wer Now we will exami ne the history of the t wo cont endi ng theories of value to see how political economi st s have sculpted model s wi t h regards to the aforementioned requi rement s. Cl assi cal Pol i t i cal Economi s t s and t he La b o r The or y of Val ue Before the publ i cat i on of Adam Smi t h' s groundbreaki ng work Weal t h of Nat i ons, political economy had failed to progress further t han a stage of description and 21 classification. For the most part, those at t empt i ng to decipher an expl anat i on of economi c phenomena lacked the ability to make accurate statements about the general relationships in the system. Smi t h' s insight provi ded political economi st s wi t h a new format for percei vi ng economi c generalities. Economi st s like David Ri cardo and Karl Marx rigorously syst emi zed Smi t h' s approach, and within a century of the publ i shi ng of Wealth of Nat i ons, political economi st s had created "unifying quantitative principles whi ch enabled it to make postulates in t erms of the general equilibriums of the economi c syst emt o make deterministic statements about the general relationships whi ch held 2 1 For those who have a deeper interest in the historical development of political economy, I recommend a thorough reading of E.K. Hunt's History of Economic Thought. 19 1) Theories of value must have an 'earthly' character 2) They must be capable of solving the problem of distribution/commodity- values 3) They must be quantitative in form, existing as equational systcms with determining independent value-constants. 4) Thcy must be able to answer the questions they seek to answer Now we will examine the history of the two contending theories of value to see how political economists have sculpted models with regards to the aforementioned requirements. Classical Political Economists and the Labor Theory of Value Before the publication of Adam Smith's groundbreaking work Wealth of Nations, political economy had failed to progress further than a stage of description and classification?' For the most part, those attempting to decipher an explanation of economic phenomena lacked the ability to make accurate statements about the general relationships in the system. Smith's insight provided political economists with a new format for perceiving economic generalities. Economists like David Ricardo and Karl Marx rigorously systemized Smith's approach, and within a century of the publishing of Wealth of Nations, political economists had created "unifying quantitative principles which enabled it to make postulates in terms of the general equilibriums of the economic system-to make deterministic statements about the general relationships which held 21 For those who have a deeper interest in the historical development of political economy, I recommend a thorough reading of E.K. Hunt's History of Economic Thought. 20 bet ween the major el ement s of the syst em. " 2 2 This unifying principle, where commodi t y- values were related to the amount of labor needed to produce t hem, came to be known as the labor theory of val ue. What led classical political economi st s to this particular theory? Dobb t hought the probl ems of weal t h distribution, the creation of surplus-value, and deci pheri ng the formation of exchange-rat i os were of central concern. Classical political economy described the val ue-const ant governi ng exchange-rat i os in a relationship of cost, where the exchange-val ue of a commodi t y was expressed relatively as the amount of other commodi t i es the first could be exchanged for. However, this definition alone was incapable of expl ai ni ng what determined exchange rates. The necessary det ermi nat e solution for this system was found in the quantity of labor required for product i on of commodi t i es. This theory was vaguel y described by Adam Smith, but it wasn' t until Ricardo that this principle was described clearly. Ricardo considered labor to be an objective entity, specifying it as ' t he expendi t ure of a given quant um of human energy' . "Vi ewed objectively in this way, the det ermi ni ng relation was a technical one, and not a val ue-rel at i on. " 2 4 Such a classification made labor independent of the val ue of labor- power, the price of the commodi t y, and the wage level. It also was capable of bei ng expressed in t erms of more and less, an extremely useful characteristic for the purpose of quantification. Under condi t i ons of constant returns, labor was also i ndependent of demand, fulfilling a major condition for a theory of value. Dobb, Political Economy and Capitalism, p. 5. 2 3 For instance, Smith wrote in the Wealth of Nations that, "The value of any commodity... to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. 2 4 Dobb, Political Economy and Capitalism, p. 13. 20 between the major elements of the system."n This unifying principle, where commodity- values were related to the amount of labor needed to produce them, came to be known as the labor theory of value. What led classical political economists to this particular theory? Dobb thought the problems of wealth distribution, the creation of surplus-value, and deciphering the formation of exchange-ratios were of central concern. Classical political economy described the value-constant governing exchange-ratios in a relationship of cost, where the exchange-value of a commodity was expressed relatively as the amount of other commodities the first could be exchanged for. However, this definition alone was incapable of explaining what determined exchange rates. The necessary determinate solution for this system was found in the quantity of labor required for production of commodities. This theory was vaguely described by Adam Smith, but it wasn't until Ricardo that this principle was described clearly.23 Ricardo considered labor to be an objective entity, specifying it as 'the expenditure ofa given quantum of human energy'. "Viewed objectively in this way, the determining relation was a technical one, and not a value-relation.,,24 Such a classification made labor independent of the value oflabor- power, the price of the commodity, and the wage level. It also was capable of being expressed in terms of more and less, an extremely useful characteristic for the purpose of quantification. Under conditions of constant returns, labor was also independent of demand, fulfilling a major condition for a theory of value. 22 Dobb, Political Economy and Capitalism, p. 5. 23 For instance, Smith wrote in the Wealth q( Nations that, 'The value of any commodity ... to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. 24 Dobb, Political Economy and Capitalism, p. 13. 21 Ri cardo seems to have only faintly sensed the requi rement s of a value-theory, although Dobb considered his instincts and ' analytically robust mi nd' as essentially ' ri ght ' . Hi s defense of the newly formed capitalist class against the landed gentry compel l ed hi m to exami ne the i nner-worki ngs of economi es in detail. Not abl y, Ri cardo was interested in det ermi ni ng the difference bet ween the value of l abor-power and the value of all other commodi t i es. If value originated from the amount of labor necessary for product i on of a good, how could a capitalist sell the commodi t y for mor e t han the labor embodi ed in it? If wages were increased, what woul d happen to the price of all commodi t i es? Woul d the difference bet ween t hem decrease, or woul d the price of all other commodi t i es rise proportionally? Mul t i pl e political economi st s had attempted to formulate solutions to these questions. Mi l l ' s cost-of-production theory at t empt ed to explain prices as det ermi ned by the technical condi t i ons of production, including given wages plus an average rate of profit. However, Mill failed to explain the origin of profit, let alone provi de an expl anat i on for what specifically determined the profit-rate. Marx later realized that Mi l l ' s theory was useless unless the rate of profit could be defined. Bot h wages and profits are derivations of other prices, maki ng it i mpossi bl e to explain general prices without a det ermi ni ng constant that was not a price itself. A compet ent theory of value was therefore necessary for unveiling the causes of price determination. Mar x recognized that if the rate of profit could be det ermi ned within the framework of the labor-theory of value, Mi l l ' s cost-of-production could be used to sufficiently explain prices. 21 Ricardo seems to have only faintly sensed the requirements of a value-theory, although Dobb considered his instincts and 'analytically robust mind' as essentially 'right'. His defense of the newly formed capitalist class against the landed gentry compelled him to examine the inner-workings of economies in detail. Notably, Ricardo was interested in determining the difference between the value of labor-power and the value of all other commodities. If value originated from the amount of labor necessary for production of a good, how could a capitalist sell the commodity for more than the labor embodied in it? If wages were increased, what would happen to the price of all commodities? Would the difference between them decrease, or would the price of all other commodities rise proportionally? Multiple political economists had attempted to formulate solutions to these questions. Mill's cost-of-production theory attempted to explain prices as determined by the technical conditions of production, including given wages plus an average rate of profit. However, Mill failed to explain the origin of profit, let alone provide an explanation for what specifically determined the profit-rate. Marx later realized that Mill's theory was useless unless the rate of profit could be defined. Both wages and profits are derivations of other prices, making it impossible to explain general prices without a determining constant that was not a price itself. A competent theory of value was therefore necessary for unveiling the causes of pricc determination. Marx recognized that if the rate of profit could be determined within the framework of the labor-theory of value, Mill's cost-of-production could be used to sufficiently explain pnces. 22 There can be little doubt that Marx was far mor e aware of the met hodol ogi cal probl ems than his predecessors, not to ment i on the overwhel mi ng majority of his successors. Dobb described Mar x' s background as "approached from the standpoint of a general phi l osophy of history, by whi ch it can be said that the descriptive and classificatory emphasi s of the historical school and the analytical and quantitative emphasi s of abstract Political Economy were combi ned. " 2 5 He was deeply concerned with the movement s of the mai n class revenues of society, whi ch he considered key to ' t he laws of mot i on of capitalist soci et y' . He was also troubled by the so-called transformation probl emspeci fi cal l y the transformation of val ues into prices of production. Marx found the labor-theory of val ue essential for deci pheri ng these relationships. Ricardo had based his theory of value upon labor, but wi t hout first defining an i ndependent val ue-const ant , he was unable to explain the probl em of how surplus-value could arise from the exchange of capital and labor. Mar x underst ood the necessity of i ndependent val ue-const ant s, emphasi zi ng in the openi ng chapter of Das Kapital "the need for some uniform quantity, not itself a value, in t erms of whi ch the exchange-val ues of commodi t i es could be expr essed. " 2 6 The essential i mport ance of usi ng labor as a value-constant was that it could be used to det ermi ne the value of l abor-power itself. Thi s is the reason why Marx spent so much t i me separating l abor-power from labor in his first vol ume, divorcing the former, a commodi t y, from the latter, a representation of human activity that is objective by nature. Marx considered labor to be the actual activity of work whi l e l abor-power to be the ability to labor. This separation was a crucial step 2 5 Ibid., p. 23. 2 6 Ibid., p. 12. 22 There can be little doubt that Marx was far more aware of the methodological problems than his predecessors, not to mention the overwhelming majority of his successors. Dobb described Marx's background as "approached from the standpoint of a general philosophy of history, by which it can be said that the descriptive and classificatory emphasis of the historical school and the analytical and quantitative emphasis of abstract Political Economy were combined.,,25 He was deeply concerned with the movements of the main class revenues of society, which he considered key to 'the laws of motion of capitalist society'. He was also troubled by the so-called transformation problem-specifically the transformation of values into prices of production. Marx found the labor-theory of value essential for deciphering these relationshi ps. Ricardo had based his theory of value upon labor, but without first defining an independent value-constant, he was unable to explain the problem of how surplus-value could arise from the exchange of capital and labor. Marx understood the necessity of independent value-constants, emphasizing in the opening chapter of Das Kapital "the need for some uniform quantity, not itselfa value, in terms of which the exchange-values of commodities could be expressed.,,26 The essential importance of using labor as a value-constant was that it could be used to determine the value of labor-power itself. This is the reason why Marx spent so much time separating labor-power from labor in his first volume, divorcing the former, a commodity, from the latter, a representation of human activity that is objective by nature. Marx considered labor to be the actual activity of work while labor-power to be the ability to labor. This separation was a crucial step 25 Ibid., p. 23. 26 Ibid., p. 12. 23 for the labor theory of val ue; without an i ndependent value-constant, the theory woul d be incapable of explaining phenomena like wages, prices, and surpluses. Val ue was therefore seen as an objective entity originating in the product i on process. The labor theory of val ue implied that exchange-val ues were related to the output and usi ng-up of human energies, provi di ng an expl anat i on that gave some meani ng to the distinctions bet ween gross and net -product s, the surplus of labor, and differing forms of i ncome. It became possible to distinguish exchange relationships whi ch represent a passi ng of val ue-equi val ent s from one faction to the next. The labor- theory also provi ded a platform for distinguishing the product i ve contribution of a person. Such a distinction had crucial implications for det ermi ni ng the behavi or of different i ncome classes and their reaction to economi c changes. By relating exchange- val ues to the output and using of human energies, the labor theory of val ue gave meani ng to concepts such as surplus that woul d otherwise be inexplicable. Yet the det ermi nat i on of labor as the fundamental value-constant by classical political economi st s was still only addressi ng the formal requi rement s of the theory. Why should a cost theory focus only on one of the factors in weal t h product i on? If a theory that ignores capital or land inputs and focuses only on labor is, as Dobb put it, ' surely, arbitrary dogmat i sm' , is it not subject to serious quest i on? This is a practical question, not a formal one. "The truth of an economi c principle must lie in whether, in maki ng abstraction of certain aspects of the probl em, it does so in order to focus upon features whi ch are in fact crucial and fundamental features of that slice of the real worl d 97 to whi ch the theory is intended to appl y. " 2 7 Ibid., p. 18. 23 for the labor theory of value; without an independent value-constant, the theory would be incapable of explaining phenomena like wages, prices, and surpluses. Value was therefore seen as an objective entity originating in the production process. The labor theory of value implied that exchange-values were related to the output and using-up of human energies, providing an explanation that gave some meaning to the distinctions between gross and net-products, the surplus of labor, and difTering forms of income. It became possible to distinguish exchange relationships which represent a passing of value-equivalents from one faction to the next. The labor- theory also provided a platform for distinguishing the productive contribution of a person. Such a distinction had crucial implications for determining the behavior of different income classes and their reaction to economic changes. By relating exchange- values to the output and using of human energies, the labor theory of value gave meaning to concepts such as surplus that would otherwise be inexplicable. Yet the determination of labor as the fundamental value-constant by classical political economists was still only addressing the formal requirements of the theory. Why should a cost theory focus only on one of the factors in wealth production? If a theory that ignores capital or land inputs and focuses only on labor is, as Dobb put it, 'surely, arbitrary dogmatism', is it not subject to serious question? This is a practical question, not a formal one. "The truth of an economic principle must lie in whether, in making abstraction of certain aspects of the problem, it does so in order to focus upon features which are in fact crucial and fundamental features of that slice of the real world to which the theory is intended to apply."n 27 Ibid., p. 18. 24 Dobb listed some practical objections to taking land or capital as the basis, issues that were far mor e damni ng t han t hose found in the labor theory of value. The dissimilarity of land had already been noticed by the classical Political Economi st s, and was already bei ng used in the classical det ermi nat i on of rent. In Dobb' s words, "acres are more dissimilar t han man-hours of l abor . " 2 8 Capital was even mor e probl emat i c in that it was a val ue, and depended upon other value, particularly profit earned. If they took representations of capital (machi nes, structures) instead, they could "onl y have quantitative significance in this context as stored-up labor. " A combi nat i on of the three is meani ngl ess as there exists no common t erm bet ween t hem. Most importantly, labor had a practical quality to it. Dobb thought that the idea that labor constituted a cost was a uni que assumpt i on, but one that was born from the specific vi ew of the essence of the economi c probl em. It was not an arbitrary choice, but one that was at t empt i ng to depict the essential shape of the real world. Dobb said, "The crux of the economi c pr obl em. . . lay in the struggle of man with nature to wrest a 29 livelihood for hi msel f under various forms of product i on at various stages of hi st ory. " Human activity versus the process of nature is seen here as & fundamental relationship, with human activity acting as the i mpet us for altering the natural world. The economi c probl em in real t erms almost assuredly must include the contrasting relationship bet ween labor and nature as a necessary factor. If we are t hen to give a quantitative expressi on to this relationship, it is hard to think of any other expression than the expendi t ure of human energy for production. "The essence of value, in other words, by contrast wi t h riches, was conceived to be cost, and the essence of cost to lie in labor, by contrast with nature. 2 8 Ibid., p. 18. 2 9 Ibid., p. 19. 24 Dobb listed some practical objections to taking land or capital as the basis, issues that were far more damning than those found in the labor theory of value. The dissimilarity of land had already been noticed by the classical Political Economists, and was already being used in the classical determination of rent. In Dobb' s words, "acres are more dissimilar than man-hours oflabor.,,28 Capital was even more problematic in that it was a value, and depended upon other value, particularly profit earned. If they took representations of capital (machines, structures) instead, they could "only have quantitative significance in this context as stored-up labor." A combination of the three is meaningless as there exists no common term between them. Most importantly, labor had a practical quality to it. Dobb thought that the idea that labor constituted a cost was a unique assumption, but one that was born from the specific view of the essence of the economic problem. It was not an arbitrary choice, but one that was attempting to depict the essential shape of the real world. Dobb said, "The crux of the economic problem ... lay in the struggle of man with nature to wrest a livelihood for himself under various forms of production at various stages ofhistory.,,29 Human activity versus the process of nature is seen here as afimdamental relationship, with human activity acting as the impetus for altering the natural world. The economic problem in real terms almost assuredly must include the contrasting relationship between labor and nature as a necessary factor. If we are then to give a quantitative expression to this relationship, it is hard to think of any other expression than the expenditure of human energy for production. "The essence of value, in other words, by contrast with riches, was conceived to be cost, and the essence of cost to lie in labor, by contrast with nature. 28 Ibid., p. 18. 29 Ibid., p. 19. 25 Labor, conceived objectively, as the output of human energy, was the measure and the 30 essence of Ri car do' s ' difficulty or facility of product i on' . " By describing the human effort that goes into product i on, the classical economi st s were maki ng a description that was far from met aphysi cal . Proponent s of the labor t heory of val ue do not doubt the wort h of the fertility of land or the organi zed means of product i on, but t hey do not grade the ownershi p of these resources in describing participation of product i on on level wi t h the personal participation found in labor. They coul dn' t see wort h in ascribing value to mere use. As Bohm- Bawer k put it, "there is no other sense of the word ' us e' t han the ' put t i ng forth of physical power s' , or energy. " Basi ng itself on a fundamental characterization of economi c activity, the labor-theory of val ue was goi ng beyond the formal requi rement s: "it was maki ng an i mport ant qualitative (often confused wi t h ethical) statement about the nature of the economi c probl em, and i mpart i ng the implications of this statement to its corol l ari es. " 3 2 In summary, the classical political economi st s found the labor-theory of val ue to be capable of explaining distribution, surplus-value, commodi t y-val ues, and exchange- ratios. By choosi ng objective labor as their invariant, classical political economi st s were able to distinguish a value-constant that was i ndependent of value itself, and could be used to det ermi ne cost and exchange-rat i os. They were also able to describe a quantitative syst em in an ' eart hl y' manner, where real economi c phenomena and relationships were represented el ement s. Most importantly, they were able to use the labor t heory of val ue to answer the economi c questions they originally sought to answer. Ibid., p. 20, my italics. 3 1 Ibid., p. 21. 3 2 Ibid., p. 21. 25 Labor, conceived objectively, as the output of human energy, was the measure and the essence of Ricardo' s 'difficulty or facility of production' .,,30 By describing the human effort that goes into production, the classical economists were making a description that was far from metaphysical. Proponents of the labor theory of value do not doubt the worth of the fertility ofland or the organized means of production, but they do not grade the ownership of these resources in describing participation of production on level with the personal participation found in labor. They couldn't see worth in ascribing value to mere use. As Bohm-Bawcrk put it, "there is no other sense of the word 'use' than the 'putting forth of physical powers', or energy.,,3l Basing itself on a fundamental characterization of economic activity, the labor-theory of value was going beyond the formal requirements: "it was making an important qualitative (often confused with ethical) statement about the nature of the economic problem, and imparting the implications of this statement to its corollaries.,,32 In summary, the classical political economists found the labor-theory of value to be capable of explaining distribution, surplus-value, commodity-values, and exchange- ratios. By choosing objective labor as their invariant, classical political economists were able to distinguish a value-constant that was independent of value itself, and could be used to determine cost and exchange-ratios. They were also able to describe a quantitative system in an 'earthly' manner, where real economic phenomena and relationships were represented elements. Most importantly, they were able to use the labor theory of value to answer the economic questions they originally sought to answer. 30 Ibid., p. 20, my italics. 31 Ibid., p. 21. 32 Ibid., p. 21. 26 J evoni an Revol ut i on and t he Ut i l i t y The or y of Val ue But within ten years of Mar x' s t horough analysis of political economy, a new value-theory was born that brushed the labor-theory aside with seemi ngl y little resistance. Thi s so-called utility-theory was apparently concei ved simultaneously in vari ous mi nds, including the Engl i sh economi st Wi l l i am Jevons, as well as Menger, Wi eser, and Bohm- Bawerk of the Aust ri an School. The new t heory was elegant and novel , owi ng its invention partially to the concepts of differential calculus, wi t h emphasi s on margi nal i ncrement s and rates det ermi ned t hrough differential calculus. Bohm- Bawer k seems to have underst ood the probl em classical Political Economy had tried to solve, and it appears the formulation of his theory was at least partially written as a direct response to the concl usi ons Marx had postulated. As Dobb so elegantly said, "if only by the effect of negat i on, the influence of Marx on the economi c theory of the 19 t h century woul d appear to have been much more profound than it is fashionable to admi t ". The materialization of this new theory of val ue appears to represent Dobb' s demarcat i ng line bet ween classical political economy and its successor. The hastily erected Jevoni an Revol ut i on provi ded the theoretical basis for both neo-classical and Keynesi an economi cs. Utility, the anchor of this new theory, represented somet hi ng individual and subjective. In this case, value was expressed as ' t he i ncrement of utility on the margi n of consumpt i on' . Instead of an objective cost-relation originating in product i on, a subjective relation bet ween commodi t i es and the individual mi nds of consumers was taken as the det ermi ni ng constant in the equational system. Bot h the utility-theory and the labor- theory made qualitative statements about the nature of economi c activity t hrough form and concept, but these statements were of different orders. Unlike its predecessor, the 3 3 Ibid., p. 25. 26 Jevonian Revolution and the Utility Theory of Value But within ten years of Marx's thorough analysis of political economy, a new value-theory was born that brushed the labor-theory aside with seemingly little resistance. This so-called utility-theory was apparently conceived simultaneously in various minds, including the English economist William levons, as well as Menger, Wieser, and Bohm- Bawerk of the Austrian School. The new theory was elegant and novel, owing its invention partially to the concepts of differential calculus, with emphasis on marginal increments and rates determined through differential calculus. Bohm-Bawerk seems to have understood the problem classical Political Economy had tried to solve, and it appears the formulation of his theory was at least partially written as a direct response to the conclusions Marx had postulated. As Dobb so elegantly said, "if only by the effect of negation, the influence of Marx on the economic theory of the 19 th century would appear to have been much more profound than it is fashionable to admit".33 The materialization of this new theory of value appears to represent Dobb's demarcating line between classical political economy and its successor. The hastily erected levonian Revolution provided the theoretical basis for both neo-classical and Keynesian economics. Utility, the anchor of this new theory, represented something individual and subjective. In this case, value was expressed as 'the increment of utility on the margin of consumption'. Instead of an cost-relation originating in production, a relation between commodities and the individual minds of consumers was taken as the determining constant in the equational system. Both the utility-theory and the labor- theory made qualitative statements about the nature of economic activity through form and concept, but these statements were of different orders. Unlike its predecessor, the 33 Ibid., p. 25. 27 utility-theory was "concerned not with relations of product i on, but with the relation of commodi t i es to the psychology of consumer s. " 3 4 By expressing value as a function of utility, it was characterizing the equilibrium in a specific fashion, relating the bal ance to a relative ' maxi mum' of utility. Val ue was seen as existing as a function of the increment of utility on the margi n of consumpt i on. From this vant age point, economi c concepts were seen as dependent on human consci ousness, provi di ng the theory with justification for cl ai mi ng a level of greater generality t han the labor-theory. The utility-theory was seen as applicable regardl ess of the makeup of the factors of production, allowing it to shrug off the restrictive assumpt i ons about the ' organi c composi t i on of capi t al ' . Thi s made the utility theory j ust as compet ent in det ermi ni ng mi croscopi c probl ems as it was for macroscopi c probl ems. Many proposed that since fundamental instincts of human consci ousness had remai ned relatively constant t hroughout different epochs of human devel opment , the utility theory could be applied regardless of the organization of economi c society. However, there were limiting assumpt i ons wi t hi n the utility-theory as well. Since states of human consci ousness could only be expressed in t erms of value, different i ncome-posi t i ons were no longer det ermi ni ng, and could therefore be abstracted out. Consumer s were abstracted away from their position as producers, and vice versa. The classical political economi st s saw i ncome distribution as the result of social institutions and relations whi l e supply and demand theorists t hought it was determined by exchange. In the former approach, profit is seen as part of the surplus, whi l e the latter approach gave t hem the appearance of the results of the capi t al i st ' s net contribution. The probl em of 3 4 Ibid., p. 21. 3 5 Ibid., p. 22. 27 utility-theory was "concerned not with relations of production, but with the relation of commodities to the psychology of consumers.,,34 By expressing value as a function of utility, it was characterizing the equilibrium in a specific fashion, relating the balance to a relative 'maximum' ofutility.35 Value was seen as existing as a function of the increment of utility on the margin of consumption. From this vantage point, economic concepts were seen as dependent on human consciousness, providing the theory with justification for claiming a level of greater generality than the labor-theory. The utility-theory was seen as applicable regardless of the makeup of the factors of production, allowing it to shrug off the restrictive assumptions about the 'organic composition of capital'. This made the utility theory just as competent in determining microscopic problems as it was for macroscopic problems. Many proposed that since fundamental instincts of human consciousness had remained relatively constant throughout different epochs of human development, the utility theory could be applied regardless of the organization of economic society. However, there were limiting assumptions within the utility-theory as well. Since states of human consciousness could only be expressed in terms of value, different income-positions were no longer determining, and could therefore be abstracted out. Consumers were abstracted away from their position as producers, and vice versa. The classical political economists saw income distribution as the result of social institutions and relations while supply and demand theorists thought it was determined by exchange. In the former approach, profit is seen as part of the surplus, while the latter approach gave them the appearance of the results of the capitalist's net contribution. The problem of 34 Ibid., p. 21. 35 Ibid., p. 22. 28 value had to be treated as t hough it was i ndependent from the effects on demand of i ncome distribution, "ot herwi se a demand-schedul e could not be regarded solely as a function of utility and as i ndependent of the val ue of commodi t i es and of product i ve- agent s. " 3 6 Thi s has led some to say that the theory is applicable only to a society of equal i ncomes, where there is no question of distribution left to explain. By considering individual consci ousness as fundamental to the theory, the utility-approach made abstractions of all social influences upon individual charact erof all reactions of society of whi ch he was a part, let alone the economi c relations into whi ch his subjectivity was formed. Dobb says it is clear that the corollaries should have an individualist bias, as an individualist description of human society was contained in the assumpt i ons. "Whet her such a description is justified or not is not a formal or logical question but a question of f act . " 3 8 Can utility be treated as a quantity at all? Dobb thought it possible to concei ve utility as Kant woul d have, giving it ' i nt ensi ve magni t ude' , allowing it to be concei ved of as ' great er or l ess' . Whet her this consideration is justified is another matter entirely. Either way, Dobb t hought the question of its existence as an entity was irrelevant. If it does exist, it can have economi c significance only through its objective expressi on as an i ndi vi dual ' s behavi or on a market. The term "desi re" is used to express the i mmedi at e mental activity behi nd such an act of purchase. Here is the often unnot i ced ' sl ender pedi ment ' that the utility theory rests upon. This premi se identifies ' desi re' wi t h ' sat i sfact i on' , another subjective term that appears difficult, if not i mpossi bl e, to 3 6 Ibid., p. 26. 3 7 As E.K. Hunt wrote, "The latter theory's greater generality is purchased at a rather high price." History of Economic Thought, p. 100. ' 8 Dobb, Political Economy and Capitalism, p. 27. 28 value had to be treated as though it was independent from the effects on demand of income distribution, "otherwise a demand-schedule could not be regarded solely as a function of utility and as independent of the value of commodities and of productive- agents.,,36 This has led some to say that the theory is applicable only to a society of equal incomes, where there is no question of distribution left to explain. By considering individual consciousness as fundamental to the theory, the utility-approach made abstractions of all social influences upon individual character-of all reactions of society of which he was a part, let alone the economic relations into which his subjectivity was formed. 37 Dobb says it is clear that the corollaries should have an individualist bias, as an individualist description of human society was contained in the assumptions. "Whether such a description is justified or not is not a formal or logical question but a question of fact. ,,38 Can utility be treated as a quantity at all? Dobb thought it possible to conceive utility as Kant would have, giving it 'intensive magnitude', allowing it to be conceived of as 'greater or less'. Whether this consideration is justified is another matter entirely. Either way, Dobb thought the question of its existence as an entity was irrelevant. If it does exist, it can have economic significance only through its objective expression as an individual's behavior on a market. The term "desire" is used to express the immediate mental activity behind such an act of purchase. Here is the often unnoticed 'slender pediment' that the utility theory rests upon. This premise identifies 'desire' with 'satisfaction', another subjective term that appears difficult, if not impossible, to 36 Ibid., p. 26. 37 As E.K. Hunt wrote, "The latter theory's greater generality is purchased at a rather high price." History of Economic Thought, p. 100. 38 Dobb, Political Economy and Capitalism, p. 27. 29 quantify. Professor Pi gou defended this conceptualization as a sufficient approxi mat i on that is true of ' most commodi t i es' ; without this assumpt i on, there is no ground for expressi ng demand as a function of utility, thereby removi ng any possible connect i on bet ween val ue-phenomena and utility. In sum, the utility theory of value chose the subjective term ' ut i l i t y' to act as their independent value-constant. By focusing on exchange, the utility theorists were only able to define productive contributions by what eventuated. The concept of satisfaction existing as the mai n influence on prices could easily be described as a circular t aut ol ogywhere prices determine pr i ces. 4 0 The total contributed was seen as equal to the total return, and any participant that required a price must have therefore made a contribution, thereby removi ng any coherent concept of i ncome distribution and surplus other t han expl ai ned as ' deserved. ' It is not convincingly clear that the utility t heory is capable of accurately explaining economi c movement s. On the other hand, if their goal was describing a syst em where appropriating surpluses for the capitalist class was considered bot h warrant ed and justified, they succeeded spectacularly. The Pr obl e m of Sur pl uses The concept of surplus has no meani ng outside of a cost-principle as a basis of interpretation. Wi t hout a cost-principle, no criterion exists of differentiation bet ween cl ass-i ncomes. The reason for this is that a cost-principle makes "some st at ement concerni ng the nature of productive activitiesof the relation bet ween men in the activity of product i onwhereas a demand-t heory is a generalization about consumpt i on and exchangeabout the relation bet ween men qua consumers and the commodi t i es 3 9 Ibid., p. 27. 4 0 It is a question of causalityprices cannot be the cause of prices. 29 quantify.39 Professor Pigou defended this conceptualization as a sufficient approximation that is true of 'most commodities'; without this assumption, there is no ground for expressing demand as a function of utility, thereby removing any possible connection between value-phenomena and utility. In sum, the utility theory of value chose the subjective term 'utility' to act as their independent value-constant. By focusing on exchange, the utility theorists were only able to define productive contributions by what eventuated. The concept of satisfaction existing as the main influence on prices could easily be described as a circular tautology-where prices determine prices. 4o The total contributed was seen as equal to the total return, and any participant that required a price must have therefore made a contribution, thereby removing any coherent concept of income distribution and surplus other than explained as 'deserved.' It is not convincingly clear that the utility theory is capable of accurately explaining economic movements. On the other hand, if their goal was describing a system where appropriating surpluses for the capitalist class was considered both warranted and justified, they succeeded spectacularly. The Problem of Surpluses The concept of surplus has no meaning outside of a cost-principle as a basis of interpretation. Without a cost-principle, no criterion exists of di fferentiation between class-incomes. The reason for this is that a cost-principle makes "some statement concerning the nature of productive activities-of the relation between men in the activity of production-whereas a demand-theory is a generalization about consumption and exchange-about the relation between men qua consumers and the commodities 39 Ibid., p. 27. 40 It is a question cannot be the cause of prices. 30 whi ch result from pr oduct i on. " 4 1 A question containing the concept of surplus concerns itself wi t h the connection bet ween a given i ncome and product i ve activity, an ipso facto concept of cost. Cost and surplus are correlative t erms. The labor-theory of val ue provi ded political economi st s with a template for explaining the existence and origin of surpluses. If the labor embodi ed in the commodi t y is greater t han the labor needed to replace it, a surplus emerges. Under such conditions, one can attempt to det ermi ne who is the recipient of this surplus-value, as well as why they received it. On the other hand, "a principle whi ch interprets value purely in t erms of demand can define the productive ' cont ri but i on' of a person or a class onl y accordi ng to the val ue of what eventuates"; it cannot talk about what originates, as it includes no such statement about any productive relationship of this kind. "Hence any participant in product i on whi ch acquires a pri ceany agent whi ch figures on the market at al l must ipso facto have made a "cont ri but i on. " 4 2 This makes services like ' t he loan of scarce resources' contributions to the productive process. If somet hi ng acquires a price, it must therefore perform a service. Under competitive conditions, the sum total of val ues must equal the value of the result, and the inquiry into surplus-value becomes meani ngl ess. The inquiry becomes meani ngl ess not because it doesn' t exist, but because of the form in whi ch the probl em was stated. Concept s of cost and surplus are not abstract. Why does a value-difference exist at all, and if it persists, what causes it to do so? Why doesn' t competition equalize the original and final val ues? Any theory of distribution must concern itself with the probl em of the creation and disposal of this surplus value, as the classical Political Economi st realized. The labor theory of value gave "a quantitative Ibid., p. 30. Ibid., p. 30. 30 which result from production. ,,41 A question containing the concept of surplus concerns itself with the connection between a given income and productive activity, an ipsofacto concept of cost. Cost and surplus are correlative terms. The labor-theory of value provided political economists with a template for explaining the existence and origin of surpluses. lfthe labor embodied in the commodity is greater than the labor needed to replace it, a surplus emerges. Under such conditions, one can attempt to determine who is the recipient of this surplus-value, as well as why they received it. On the other hand, "a principle which interprets value purely in terms of demand can define the productive 'contribution' of a person or a class only according to the value of what eventuates"; it cannot talk about what originates, as it includes no such statement about any productive relationship of this kind. "Hence any participant in production which acquires a price-any agent which figures on the market at all-must ipso facto have made a "contribution. ,,42 This makes services like 'the loan of scarce resources' contributions to the productive process. If something acquires a price, it must therefore perform a service. Under competitive conditions, the sum total of values must equal the value of the result, and the inquiry into surplus-value becomes meaningless. The inquiry becomes meaningless not because it doesn't exist, but because of the form in which the problem was stated. Concepts of cost and surplus are not abstract. Why does a value-difference exist at all, and if it persists, what causes it to do so? Why doesn't competition equalize the original and final values? Any theory of distribution must concern itself with the problem of the creation and disposal of this surplus value, as the classical Political Economist realized. The labor theory of value gave "a quantitative 41 Ibid., p. 30. 42 Ibid., p. 30. 31 meani ng to the original value-contribution made to the product i ve process in a sense whi ch enabled it to be different from the final val ue of the pr oduct . " 4 3 As a cost-principle, it evaluates a product i ve contribution in t erms of the physical using up of somet hi ng that has to be replaced by human activity. "If the labor or activity required to replace what is used up is less t han the labor embodi ed in the total product, a surplus emer ges. " Is this surplus then distributed in proportion to the product i ve contribution of the participants in the production, or is some class that did relatively little harvesting some of the surplus? If so, how does this happen, and why? This is less an ethical question t han one of rigorous scientific inquiry, yet it is an inquiry that has largely been eliminated by modern economi cs. Dobb t hought it was eliminated not by accident, but purposefully for a crucial reason: "namel y, that subjective economi cs, in its obsessi on wi t h demand and exchange, postulates little or nothing about the activity of product i on except that certain agents of product i on exist whi ch are necessary and are scar ce. " 4 4 The moder n subjective theory of value removes all meani ng from the concept of surplus, as well as distinctions bet ween i ncome classes. The labor-theory focused on the product i on process, provi di ng a platform for expl ai ni ng how the capitalist class profited off the labor they empl oyed. "Wi t hout some such value-conception, fundamental distinctions of this kind can have no place in economi c theory. Wi t h a different value-principle they di sappear . " 4 5 Cont e mpor a r y Theor i es and Cr i t i ques of t he Cl assi cal i st s It has become increasingly fashionable to disregard utility as ' ei t her shadowy or a superfluous ent i t y' . The term ' satisfaction' has been t hrown to other fields. Prices are 4 3 Ibid., p. 32. 4 4 Ibid., p. 33. 4 5 Ibid., p. 22. 31 meaning to the original value-contribution made to the productive process in a sense which enabled it to be different from the final value of the product.,,43 As a cost-principle, it evaluates a productive contribution in terms of the physical using up of something that has to be replaced by human activity. "If the labor or activity required to replace what is used up is less than the labor embodied in the total product, a surplus emerges." Is this surplus then distributed in proportion to the productive contribution of the participants in the production, or is some class that did relatively little harvesting some of the surplus? I f so, how does this happen, and why? This is less an ethical question than one of rigorous scientific inquiry, yet it is an inquiry that has largely been eliminated by modern economics. Dobb thought it was eliminated not by accident, but purposefully for a crucial reason: "namely, that subjective economics, in its obsession with demand and exchange, postulates little or nothing about the activity of production except that certain agents of production exist which are necessary and are scarce. ,,44 The modern subjective theory of value removes all meaning from the concept of surplus, as well as distinctions between income classes. The labor-theory focused on the production process, providing a platform for explaining how the capitalist class profited offthe labor they employed. "Without some such value-conception, fundamental distinctions of this kind can have no place in economic theory. With a different value-principle they disappear.,,45 Contemporary Theories and Critiques of the Classicalists It has become increasingly fashionable to disregard utility as 'either shadowy or a superfluous entity'. The term 'satisfaction' has been thrown to other fields. Prices are 43 Ibid., p. 32. 401 Ibid., p. 33. 45 Ibid., p. 22. 32 now considered the resultant on certain schedules of demand-pri ces, of empirically observed market-offers; "and economi cs as a science of "cat al l act i cs" is presented as the last word of amoral purity and scientific obj ect i vi t y. " 4 6 Dobb questioned the legitimacy of this escape, particularly its consistency wi t h the requi rement s of a theory of value. Equat i ons mi ght appear adequat e on a purel y formal stage, where constants can simply be defined as constants. However, can such equat i ons hold up from a realistic interpretation; can they sustain the necessary corollaries that are required? What quantity i ndependent of val ue-movement s can the syst em rest on? Demand is not to rest on utility, but on ' empi ri cal l y observed preference-scal es' ? How can we assume that they are the creators, not the creations, of market pri ces? If this criticism is valid, then we are left wi t h a ' formal t echni que' that is capable of maki ng certain definitions and make realistic propositions about certain probl ems treated separately in isolation; but it is i mpot ent to pronounce j udgment on macroscopi c phenomena of economi c society. An economi c law cannot j ust be a conditional sentence, for this would make it no more than a mere tautology. It must state the probability of some actual course of events occurring; and it is to permi t such statements for a l aw of val ue to be adequat e. Ot herwi se it is wort hl ess, regardless of formal elegance. Dobb saw a clear t endency of modern economi cs to regard some of the fundamental questions asked by classical political economi st s as no longer relevant. Previously vital concept s such as the need for a theory of val ue no longer act as a basis for economi c theories. Al t hough these antiquated mast ers certainly asked many correct 4 6 Ibid., p. 28. Catallactics is defined as the praxeological theory of the way the free market system reaches exchange ratios and prices. Such a theory aims to analyze all actions based on monetary calculation, tracing the formation of prices back to the point of choice for an economic agent. Catallactics does not attempt to make value judgments, but aim to be exact, objective and of universal validity. 32 now considered the resultant on certain schedules of demand-prices, of empirically observed market-offers; "and economics as a science of "catallactics" is presented as the last word of amoral purity and scientific objectivity. ,,46 Dobb questioned the legitimacy ofthis escape, particularly its consistency with the requirements of a theory of value. Equations might appear adequate on a purely formal stage, where constants can simply be defined as constants. However, can such equations hold up from a realistic interpretation; can they sustain the necessary corollaries that are required? What quantity independent of value-movements can the system rest on? Demand is not to rest on utility, but on 'empirically observed preference-scales'? How can we assume that they are the creators, not the creations, of market prices? If this criticism is valid, then we are left with a 'formal technique' that is capable of making certain definitions and make realistic propositions about certain problems treated separately in isolation; but it is impotent to pronounce judgment on macroscopic phenomena of economic society. An economic law cannot just be a conditional sentence, for this would make it no more than a mere tautology. It must state the probability of some actual course of events occurring; and it is to permit such statements for a law of value to be adequate. Otherwise it is worthless, regardless of formal elegance. Dobb saw a clear tendency of modern economics to regard some of the fundamental questions asked by classical political economists as no longer relevant. Previously vital concepts such as the need for a theory of value no longer act as a basis for economic theories. Although these antiquated masters certainly asked many correct 46 Ibid., p. 28. Catallactics is defined as the praxeological theory of the way the free market system reaches exchange ratios and prices. Such a theory aims to analyze all actions based on monetary calculation, tracing the formation of prices back to the point of choice for an economic agent. Catallactics does not attempt to make value judgments, but aim to be exact, objective and of universal validity. 33 questions, as well as occasionally guessing rightly at the answers, the analytical tools at their disposal were insufficient for ascertaining the actuality of the economi c world, and thus their precision was hampered by ' el ement ary conf usi on' . 4 7 It has become quite fashionable to di smi ss theories of val ue as unnecessary and false, and that all that is necessary for economi cs is a theory that represents exchange-rel at i onshi ps as "functions of human preferences, " a generalized consequence of scarcity and limited possibilities. Dobb cited a cont emporary economi st , Professor Myrdal , as describing the search of previ ous economi st s for a theory of val ue represented an obsession with ethical and 48 political quest i ons, t hereby limiting the scientific validity of the field. Common critiques of Ri cardo include his lack of underst andi ng of differential calculus and mi sgui ded allegiance to the labor theory of value stymied his analysis. Current economi st s often di smi ss Ri cardo' s work based on his inability to det ermi ne particular commodi t y prices. Moder n economi st s are quite concerned wi t h predictive qualities of economi c theories and model s, much more so than they are with descriptive qualities. Dobb remi nded us that Ri cardo was not concerned wi t h specific probl ems to begin with. "It is too sel dom remembered today that the concern of classical Political Economy was wi t h what one may term the "macr oscopi c" probl ems of economi c society, and only very secondarily wi t h "mi cr oscopi c" probl ems, in the shape of the movement s of particular commodi t y pr i ces. " 4 He was mor e interested in probl ems wi t h distribution, with the movement s of rent, wages, and profits, and was therefore mor e concerned wi t h the broad generality of commodi t i es t han with the movement s of a particular commodi t y. Ricardo had focused on the forces affecting capital accumul at i on, and for such a general 4 7 Dobb, Political Economy and Capitalism, p. 1. 4 8 G. Myrdal, Das politische Element in der Nationalokonomischen Doktrinbilditng, Chapters 3 and 4. 4 9 Ibid, pp. 15-16. 33 questions, as well as occasionally guessing rightly at the answers, the analytical tools at their disposal were insufficient for ascertaining the actuality of the economic world, and thus their precision was hampered by 'elementary confusion' .47 It has become quite fashionable to dismiss theories of value as unnecessary and false, and that all that is necessary for economics is a theory that represents exchange-relationships as "functions of human preferences," a generalized consequence of scarcity and limited possibilities. Dobb cited a contemporary economist, Professor Myrdal, as describing the search of previous economists for a theory of value represented an obsession with ethical and political questions, thereby limiting the scientific validity of the field. 48 Common critiques of Ricardo include his lack of understanding of differential calculus and misguided allegiance to the labor theory of value stymied his analysis. Current economists often dismiss Ricardo's work based on his inability to determine particular commodity prices. Modern economists are quite concerned with predictive qualities of economic theories and models, much more so than they are with descriptive qualities. Dobb reminded us that Ricardo was not concerned with specific problems to begin with. "It is too seldom remembered today that the concern of classical Political Economy was with what one may term the "macroscopic" problems of economic society, and only very secondarily with "microscopic" problems, in the shape of the movements of particular commodity prices.,,49 He was more interested in problems with distribution, with the movements of rent, wages, and profits, and was therefore more concerned with the broad generality of commodities than with the movements of a particular commodity. Ricardo had focused on the forces affecting capital accumulation, and for such a general 47 Dobb, Political Economy and Capitalism, p. I. 48 G. Myrdal, Das politische Element in der Nationa/okonomischen Doktrinbildung, Chapters 3 and 4. 49 Ibid, pp. 15-16. 34 question, Ri cardo found his approxi mat i on to be both adequat e and justified. Al t hough the utility-theory woul d later claim to have a superior generality, it was i ncapabl e of provi di ng any insight into the phenomenon of capital accumul at i on. Mar x' s theory has suffered more direct attacks t han any other economi c t heory postulated thus far. He is often criticized as letting his ' sympat hi es wi t h suffering' dictate his line of inquiry, dulling his otherwise razor sharp mi nd. Similarly, his use of abstraction has been used as a basis for rejecting his theory. Is this a reasonabl e source of attack? After all, Dobb' s first requi rement for a theory of val ue was ' eart hl i ness' ; did Mar x' s abstractions violate this requi rement ? Let us exami ne this question in more detail. Mar x' s first approxi mat i on studied in Vol ume I of Capital, where prices are proportional to values and the price of l abor-power is given by the labor-content of its product i ve consumpt i on, was not meant to be a predictive model . It described a special case where all commodi t i es are exchanged for their values, raising the question of if exploitation and profits could actually exist in this model , given the restrictions. What made this special case specifically interesting to Marx is that it was far from favorable for labor t heori st squi t e the opposite. It challenged political economi st s to explain the existence of capital accumul at i on when everything, including labor-power, is exchanged at its actual val ue, where prices are proportional to values. The principle of the identity of value-ratios with labor-ratios rested on the domi nant t endenci es in an exchange-soci et y characterized by the division of labor, compet i t i on, and the mobility of resources. Presumabl y, compet i t i on should ensure that labor was distributed in equal ratios. The principle was dependent on a specific concept i on of the question, Ricardo found his approximation to be both adequate and justified. Although the utility-theory would later claim to have a superior generality, it was incapable of providing any insight into the phenomenon of capital accumulation. Marx's theory has suffered more direct attacks than any other economic theory postulated thus far. He is often criticized as letting his 'sympathies with suffering' 34 dictate his line of inquiry, dulling his otherwise razor sharp mind. Similarly, his use of abstraction has been used as a basis for rejecting his theory. Is this a reasonable source of attack? After all, Dobb's first requirement for a theory of value was 'earthliness'; did Marx's abstractions violate this requirement? Let us examine this question in more detail. Marx's first approximation studied in Volume I of Capital, where prices are proportional to values and the price oflabor-power is given by the labor-content of its productive consumption, was not meant to be a predictive model. It described a special case where all commodities are exchanged for their values, raising the question of if exploitation and profits could actually exist in this model, given the restrictions. What made this special case specifically interesting to Marx is that it was far from favorable for labor theorists-quite the opposite. It challenged political economists to explain the existence of capital accumulation when everything, including labor-power, is exchanged at its actual value, where prices are proportional to values. The principle of the identity of value-ratios with labor-ratios rested on the dominant tendencies in an exchange-society characterized by the division of labor, competition, and the mobility of resources. Presumably, competition should ensure that labor was distributed in equal ratios. The principle was dependent on a specific conception of the 35 equilibrium of such a society, upon the concept i on of wages being uniform, t hough not necessarily constant. Thi s statement was subject to t wo important qualifications: 1) Wi t h respect to land, it only held true under margi nal conditions of product i on. Thi s must be the case in any form of cost-theory. 2) It implied the simplifying assumpt i on that the ratio of labor to capital is equal across the board, in every line of product i on (equality in the organic composi t i on of capital, a.k.a. uniformity of technical coeffi ci ent s). 5 0 Samuel son challenged the labor theory of value by procl ai mi ng the simplifying first approxi mat i ons mi ght be well and good, but are often found to be inferior to second approxi mat i ons once greater particularity is exami ned. Dobb dismissed this critique, poi nt i ng out that such a challenge falls on its face where there is somet hi ng contained in the first approxi mat i on that is lacking in later approxi mat i ons. 5 Critics such as Bohm- Bawerk declared this approxi mat i on to be a fatal flaw in Mar x' s theory. Dobb disagreed wi t h this objection, pointing out that "all abstractions remai n only approxi mat i ons to reality: this is their essential nature; and it is no criticism of a theory of val ue merel y to say that this is s o. ' 2 He recogni zed that the second assumpt i on meant the value was only an abstract approxi mat i on to concrete exchange val ues. Therefore such criticism only hol ds true if the limiting assumpt i ons prevent the generalizations from sustaining the results it has attempted to explain. Marx was not trying to create a perfectly predictive model t hrough his abstract exampl e. Instead, he was at t empt i ng to lift the veil cloaking the fundamental movement s of capitalist society. Marx was well aware of the limitations and requi rement s inherent in the abstractions he used. To formulate an exact picture of the world system is i mpossi bl e; manki nd al ways will need further knowl edge of the 5 0 Dobb, Political Economy & Capitalism, p. 14. 5 1 Dobb, Theories of Value & Distribution Since Adam Smith, p. 148. 5 2 Dobb, Political Economy & Capitalism, p. 15. 35 equilibrium of such a society, upon the conception of wages being uniform, though not necessarily constant. This statement was subject to two important qualifications: 1) With respect to land, it only held true under marginal conditions of production. This must be the case in any form of cost-theory. 2) It implied the simplifying assumption that the ratio of labor to capital is equal across the board, in every line of production (equality in the organic composition of capital, a.k.a. uniformity of technical coefficients). 50 Samuelson challenged the labor theory of value by proclaiming the simplifying first approximations might be well and good, but are often found to be inferior to second approximations once greater particularity is examined. Dobb dismissed this critique, pointing out that such a challenge falls on its face where there is something contained in the first approximation that is lacking in later approximations. 51 Critics such as Bohm- Bawerk declared this approximation to be a fatal flaw in Marx's theory. Dobb disagreed with this objection, pointing out that "all abstractions remain only approximations to reality: this is their essential nature; and it is no criticism of a theory of value merely to say that this is so. ,,52 He recognized that the second assumption meant the value was only an abstract approximation to concrete exchange values. Therefore such criticism only holds true if the limiting assumptions prevent the generalizations from sustaining the results it has attempted to explain. Marx was not trying to create a perfectly predictive model through his abstract example. Instead, he was attempting to lift the veil cloaking the fundamental movements of capitalist society. Marx was well aware of the limitations and requirements inherent in the abstractions he used. To formulate an exact picture of the world system is impossible; mankind always will need further knowledge of the 50 Dobb, Political Economy & Capitalism, p. 14. 51 Dobb, Theuries of Value & Distrihution Since Adam S'mith, p. 148. 52 Dobb, Pulitical Econumy & Capitalism, p. 15. 36 world in an infinite cycle of pushi ng the boundari es, exposing the existence of further unknowns. All ment al i mages are inherently abstractions, approxi mat i ons. Pure mat hemat i cs deals wi t h the space forms and quantity relations of the real worl dt hat is, wi t h material whi ch is very real indeed. In order to make it possible to investigate these forms and relations in their pure state, it is necessary to abstract 53 t hem entirely from their content, to put the content aside as irrelevant. Al t hough a concept i on is therefore never reality, the practical model political economy ai ms to create necessitates abstractions to represent tangible subjects. When Marx approached the probl em of the price of a particular commodi t y in vol ume III, he did so based on the first approxi mat i on of vol ume I, namel y that "profit dependi ng on the surplus or difference bet ween the val ue of l abor-power and the value of finished commodi t i es. " 5 4 The second depended on the first approxi mat i on, and t hus was not a contradiction. As Dobb says, the solution of the mi croscopi c probl em depended on the solution to the macroscopi c probl em. Just because the theory needed modification to explain el ement s acting differently t han wi t hi n the first approxi mat i on does not make the theory useless. As for cl ai ms that Mar x' s sympat hi es for the worki ng class dictated his approach, one has only to recall the fundamental relationships of a capitalist society to find an answer. As previously stated, the domi nant t endenci es in an exchange-society are characterized by the division of labor, competition, and the mobility of resources. In such a society, wealth disparities bet ween classes exist. Including these disparities within an economi c model is far from arbitrary; indeed, an economi c theory that abstracted out such divisions is far more susceptible to cl ai ms of impartiality. Weal t h disparities exist in reality. It seems clear that different classes derive their i ncome in strikingly different and often x ' Engels, knti-Diirhin, pp. 46-47. 5 4 Dobb, Political Economy and Capitalism, p. 17. world in an infinite cycle of pushing the boundaries, exposing the existence of further unknowns. All mental images arc inherently abstractions, approximations. Pure mathematics deals with the space forms and quantity relations of the real world-that is, with material which is very real indeed. In order to make it possible to investigate these forms and relations in their pure state, it is necessary to abstract them entirely from their content, to put the content aside as irrelevant. 53 Although a conception is therefore never reality, the practical model political economy aims to create necessitates abstractions to represent tangible subjects. 36 When Marx approached the problem of the price of a particular commodity in volume III, he did so based on the first approximation of volume I, namely that "profit depending on the surplus or difference between the value oflabor-power and the value of finished commodities."s4 The second depended on the first approximation, and thus was not a contradiction. As Dobb says, the solution of the microscopic problem depended on the solution to the macroscopic problem. Just because the theory needed modification to explain elements acting differently than within the first approximation does not make the theory useless. As for claims that Marx's sympathies for the working class dictated his approach, one has only to recall the fundamental relationships of a capitalist society to find an answer. As previously stated, the dominant tendencies in an exchange-society are characterized by the division of labor, competition, and the mobility of resources. In such a society, wealth disparities between classes exist. Including these disparities within an economic model is far from arbitrary; indeed, an economic theory that abstracted out such divisions is far more susceptible to claims of impartiality. Wealth disparities exist in reality. It seems clear that different classes derive their income in strikingly different and often 53 Engels, Anti-Diirhin, pp. 46-47. 54 Dobb, Political Economy and Capitalism, p. 17. 37 contradicting ways. If we abstract class positions out of the economi c theory, are we violating the informal but crucial requi rement of ' eart hl i ness' ? Any economi c model that at t empt ed to remove such a crucial detail is openi ng itself up to far more critique t han model ' s that include the objective actuality. Seen from this point of vi ew, it appears that Mar x' s theory compet ent l y fulfilled the requi rement of ' eart hl i ness' far better t han his detractors woul d prefer to assume. Moder n economi st s tend to concern t hemsel ves wi t h how accurate the predi ct i ve qualities of economi c theories are, far more t han t hey distress over descriptive qualities. Paul Samuel son challenged the labor theory of val ue by procl ai mi ng its simplifying first approxi mat i ons to be well and good, but often inferior t o second approxi mat i ons once greater particularity are exami ned. Dobb dismissed this critique, pointing out that such a chal l enge falls on its face where there is somet hi ng cont ai ned in the first approxi mat i on that is lacking in later appr oxi mat i ons. 5 5 Dobb' s reply highlights his concern wi t h the descriptive nature of the labor theory of value, where later approxi mat i ons mi ght be better predictors of relative prices but lack the descri pt i on of personal part i ci pat i on. 5 6 Dobb, like the classical political economi st s who influenced hi m, appears far mor e concerned with description than prediction. Concl usi ons Once again, Dobb identified four distinct requi rement s for a t heory of val ue to be consi dered passabl e: 1) Theor i es of val ue mus t have an ' e a r t hl y' c ha r a c t e r Dobb, Theories of Value and Distribution Since Adam Smith, p. 148. Cambridge Journal of Economics, 1980;4, p. 217. 37 contradicting ways. Ifwe abstract class positions out of the economic theory, are we violating the infonnal but crucial requirement of 'earthliness'? Any economic model that attempted to remove such a crucial detail is opening itself up to far more critique than model's that include the objective actuality. Seen from this point of view, it appears that Marx's theory competently fulfilled the requirement of 'emihliness' far better than his detractors would prefer to assume. Modem economists tend to concern themselves with how accurate the predictive qualities of economic theories are, far more than they distress over descriptive qualities. Paul Samuelson challenged the labor theory of value by proclaiming its simplifying first approximations to be well and good, but often inferior to second approximations once greater particularity are examined. Dobb dismissed this critique, pointing out that such a challenge falls on its face where there is something contained in the first approximation that is lacking in later approximations. 55 Dobb's reply highlights his concern with the descriptive nature of the labor theory of value, where later approximations might be better predictors of relative prices but lack the description of personal participation. 56 Dobb, like the classical political economists who influenced him, appears far more concerned with description than prediction. Conclusions Once again, Dobb identified four distinct requirements for a theory of value to be considered passable: 1) Theories of value must have an 'earthly' character 55 Dobb, Theories of Va/lie and Distrib1ltion Since Adam Smith, p. 148. 56 Cambridge Journal of Economics, 1980;4, p. 217. 2) They mus t be capabl e of sol vi ng t he pr obl em of di s t r i but i on/ commodi t y- val ues 3) They mus t be quant i t at i ve in f or m, exi st i ng as equat i onal syst ems wi t h det er mi ni ng i ndependent val ue- const ant s. 4) They mus t be abl e to ma ke ans wer t he quest i ons t hey a t t e mpt The format both the labor theory and utility theory attempted to fulfill these requi rement s differed quite dramatically. The most i mmedi at e difference was their particular selections of value-constants. The labor theory found their constant in objective labor, a constant independent of value itself, whi l e the utility theory selected a far more subjective constant, namel y utility. The former allowed classical political economi st s to determine distribution, surplus-value, commodi t y-val ues, cost and exchange-rat i os; the latter was only able to define productive contributions by what eventuated out of the product i on process. The subjectivity of ' ut i l i t y' was associated with a vague ' sat i sfact i on' , maki ng the utility theory a tautological conjecture, where prices were seen as det ermi ni ng prices. Dobb t hought the selection of these value constants was a critical difference. By choosi ng labor as their constant, labor theorists were able to describe a quantitative system in an ' eart hl y' manner, provi di ng a platform for answeri ng the questions they were maki ng. It is unclear if the same coul d be said for the utility theory. Bot h theories have evolved greatly over t i me, with the labor theory of val ue gaining the most promi nence in the work of Karl Marx. Its replacement, the utility theory, now provi des the framework for the vast majority of economi c model s, whet her Keynesi an or neo-classical. It could be argued that political economi st s woul d be forced to recogni ze the wol f in sheep' s clothing if they continued to adhere to the labor theory. If so, it 2) They must be capable of the problem of distribution/commodity- values 3) They must be quantitative in form, existing as equational systems with determining independent value-constants. 4) They must be able to make answer the questions they attempt The format both the labor theory and utility theory attempted to fulfill these 38 requirements differed quite dramatically. The most immediate difference was their particular selections of value-constants. The labor theory found their constant in objective labor, a constant independent of value while the utility theory selected a far more subjective constant, namely utility. The former allowed classical political economists to determine distribution, surplus-value, commodity-values, cost and exchange-ratios; the latter was only able to define productive contributions by what eventuated out of the production process. The subjectivity of 'utility' was associated with a vague 'satisfaction', making the utility theory a tautological conjecture, where prices were seen as determining prices. Dobb thought the selection of these value constants was a critical differencc. By choosing labor as their constant, labor theorists were able to describe a quantitative system in an 'earthly' manner, providing a platform for answering the questions they were making. It is unclear if the same could be said for the utility theory. Both theories have evolved greatly over time, with the labor theory of value gaining the most prominence in the work of Karl Marx. Its replacement, the utility theory, now provides the framework for the vast majority of economic models, whether Keynesian or neo-classical. It could be argued that political economists would be forced to recognize the wolf in sheep's clothing if they continued to adhere to the labor theory. If so, it 39 comes as little surprise that they rapidly devel oped and defended a theory that justified the continuation of capitalist exploitation. Al t hough Dobb never explicitly passed j udgment on either theory in an attempt to mai nt ai n the pretense of objectivity, but his rhetorical statements implicate his personal opinion. In particular, Dobb appeared ext remel y critical of the ut i l i t y-t heory' s failure to explain the existence of surpluses. If surpluses cannot be explained wi t hi n the context of a certain theory of val ue, does this therefore make the theory i nadequat e? Certainly there are grounds for maki ng such a claim. The dismissal of such a significant characteristic of a capitalist society could easily be seen as removi ng a necessary and det ermi ni ng economi c relationship from a model attempting to represent real economi c connect i ons. Is it appropriate to make such an abstraction? It is my opi ni on that Dobb woul d undoubt edl y answer no. Is it safe to assume either theory of value as correct? The answer appears to be ambi guous. Surely we can exami ne if theories fulfill the necessary requi rement s, formal or ot herwi sebut can we realistically consider either to be bulletproof? Bot h theories of value contain ambi gui t i es that could not be avoided, so it should come as no surprise that their conclusions are ambi guous as well. Nonet hel ess, it is the line of quest i oni ng that is most relevant, the exami nat i on of why human bei ngs interact in the ways that they do. Wi t hout introspection, we cannot have thoughtful progression. As of yet, no one theory of value has proved itself to be beyond question, and t hus political economi st s should be hesitant of simply shrugging off the existence of compet i ng theories for the unsubstantiated accept ance of one. Uncoveri ng the origins of economi c val ue appears to be an important task for the field of economi cs, but it is a subject often left unt ouched. comes as little surprise that they rapidly developed and defended a theory that justified the continuation of capitalist exploitation. 39 Although Dobb never explicitly passed judgment on either theory in an attempt to maintain the pretense of objectivity, but his rhetorical statements implicate his personal opinion. In particular, Dobb appeared extremely critical of the utility-theory's failure to explain the existence of surpluses. If surpluses cannot be explained within the context of a certain theory of value, does this therefore make the theory inadequate? Certainly there are grounds for making such a claim. The dismissal of such a significant characteristic of a capitalist society could easily be seen as removing a necessary and determining economic relationship from a model attempting to represent real economic connections. Is it appropriate to make such an abstraction? It is my opinion that Dobb would undoubtedly answer no. Is it safe to assume either theory of value as correct? The answer appears to be ambiguous. Surely we can examine if theories fulfill the necessary requirements, formal or otherwise-but can we realistically consider either to be bulletproof? Both theories of value contain ambiguities that could not be avoided, so it should come as no surprise that their conclusions are ambiguous as well. Nonetheless, it is the line of questioning that is most relevant, the examination of why human beings interact in the ways that they do. Without introspection, we cannot have thoughtful progression. As of yet, no one theory of value has proved itself to be beyond question, and thus political economists should be hesitant of simply shrugging ofT the existence of competing theories for the unsubstantiated acceptancc of onc. Uncovering the origins of economic value appears to be an important task for the field of economics, but it is a subject often left untouched. 40 From this perspect i ve, the pursuit of a unified theory of economi c val ue becomes an ext remel y relevant and essential quarry. From this perspective, the pursuit of a unified theory of economic value becomes an extremely relevant and essential quarry. 40 E C O N O MI C C R I S E S ECONOMIC CRISES 42 I nt r oduct i on The global economi c crisis of 2008 took most mai nst ream political economi st s by surprise. Their belief that a firm monet ary policy woul d be sufficient for mai nt ai ni ng bal ance had been treated as dogma, and crises were largely regarded an extinct trend. In an instant, everyt hi ng changed. Macroeconomi c t ext books became antiquated as their predictions proved inaccurate, and mai nst ream economi st s found t hemsel ves scrambl i ng to make adjustments to their failed theories. Many economi st s found t hemsel ves exami ni ng the work of precedi ng political economi st s, looking for forgotten perspectives that mi ght be relevant to the situation. In the years following the Great Depressi on, Mauri ce Dobb had done the same thing. By descri bi ng the progressi on of concept ual i zi ng economi c crises from Adam Smi t h to Karl Marx, Dobb was able to describe a fluid transition from vague t hought to critical analysis. Ultimately, Dobb agreed with Mar x' s perspective of economi c crises, specifically that t hey are an inherent result of capitalism. Dobb did not let his opi ni ons dictate his work; he simply recount ed the history and let the facts speak for t hemsel ves. Mai nst ream economi st s have undoubt edl y spent most of their t i me consulting the work of economi st s within the interval bet ween John Maynard Keynes and Mi l t on Fri edman, leaving the work of the classical political economi st s largely ignored. Thus it appears to be a poi gnant t i me to revi ew these giants, whose concept s provi ded the foundations for economi cs as a study. This task is here undert aken as a revi ew of Mauri ce Dobb' s historical recount of the perspect i ves of classical political economi st s and their takes on economi c crises. 42 Introduction The global economic crisis of 2008 took most mainstream political economists by surprise. Their belief that a firm monetary policy would be sufficient for maintaining balance had been treated as dogma, and crises were largely regarded an extinct trend. In an instant, everything changed. Macroeconomic textbooks became antiquated as their predictions proved inaccurate, and mainstream economists found themselves scrambling to make adjustments to their failed theories. Many economists found themselves examining the work of preceding political economists, looking for forgotten perspectives that might be relevant to the situation. In the years following the Great Depression, Maurice Dobb had done the same thing. By describing the progression of conceptualizing economic crises from Adam Smith to Karl Marx, Dobb was able to describe a fluid transition from vague thought to critical analysis. Ultimately, Dobb agreed with Marx's perspective of economic crises, specifically that they are an inherent result of capitalism. Dobb did not let his opinions dictate his work; he simply recounted the history and let the facts speak for themselves. Mainstream economists have undoubtedly spent most of their time consulting the work of economists within the interval between John Maynard Keynes and Milton Friedman, leaving the work of the classical political economists largely ignored. Thus it appears to be a poignant time to review these giants, whose concepts provided the foundations for economics as a study. This task is here undertaken as a review of Maurice Dobb's historical recount of the perspectives of classical political economists and their takes on economic crises. 43 Cl assi cal Per spect i ve of Economi c Cr i ses Bef or e Ma r x It is well known that disruptions occur in a cyclical fashion (the inevitable bust to the proverbial boom) , but the causes for such reoccurrences are still openly debated. Indeed, the percept i ons of the impact are highly subjective, wi t h various interpretations indicating vari ous original perspectives. Before the groundbreaki ng analysis of Karl Marx, political economi st s could be described as havi ng only addressed the probl em of economi c crises in a superficial and underdevel oped fashion. Few had seriously pondered potential causes of the phenomenon, focusing instead almost exclusively on equilibrating forces in the system, ignoring or disregarding contrary movement s. Al t hough there had been a wi del y observed discussion bet ween Ri cardo and Mal t hus regardi ng gluts and depressions as potentially caused by under-consumpt i on, it is all too apparent that early member s of the Ricardian School did not concern t hemsel ves wi t h crises when formulating their system of thought. This tradition generally shrugged off depressi ons as either the product of external interferences to the free worki ng of economi c forces, or an expected result of the progress of capital accumul at i on. Later adherents to the Ricardian tradition were consumed wi t h finding an expl anat i on for crises in either the not ori ous veil of money or t hrough ' natural causes' . Whi l e classical economi st s had ignored economi c crises almost entirely, they had focused a good deal of energy treating another seemi ngl y odd characteristic of capitalism, namel y the alleged t endency of the rate of profit to decline over t i me. As Marx noted, "the difference bet ween the various schools since Adam Smith consists in their different at t empt s to solve this r i ddl e. " 5 7 Approaches to this phenomenon had changed quite dramatically over t i me, with evolving perspectives giving rise to different interpretations. 5 7 Marx, Capital, Vol.111, p. 250. 43 Classical Perspective of Economic Crises Before Marx It is well known that disruptions occur in a cyclical fashion (the inevitable bust to the proverbial boom), but the causes for such reoccurrences are still openly debated. Indeed, the perceptions of the impact are highly subjective, with various interpretations indicating various original perspectives. Before the groundbreaking analysis of Karl Marx, political economists could be described as having only addressed the problem of economic crises in a superficial and underdeveloped fashion. Few had seriously pondered potential causes of the phenomenon, focusing instead almost exclusively on equilibrating forces in the system, ignoring or disregarding contrary movements. Although there had been a widely observed discussion between Ricardo and Malthus regarding gluts and depressions as potentially caused by under-consumption, it is all too apparent that early members of the Ricardian School did not concern themselves with crises when formulating their system of thought. This tradition generally shrugged off depressions as either the product of external interferences to the free working of economic forces, or an expected result of the progress of capital accumulation. Later adherents to the Ricardian tradition were consumed with finding an explanation for crises in either the notorious veil of money or through 'natural causes'. While classical economists had ignored economic crises almost entirely, they had focused a good deal of energy treating another seemingly odd characteristic of capitalism, namely the alleged tendency of the rate of profit to decline over time. As Marx noted, "the difference between the various schools since Adam Smith consists in their different attempts to solve this riddle."s7 Approaches to this phenomenon had changed quite dramatically over time, with evolving perspectives giving rise to different interpretations. 57 Marx, Capital, Vol.llI, p. 250. 44 In the 18 t h century, when political economi st s like Adam Smith and Davi d Hume were vi ewi ng the matter from the stance of the borrower of capital, the decline was seen as a healthy indication of a smoot hl y operating economy. Smith wrote in The Wealth of Nations, "The increase of stock, whi ch raises prices, tends to lower profit. When the stocks of many rich merchant s are t urned into the same trade, their mutual competition naturally t ends to l ower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in all of t hem. " 5 8 Smi t h undoubt edl y believed the decline of the rate of profit was attributed to the compet i t i on of capital, provi di ng hi m wi t h subjective evi dence that unfettered healthy compet i t i on woul d eventually lead to a l ower profit rate than woul d be found in a monopol i st i c system. Thi s perception of the phenomenon underwent a radical shift with the revolution of a new influential class primarily composed of merchant s and the mi ddl e class. These new ' bourgeoi si e' political economi st s vi ewed the declining rate of profit as significant cause for alarm, and rightfully so; the capitalist class they represented derived their revenue from profit, and thus a reduction of i ncome was seen as a threat to their increasingly influential status. The controversy over the Corn Laws had brought the conflict bet ween the landed interest and the new capitalist class to a critical level, and profit was now seen as the central issue. For the bourgeoi si e, profit constituted more t han mere revenue; it was the raison d'etre, the incentive for progress and invention. Ri cardo, who took up the theoretical argument on behal f of the capitalists, focused intently on defending the profit of this merchant class. Thus it became necessary for Ri cardo to address a question that Dobb saw arising ' nat ural l y' : 5 8 Smith, Wealth of Nations, 3 rd edition, p. 89. 44 In the 18 th century, when political economists like Adam Smith and David Hume were viewing the matter from the stance of the borrower of capital, the decline was seen as a healthy indication of a smoothly operating economy. Smith wrote in The Wealth of Nations, "The increase of stock, which raises prices, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in all ofthem."s8 Smith undoubtedly believed the decline of the rate of profit was attributed to the competition of capital, providing him with subjective evidence that unfettered healthy competition would eventually lead to a lower profit rate than would be found in a monopolistic system. This perception of the phenomenon underwent a radical shift with the revolution of a new influential class primarily composed of merchants and the middle class. These new 'bourgeoisie' political economists viewed the declining rate of profit as significant cause for alarm, and rightfully so; the capitalist class they represented derived their revenue from profit, and thus a reduction of income was seen as a threat to their increasingly influential status. The controversy over the Com Laws had brought the conflict between the landed interest and the new capitalist class to a critical level, and profit was now seen as the central issue. For the bourgeoisie, profit constituted more than mere revenue; it was the raison d'etre, the incentive for progress and invention. Ricardo, who took up the theoretical argument on behalf of the capitalists, focused intently on defending the profit of this merchant class. Thus it became necessary for Ricardo to address a question that Dobb saw arising 'naturally': 58 Smith, Wealth ojNations, 3'." edition, p. 89. 45 How can a fall in this revenue be a condition favorable to progress? If the system, by its own devel opment , generates a t endency for Profit to fall, is there not somet hi ng strangely contradictory about the system: is it not thereby defined as transitory, generating the seeds of its own retardation and decay? 5 9 Marx woul d later say that what worri ed Ri cardo was that the rate of profit mi ght be endangered by the devel opment of product i on itself. 6 0 Ri cardo did not deny that a t endency for the rate of profit to decline existed, but his defense of the capitalist class forced hi m to limit his search to external factors outside the capitalist system. The Ricardian School di smi ssed Smi t h' s theory i mpl yi ng competition (as well as an increase in wages) was to bl ame for a decline in profit, assigning the bl ame to the decreased productivity of capital in agriculture instead. Ri cardo, an adherent to the labor theory of value, t hought val ue itself depended upon the difficulty of production. He therefore conceptualized a relationship where the val ue of the net produce depended on the "proport i on of the social labor whi ch was required to procure the l aborer' s subsi st ence"; i.e., the difference bet ween wages and the val ue of the product . 6 1 This theory became known as the l aw of di mi ni shi ng returns. Ri cardo, who disagreed wi del y wi t h Thomas Mal t hus on several economi c issues, accepted, adopted, and applied Mal t hus' l aw of popul at i on to his own analysis. Ri cardo wrot e: "Whet her increased product i ons, and the consequent demand whi ch they occasi on, shall or shall not l ower profits, depends solely on the rise of wages; and the rise of wages, except i ng for a limited period, on the facility of produci ng the food and necessaries of the laborers. I say except i ng for a limited period, because no point is better established t han 5 9 Dobb, Political Economy and Capitalism, p. 83. 6 0 Marx, Capital, Vol. Ill, p. 304. 6 1 Dobb, Political Economy and Capitalism, pp. 84-85. 6 2 The law of diminishing returns refers to how the marginal contribution of a factor of production generally decreases as more of the factor is used. How can a fall in this revenue be a condition favorable to progress? If the system, by its own development, generates a tendency for Profit to fall, is there not something strangely contradictory about the system: is it not thereby defined as transitory, generating the seeds of its own retardation and decay?59 4S Marx would later say that what worried Ricardo was that the rate of profit might be endangered by the development of production itself. 60 Ricardo did not deny that a tendency for the rate of profit to decline existed, but his defense of the capitalist class forced him to limit his search to external factors outside the capitalist system. Thc Ricardian School dismissed Smith's theory implying competition (as well as an increase in wages) was to blame for a decline in profit, assigning the blame to the decreased productivity of capital in agriculture instead. Ricardo, an adherent to the labor theory of value, thought value itself depended upon the difficulty of production. He therefore conceptualized a relationship where the value of the net produce depended on the "proportion of the social labor which was required to procure the laborer's subsistence"; i.e., the difference between wages and the value of the product. 61 This theory became known as the law of diminishing returns. 62 Ricardo, who disagreed widely with Thomas Malthus on several economic issues, accepted, adopted, and applied Malthus' law of population to his own analysis. Ricardo wrote: "Whether increased productions, and the consequent demand which they occasion, shall or shall not lower profits, depends solely on the rise of wages; and the rise of wages, excepting for a limited period, on the facility of producing the food and necessaries of the laborers. I say excepting for a limited period, because no point is better established than 59 Dobb, Political Economy and Capitalism, p. 83. 60 Marx, Capital, Vol. III, p. 304. 61 Dobb, Political Economy and Capitalism, pp. 84-85. 62 The law of diminishing returns refers to how the marginal contribution ofa factor of production generally decreases as more of the factor is used. 46 that the supply of laborers will always ultimately be in proportion to the means of supporting t hem. " 6 3 If profit itself depended on bot h the cost of produci ng product s for subsistence and the cost of produci ng product s in general, then it is reasonabl e to consider the rate of profit as determined by the same t wo quantities. In Dobb' s words, "any factor whi ch influenced the rate of profit could do so only in so far as it altered this ratio of wages to the value of the gross pr oduce. " 6 4 If the demand for capital has infinite room for growth, t han there is no fundamental necessity demandi ng an inherent check on the increase of the rate of profit. Like the law of popul at i on itself, profit woul d be affected by "t he rise in the price of food and the consequent rise in the val ue of labor i t sel f' . 6 5 Thus Ri cardo saw no reason for the price of l abor-power to increase due to a deficient labor supply ("at least, not in the long run"), choosi ng instead to speculate that the laboring popul at i on woul d gladly accept any increased empl oyment opportunity whi ch mi ght accompany an increase in capital investment. In this case, there appeared no reason why an increase in investment capital should not be able to extract at least the same rate of profit as before, if not more profit. The only sufficient cause, therefore, of a fall in the rate of profit as capital accumul at i on proceeded could be the operation of some factor whi ch tended to raise the price of l abor-power by raising the value of the wor ker s' subsistence; and such a factor he saw in the law of di mi ni shi ng returns on l and. 6 6 Thi s concl usi on compl ement ed Ri cardo' s defense of the capitalist class versus the landed gentry quite nicely. In Ri cardo' s opinion, it had been ' satisfactorily proved' that the decline in profits woul d naturally arise without agricultural i mprovement s or the 63 Ibid., p. 86. 6 4 Dobb, Political Economy and Capitalism, p. 85 (Dobb's italics). 6 5 Letters of Ricardo to Malthus, 1810-23, p. 101. 6 6 Dobb, Political Economy and Capitalism, p. 87. 46 that the supply of laborers will always ultimately be in proportion to the means of supporting them.,,63 If profit itself depended on both the cost of producing products for subsistence and the cost of producing products in general, then it is reasonable to consider the rate of profit as determined by the same two quantities. In Dobb's words, "any factor which influenced the rate of profit could do so only in so far as it altered this ratio of wages to the value of the gross produce.,,64 If the demand for capital has infinite room for growth, than there is no fundamental necessity demanding an inherent check on the increase of the rate of profit. Like the law of population itself, profit would be affected by "the rise in the price of food and the consequent rise in the value of labor itself,.65 Thus Ricardo saw no reason for the price oflabor-power to increase due to a deficient labor supply ("at least, not in the long run"), choosing instead to speculate that the laboring population would gladly accept any increased employment opportunity which might accompany an increase in capital investment. In this case, there appeared no reason why an increase in investment capital should not be able to extract at least the same rate of profit as before, if not more profit. The only sufficient cause, therefore, of a/all in the rate of profit as capital accumulation proceeded could be the operation of some factor which tended to raise the price oflabor-power by raising the value of the workers' subsistence; and such a factor he saw in the law of diminishing returns on land. 66 This conclusion complemented Ricardo's defense of the capitalist class versus the landed gentry quite nicely. In Ricardo's opinion, it had been 'satisfactorily proved' that the decline in profits would naturally arise without agricultural improvements or the 63 Ibid., p. 86. 64 Dobb. Political Economy and Capitalism, p. 85 (Dobb's italics). 65 Letters of Ricardo to Malthlls, 1810-23, p. 101. 66 Dobb, Political Economy and Capitalism, p. 87. 47 importation of food, t wo conditions contrary to the l andowners' interests. He woul d go on to say that "t he interest of the landlord is al ways opposed to the interest of every other class of the communi t y. His situation is never as prosperous as when food is scarce and 67 dear: whereas all other persons are greatly benefited by procuri ng food cheap. " Mal t hus, who had taken up the position of defending the agricultural class against the capitalists, disagreed wi t h Ri cardo' s conclusion. He saw profits falling as a result of the fall in the price of commodi t i es due to deficient demandt he result of capital accumul at i on proceedi ng too rapidly. His vi ews, combi ned wi t h the writings of 68 Si smondi , became the mai n t heme for various doctrines of underconsumpt i on. Unde r c ons umpt i on When Political Economy and Capitalism was first published, economi c underconsumpt i on doctrines had become so popul ar that Dobb referred to t hem as ' vogue' . Instead of simply taking this theoretical canon for granted, Dobb asked a pertinent question; are economi c crises caused by conditions of underconsumpt i on? Dobb t hought that common sense woul d logically lead t hose "unt ouched by learned sophi st ri es" to a similar conclusion. But was it correct? Dobb assumed consumpt i on to be the ultimate end of production, and that the producer' s realization of profit was dependent on the sale of goods at the market . If the devel opment of individual industries was allowed to expand beyond the demand for their articles of product i on (goods), it is reasonable to assert the possibility of a general disproportion arising in the effective demand bet ween all consumabl e commodi t i es. In 6 7 Ricardo, Essay on the Influence of a Low Price of Corn on the Profits of Stock, p. 22. 6 8 Sismondi, who is credited with the discovery of economic cycles, thought unrestricted competition would force employers to cut prices and lower worker's wages, leading to the overproduction and underconsumption of goods. 47 importation of food, two conditions contrary to the landowners' interests. He would go on to say that "the interest of the landlord is always opposed to the interest of every other class of the community. His situation is never as prosperous as when food is scarce and dear: whereas all other persons are greatly benefited by procuring food cheap.,,67 Malthus, who had taken up the position of defending the agricultural class against the capitalists, disagreed with Ricardo's conclusion. He saw profits falling as a result of the fall in the price of commodities due to deficient demand-the result of capital accumulation proceeding too rapidly. His views, combined with the writings of Sismondi, became the main theme for various doctrines ofunderconsumption. 68 Underconsumption When Political Economy and Capitalism was first published, economic underconsumption doctrines had become so popular that Dobb referred to them as 'vogue'. Instead of simply taking this theoretical canon for granted, Dobb asked a pertinent question; are economic crises caused by conditions of underconsumption? Dobb thought that common sense would logically lead those "untouched by learned sophistries" to a similar conclusion. But was it correct? Dobb assumed consumption to be the ultimate end of production, and that the producer's realization of profit was dependent on the sale of goods at the market. If the development of individual industries was allowed to expand beyond the demand for their articles of production (goods), it is reasonable to assert the possibility of a general disproportion arising in the effective demand between all consumable commodities. In 67 Ricardo, Essay on the Influence ola Low Price of Corn on the Profits olS{ock, p. 22. 68 Sismondi, who is credited with the discovery of economic cycles, thought unrestricted competition would force employers to cut prices and lower worker's wages, leading to the overproduction and underconsumption of goods. 48 other words, if the market could only sustain a certain demand that all industries were produci ng beyond, t hen it is possible to conceptualize a situation wi t h insufficient demand for all commodi t i es. Underconsumpt i on woul d presumabl y follow. However, this was not the only cause of underconsumpt i on. Classical political economi st s had abstractly described a relationship bet ween i ncome and product i on, where total i ncome was always proportionate to total costs. In such a scenario, what can be said about saved and invested i ncome? Total i ncome mi ght be sufficient to cover the total cost of all consumpt i on goods produced if the whol e of that i ncome was in fact spent on consumpt i on goods. But if part of that i ncome was not spent, but saved, this saved portion of i ncome went to purchase, not consumpt i on goods, but producer' s goods whi ch woul d further augment the flow of consumpt i on goods in the future. If saving continued, where was the market to be for this additional flow of final product s, unless prices were to decline to a point where profit fell or even di sappear ed? 6 9 Dobb identified t wo traditional answers. The first came as a reply by Ri cardo in response to a proposition by Mal t hus. Ri cardo t hought that consumpt i on was transferred from one set of consumers to anot hert hat saving could be equated to an ext ensi on of the product i on process, whi ch in turn woul d provi de empl oyment for mor e workers, whose increase in i ncome woul d compel t hem to consume further. Hence saving does not automatically mean a decline in the demand for consumabl e goods. Even if one separated fixed capital from circulating capital, consumpt i on could potentially remai n stable. After all, the purchase of a machi ne implies a transfer of capital to the capitalist and laborers who produced the machi ne. Such an implication ultimately renders saving and consumpt i on as synonymous t erms, an allusion that has been central to political economy for hundreds of years. As Adam Smith had previously said, "what is annually Dobb, Political Economy and Capitalism, p. 91. 48 other words, if the market could only sustain a certain demand that all industries were producing beyond, then it is possible to conceptualize a situation with insufficient demand for all commodities. Underconsumption would presumably follow. However, this was not the only cause of underconsumption. Classical political economists had abstractly described a relationship between income and production, where total income was always proportionate to total costs. In such a scenario, what can be said about saved and invested income? Total income might be sufficient to cover the total cost of all consumption goods produced if the whole of that income was in fact spent on consumption goods. But if part of that income was not spent, but saved, this saved portion of income went to purchase, not consumption goods, but producer's goods which would further augment the flow of consumption goods in the future. If saving continued, where was thc market to be for this additional flow of final products, unless prices were to decline to a point where profit fell or even disappeared?69 Dobb identified two traditional answers. The first came as a reply by Ricardo in response to a proposition by Malthus. Ricardo thought that consumption was transferred from one set of consumers to another-that saving could be equated to an extension of the production process, which in turn would provide employment for more workers, whose increase in income would compel them to consume further. Hence saving does not automatically mean a decline in the demand for consumable goods. Even if one separated fixed capital from circulating capital, consumption could potentially remain stable. After all, the purchase of a machine implies a transfer of capital to the capitalist and laborers who produced the machine. Such an implication ultimately renders saving and consumption as synonymous terms, an allusion that has been central to political economy for hundreds of years. As Adam Smith had previously said, "what is annually 69 Dobb, Political Economy and Capitalism, p. 91. 49 saved is as regularly consumed as what is annually spent, and nearly in the same t i me 70 t oo; but it is consumed by a different set of peopl e. " If saving meant an i nvest ment in the ext ensi on of the product i on process, it woul d result in an increase in the product i on of consumabl e goods beyond what was originally demanded. Dobb found the second traditional reply in the answer to the following riddle: "what was to happen to the additional goods produced by the extra machi nes or the extra l abor er s?" 7 1 The logical answer implied that either the i ncome of society was enlarged t hrough the process, provi di ng more revenue for all involved (i.e., higher wages and profits), or that investing in machi nery woul d increase the output of goods whi l e decreasing the cost of production. Thi s woul d make consumabl e goods cheaper for consumers who could now purchase more of the goods, and thereby keep consumpt i on steady. Of course, this theory implied the mai nt enance of a vague level of proportionality bet ween the fall in price and the fall in product i on cost, but it worked sensibly within the abstract context the question was originally posed. Ma r x and Capi t al Accumul at i on Then, however, as seems the case wi t h most economi c conundrums of the age, Marx appeared and turned everyt hi ng on its head. Marx did not bother formulating a t horough response to what he considered the ' superficial' underconsumpt i on theory. He recogni zed Si smondi and Rodbert us had isolated demand from its multifaceted relationship wi t h production, and had thereby ignored the fact that conditions of distribution were the same as conditions of product i on, simply vi ewed from a different angle. In this case, underconsumpt i on could only be considered one facet of the probl em. 7 0 Smith, Wealth of Nations, p. 3 19. 7 1 Dobb, Political Economy and Capitalism, p. 93. 49 saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people." 70 If saving meant an investment in the extension of the production process, it would result in an increase in the production of consumable goods beyond what was originally demanded. Dobb found the second traditional reply in the answer to the following riddle: "what was to happen to the additional goods produced by the extra machines or the extra laborers?,,71 The logical answer implied that either the income of society was enlarged through the process, providing more revenue for all involved (i.e., higher wages and profits), or that investing in machinery would increase the output of goods while decreasing the cost of production. This would make consumable goods cheaper for consumers who could now purchase more of the goods, and thereby keep consumption steady. Of course, this theory implied the maintenance of a vague level of proportionality between the fall in price and the fall in production cost, but it worked sensibly within the abstract context the question was originally posed. Marx and Capital Accumulation Then, however, as seems the case with most economic conundrums of the age, Marx appeared and turned everything on its head. Marx did not bother formulating a thorough response to what he considered the 'superficial' underconsumption theory. He recognized Sismondi and Rodbertus had isolated demand from its multifaceted relationship with production, and had thereby ignored the fact that conditions of distribution were the same as conditions of production, simply viewed from a different angle. In this case, underconsumption could only be considered one facet of the problem. 70 Smith, Wealth of Nations, p. 319. 71 Dobb, Political Economy and Capitalism, p. 93. 50 Marx stressed the need for political economi st s to undergo a mor e rigorous analysis of capital accumul at i on. How could one assume capital accumul at i on was the det ermi nat e of the rate of profit wi t hout first underst andi ng capital accumul at i on itself? Al t hough Mar x' s own exami nat i on of the probl em of capital accumul at i on was left unfinished, Dobb found it to be ' sufficiently epoch-maki ng' to render it essential to any exami nat i on of economi c crises. Mar x' s critique rested on t wo crucial not i ons: 1) the separation of capital into "const ant " and "vari abl e" capital; 2) the concept of an "i ncrease of relative surplus- val ue. " 7 2 Earlier economi st s had somewhat underst ood the difference bet ween fixed and circulating capital for a single industry, but when vi ewi ng the economy as a whol e, t hey tended to revert back to the idea that all capital was reducible to a simple advance of wages to laborers. Mar x distinctly underst ood the difference bet ween fixed and circulating capital, but he considered this distinction less important than that whi ch existed bet ween constant and variable capital. Dobb explained constant capital as that "invested in equi pment or in stocks of raw mat eri al " while variable capital was capital "devot ed to the purchase of l abor-power as a current wages-fund. " This crucial distinction al l owed Mar x to state that the rate of profit was not dependent solely on the ratio of profit to wages. For instance, the influence of technological progress could lead to machi nery repl aci ng labor. Thi s woul d change the organic composi t i on of capital, effectively altering its proport i on in the direction of raising constant capital to variable Ibid., p. 94. Ibid., p. 96. 50 Marx stressed the need for political economists to undergo a more rigorous analysis of capital accumulation. How could one assume capital accumulation was the determinate of the rate of profit without first understanding capital accumulation itself? Although Marx's own examination of the problem of capital accumulation was left unfinished, Dobb found it to be 'sufficiently epoch-making' to render it essential to any examination of economic crises. Marx's critique rested on two crucial notions: 1) the separation of capital into "constant" and "variable" capital; 2) the concept of an "increase of relative surplus- value."n Earlier economists had somewhat understood the difference between fixed and circulating capital for a single industry, but when viewing the economy as a whole, they tended to revert back to the idea that all capital was reducible to a simple advance of wages to laborers. Marx distinctly understood the difference between fixed and circulating capital, but he considered this distinction less important than that which existed between constant and variable capital. Dobb explained constant capital as that "invested in equipment or in stocks of raw material" while variable capital was capital "devoted to the purchase of labor-power as a current wages-fund.,,73 This crucial distinction allowed Marx to state that the rate of profit was not dependent solely on the ratio of profit to wages. For instance, the influence of technological progress could lead to machinery replacing labor. This would change the organic composition of capital, effectively altering its proportion in the direction of raising constant capital to variable 72 Ibid., p. 94. 73 Ibid., p. 96. 51 capital. Hence the t endency of industrial progress was to l ower the rate of profit, even t hough there was no decrease in the rate of sur pl us- val ue. 7 4 In other words, Mar x t hought a decrease in the rate of profit was the general result of industrial progress, but that this relationship did not necessarily have to be so. He was aware of the existence of certain offsetting t endenci es that could push the rate of profit in an opposite direction, t hereby increasing relative surplus-value. This result could come about by i mprovi ng the productivity of industries engaged in produci ng the articles of human subsistence. A decrease in the necessary proport i on of the labor-force required to produce the subsistence of the entire labor popul at i on woul d lead to an increase in the rate of surplus-value. Thi s increased rate woul d lead to a decline of the val ue of commodi t i es in general, including the value of labor-power. Marx explained that the increase in surplus-value woul d come, ' by reason of the fact that a smaller port i on of the l aborer' s worki ng-day required to be empl oyed in replacing the val ue of his own labor- power and a larger portion of the worki ng-day remai ned to produce surplus-value for the capi t al i st ' . 7 5 Since the effects of technological progress could be felt in agriculture as well as industry, Mar x was able to dismiss the implication of the impact of di mi ni shi ng returns on the rate of profit and the appearance of economi c crises. The presence of counteracting t endenci es led Dobb to question if one t endency was more likely to prevail over the other. To answer this query, Dobb exami ned t wo different scenarios. The first assumed the existence of an infinitely elastic and unorgani zed labor-supply where "the field of exploitation could extend pari passu wi t h 7 4 Ibid., p. 97. 7 5 Ibid., p. 97. Ricardo had hinted at this prospect previously, but had been so involved with the debate against the agricultural land owners that he failed to consider the possibility seriously. 51 capital. Hence the tendency of industrial progress was to lower the rate of profit, even though there was no decrease in the rate of surplus-value. 74 In other words, Marx thought a decrease in the rate of profit was the general result of industrial progress, but that this relationship did not necessarily have to be so. He was aware of the existence of certain offsetting tendencies that could push the rate of profit in an opposite direction, thereby increasing relative surplus-value. This result could come about by improving the productivity of industries engaged in producing the articles of human subsistence. A decrease in the necessary proportion of the labor-force required to produce the subsistence of the entire labor population would lead to an increase in the rate of surplus-value. This increased rate would lead to a decline of the value of commodities in general, including the value of labor-power. Marx explained that the increase in surplus-value would come, 'by reason of the fact that a smaller portion of the laborer's working-day required to be employed in replacing the value of his own labor- power and a larger portion of the working-day remained to produce surplus-value for the capitalist'.75 Since the effects of technological progress could be felt in agriculture as well as industry, Marx was able to dismiss the implication of the impact of diminishing returns on the rate of profit and the appearance of economic crises. The presence of counteracting tendencies led Dobb to question if one tendency was more likely to prevail over the other. To answer this query, Dobb examined two different scenarios. The first assumed the existence of an infinitely elastic and unorganized labor-supply where "the field of exploitation could extend pari passu with 74 Ibid., p. 97. 7S Ibid., p. 97. Ricardo had hinted at this prospect previously, but had been so involved with the debate against the agricultural land owners that he failed to consider the possibility seriously. 52 capital accumul at i on. " 7 6 This elasticity woul d eliminate the necessity for the rate of profit to decline as industry progressed. It also provi ded no i mpet us for altering the organic composi t i on of capital. As the scenario repeated itself over multiple cycles, the product i on process woul d grow larger, but the proport i on bet ween variable and constant capital woul d remai n unchanged. The introduction of a mor e efficient piece of machi nery woul d act as a mot i ve for altering the composi t i on of capital, leading to an increase of constant capital and a reduction of variable capital. However, this change in composi t i on does not necessarily guarantee a fall in the rate of profit. If we assume this technological advance was applied t hroughout all product i ve industries, including those that produce the means of subsistence, conditions for the rate of profit to rise mi ght appear. A stable real -wage woul d lead to the cost of l abor-power declining along with the cost of all other commodi t i es, including the newl y introduced labor-saving machi nes. As Dobb put it, "the counteracting t endenci es t owards an increase of ' relative surplus- val ue' and to a ' cheapeni ng of the el ement s of constant capi t al ' may overbear the t endency to a decline in the rate of profit latent in the initial change in the ratio of constant to variable capi t al . " 7 7 Furthermore, the labor-saving innovations woul d have the additional effect of displacing laborers, resulting in an increase in the amount of labor- power in the market and a downward pressure on the wage-rat e. Dobb' s second exampl e assumed the exact opposite labor market scenario. In this case, ' relative over-popul at i on' was much smaller t han in the first exampl e, resulting in an inelastic labor supply. Dobb then added the additional assumpt i on that the labor supply was well organized, highly resistant to wage reductions, and capable of increasing Ibid., p. 111. Ibid., p. 113. 52 capital accumulation.,,76 This elasticity would eliminate the necessity for the rate of profit to decline as industry progressed. It also provided no impetus for altering the organic composition of capital. As the scenario repeated itself over multiple cycles, the production process would grow larger, but the proportion between variable and constant capital would remain unchanged. The introduction of a more efficient piece of machinery would act as a motive for altering the composition of capital, leading to an increase of constant capital and a reduction of variable capital. However, this change in composition does not necessarily guarantee a fall in the rate of profit. If we assume this technological advance was applied throughout all productive industries, including those that produce the means of subsistence, conditions for the rate of profit to rise might appear. A stable real-wage would lead to the cost oflabor-power declining along with the cost of all other commodities, including the newly introduced labor-saving machines. As Dobb put it, "the counteracting tendencies towards an increase of 'relative surplus- value' and to a 'cheapening of the elements of constant capital' may overbear the tendency to a decline in the rate of profit latent in the initial change in the ratio of constant to variable capital.,,77 Furthermore, the labor-saving innovations would have the additional effect of displacing laborers, resulting in an increase in the amount of labor- power in the market and a downward pressure on the wage-rate. Dobb's second example assumed the exact opposite labor market scenario. Tn this case, 'relative over-population' was much smaller than in the first example, resulting in an inelastic lahor supply. Dobb then added the additional assumption that the labor supply was well organized, highly resistant to wage reductions, and capable of increasing 76 Ibid., p. 111. 77 Ibid., p. 113. 53 their wage when the situation permitted. If this scenario was applied to the conditions commonl y found near the peak of an industrial boom, specifically when capital accumul at i on was increasing and the labor supply was becomi ng exhausted, the price of l abor-power is expect ed to rise (although not necessarily universally). "Capital accumul at i on, " Dobb observed, "is tending to out run any possible extension of the field of exploitation; and short of some means of intensifying the exploitation of the existing field, the rate of profit per unit of capital must fall." In this case, the lack of variable labor-supply will once again shift the organic composi t i on of capital t owards constant capital. If the machi nery was not t i me saving or more efficient than labor (and one mi ght assume it was not, ot herwi se it woul d have been introduced previously), then it is likely that the introduction of the necessary machi nery will turn out to be less profitable than it woul d have ot herwi se. Expect edl y, the different scenarios led to different results. Because neither scenario accurately describes the conditions on the ground, neither should be considered correct. Thus we cannot predict whi ch tendency woul d rule the other. Dobb' s interpretation of Mar x' s vision was that he "saw t endency and count er-t endency as el ement s of conflict out of whi ch the general movement of the system emerged: this conflict of forces achi evi ng a bal ance, and hence an even movement , only "by acci dent , " and hence promot i ng those sharp breaks of equilibrium, and their accompanyi ng fluctuations, whi ch in the concrete 79 ci rcumst ances of capitalist economy showed t hemsel ves as cri ses. " In other words, equilibrium bet ween the t wo forces is achieved almost mistakenly, as one 7 8 Ibid., p. 114. 7 9 Ibid., p. 110. 53 their wage when the situation permitted. If this scenario was applied to the conditions commonly found near the peak of an industrial boom, specifically when capital accumulation was increasing and the labor supply was becoming exhausted, the price of labor-power is expected to rise (although not necessarily universally). "Capital accumulation," Dobb observed, "is tending to outrun any possible extension of the field of exploitation; and short of some means of intensifYing the exploitation of the existing field, the rate of profit per unit of capital must fall.,,78 In this case, the lack of variable labor-supply will once again shift the organic composition of capital towards constant capital. If the machinery was not time saving or more efficient than labor (and one might assume it was not, otherwise it would have been introduced previously), then it is likely that the introduction of the necessary machinery will tum out to be less profitable than it would have otherwise. Expectedly, the different scenarios led to different results. Because neither scenario accurately describes the conditions on the ground, neither should be considered correct. Thus we cannot predict which tendency would rule the other. Dobb's interpretation of Marx's vision was that he "saw tendency and counter-tendency as elements of conflict out of which the general movement of the system emerged: this conflict of forces achieving a balance, and hence an even movement, only "by accident," and hence promoting those sharp breaks of equilibrium, and their accompanying fluctuations, which in the concrete circumstances of capitalist economy showed themselves as crises.,,79 In other words, equilibrium between the two forces is achieved almost mistakenly, as one 7R Ibid., p. 114. 79 Ibid., p. 110. 54 t endency accelerates past the other, movi ng from one disequilibrium point to another. What Dobb is trying to say is that within the confines of capitalism, equilibrium is reached bot h haphazardly and temporarily. Pr opor t i onal i t y Al t hough Mar x' s visualization of capitalism involved confliction and disproportion, it also implied that capital accumul at i on could proceed wi t hout causing any exchange issues as long as certain relationships were observed. He was quick to point out that capitalism, defined by the anarchy of product i on and absence of centralized controls, lacked any sufficient mechani sm to make sure these relationships were mai nt ai ned. The necessary relationships woul d only be preserved by ' acci dent ' ; any change in one of the mai n economi c forces, such as changes in t echni ques or the rate of 80 profit, woul d ' t end as a normal result to a rupture of equi l i bri um' . The atomistic nature of capitalism keeps each producer blind to the decisions of each other, maki ng market co ordination i mpossi bl e before crises. In capitalism, market coordination can only work to prevent crises after t hey have begun. A crisis appears as catharsis as well as retribution: as the sole mechani sm by whi ch, in this economy, equilibrium can be enforced, once it has been extensively br oken. 8 1 If capital accumul at i on is pl agued with a di scont i nuous increase, there will undoubt edl y be a period where the demand for consumer goods declines, leading to a decline in profit and an increase in unempl oyment . If the fall in activity occurs across the board for consumpt i on industries, it will impact the manufact uri ng industries. Trades that manufact ure i nst rument s of production for industries produci ng consumabl e goods rely 8 0 Ibid., p. 102. 8 1 Ibid., pp. 102-103. 54 tendency accelerates past the other, moving from one disequilibrium point to another. What Dobb is trying to say is that within the confines of capitalism, equilibrium is reached both haphazardly and temporarily. Proportionality Although Marx's visualization of capitalism involved confliction and disproportion, it also implied that capital accumulation could proceed without causing any exchange issues as long as certain relationships were observed. He was quick to point out that capitalism, defined by the anarchy of production and absence of centralized controls, lacked any sufficient mechanism to make sure these relationships were maintained. The necessary relationships would only be preserved by 'accident'; any change in one of the main economic forces, such as changes in techniques or the rate of profit, would 'tend as a normal result to a rupture of equilibrium' .80 The atomistic nature of capitalism keeps each producer blind to the decisions of each other, making market co- ordination impossible before crises. In capitalism, market coordination can only work to prevent crises after they have begun. A crisis appears as catharsis as well as retribution: as the sole mechanism by which, in this economy, equilibrium can be enforced, once it has been extensively broken. 81 If capital accumulation is plagued with a discontinuous increase, there will undoubtedly be a period where the demand for consumer goods declines, leading to a decline in profit and an increase in unemployment. If the fall in activity occurs across the board for consumption industries, it will impact the manufacturing industries. Trades that manufacture instruments of production for industries producing consumable goods rely 80 Ibid., p. 102. 81 Ibid., pp. 102-103. 55 on the demand for the latter. As Dobb realized, "when a fall in profit occurs in the consumpt i on trades this is likely to mean a fall in the demand for i nst rument s of product i on in a manner capable of resulting in a general crisis. " In this aspect, the under-consumpt i on theory has validity. Capital is often crystallized in particular forms that are adapted for specific uses, and if these uses are no longer in demand, the capital i mbedded in t hem becomes irrelevant. In such a system, the effects of a change in consumpt i on are transmitted "back along the stream of demand to all the intermediate 83 and constructional processes connected with it and adapted to it." Yet it is i mport ant to realize that although this series of event mi ght very well be the origin of a general crisis, there is no guarantee that it must be so; there is a chain of events that can lead to a crisis starting wi t hi n the manufacturing trades t hemsel ves. After revi ewi ng Ameri can economi c data, Dobb noted Professor J. M. Clark as concluding that observat i ons t ended to give wei ght to theories of consumers' demand following movement s in product i on of consumabl e goods. The mai n point is that the originating factor in a general crisis is disproportion) if either side of the equation becomes unbalanced, the entire syst em becomes susceptible to falling into a state of prolonged disequilibrium. Was capital accumul at i on to bl ame for theses di sproport i ons? Marx implicitly provi ded an answer by showi ng that capital accumul at i on could proceed wi t hout causing any probl ems within the sphere of exchange provi ded certain relationships held true. These relationships included those bet ween the capital-goods and consumpt i on-goods industries, the correlation of investment and consumpt i on, as well as the link bet ween the repl acement -demand of industries and the division of i ncome bet ween workers and 8 2 Ibid., p. 104. 8 3 Ibid., p. 104. 55 on the demand for the latter. As Dobb realized, "when a fall in profit occurs in the consumption trades this is likely to mean a fall in the demand for instruments of production in a manner capable of resulting in a general crisis."s2 In this aspect, the under-consumption theory has validity. Capital is often crystallized in particular forms that are adapted for specific uses, and if these uses are no longer in demand, the capital imbedded in them becomes irrelevant. In such a system, the effects of a change in consumption are transmitted "back along the stream of demand to all the intermediate and constructional processes connected with it and adapted to it."s3 Yet it is important to realize that although this series of event might very well be the origin of a general crisis, there is no guarantee that it must be so; there is a chain of events that can lead to a crisis starting within the manufacturing trades themselves. After reviewing American economic data, Dobb noted Professor lM. Clark as concluding that observations tended to give weight to theories of consumers' demand following movements in production of consumable goods. The main point is that the originating factor in a general crisis is disproportion; if either side of the equation becomes unbalanced, the entire system becomes susceptible to falling into a state of prolonged disequilibrium. Was capital accumulation to blame for theses disproportions? Marx implicitly provided an answer by showing that capital accumulation could proceed without causing any problems within the sphere of exchange provided certain relationships held true. These relationships included those between the capital-goods and consumption-goods industries, the correlation of investment and consumption, as well as the link between the replacement-demand of industries and the division of income between workers and 82 Ibid., p. 104. 83 Ibid., p. 104. 56 capi t al i st s. 8 4 In other words, capital accumul at i on coul d continue wi t hout necessarily leading to crises by mai nt ai ni ng a certain level of proportionality bet ween certain el ement s within the system. However, capitalism, wi t h its distinct laissez-faire approach, is characterized by qualities that i mpede structural proportionality. Therefore capitalism lacks the ability to keep certain necessary relationships proportional, maki ng crises an inherent side-effect of the ideology. Capi t al i sm I s . . . Early political economi st did not consider crises t o be caused by any inherent instability within the capitalist model , but Marx found t hem to be directly associated wi t h the essential features of capitalism. Marx distinguished t wo essential characteristics of capitalist economi es that caused i mbal ances that coul d potentially lead to economi c crises. The t wo fundamental characteristics of this economy were what he t ermed the "anarchy of product i on"t he atomistic diffusion of product i ve decisions among numerous aut onomous ent repreneursand the fact that it was a system of product i on not for consciously desi gned social ends but for profit. 5 The first characteristic, the so-called ' anarchy of product i on' , did not imply a product i on process that operated capriciously and chaotically. It si mpl y referred to a Of. process that operated wi t hout any central pl anni ng or direction. In other words, product i on decisions are determined independently by individual producers. It is as if each producer were blind and isolated. Of course, they do not operate in isolation, so treating the conditions as such could lead to unexpect ed results, including periodic 8 4 Ibid., p. 101. 8 5 Ibid., p. 80. 8 6 Dobb, Capitalism Yesterday and Today, p. 15. 56 capitalists. 84 In other words, capital accumulation could continue without necessarily leading to crises by maintaining a certain level of proportionality between certain elements within the system. However, capitalism, with its distinct laissez-faire approach, is characterized by qualities that impede structural proportionality. Therefore capitalism lacks the ability to keep certain necessary relationships proportional, making crises an inherent side-effect of the ideology. Capitalism Is ... Early political economist did not consider crises to be caused by any inherent instability within the capitalist model, but Marx found them to be directly associated with the essential features of capitalism. Marx distinguished two essential characteristics of capitalist economies that caused imbalances that could potentially lead to economic cnses. The two fundamental characteristics of this economy were what he termed the "anarchy of production"-the atomistic diffusion of productive decisions among numerous autonomous entrepreneurs-and the fact that it was a system of production not for consciously designed social ends but for profit. 85 The first characteristic, the so-called' anarchy of production', did not imply a production process that operated capriciously and chaotically. It simply referred to a process that operated without any central planning or direction. 86 In other words, production decisions are determined independently by individual producers. It is as if each producer were blind and isolated. Of course, they do not operate in isolation, so treating the conditions as such could lead to unexpected results, including periodic 84 Ibid., p. 101. 85 Ibid., p. 80. 86 Dobb, Capitalism Yesterday and Today, p. J 5. 57 disruptions. It was also the medi um for the so-called ' invisible hand' to appear, and was therefore responsible for the classical laws of the market to be described in their particular form. The second fundamental characteristic, that capitalism exists as a system of production of profit instead of for social devel opment , is a critical feature. Marx t hought this aspect was directly responsible for the pursuit of surplus-value, as well as the ci rcumst ances favoring its augment at i on on behalf of the domi nat i ng class that used this surplus as personal revenue. In the capitalist model , profit is seen as the singular mot i ve for production. To study economi c crises is to study the dynami cs of the economi c system as a whol e. Marx thought that the only way the syst em could be properly treated was by exami ni ng the form and movement s of specific class relations, as well as the class revenues whi ch acted as their market -expressi ons. Mar x felt Ri cardo and Say had neglected the fact that capitalism was not a syst em of social production, but of product i on of profit. They had concentrated exclusively on the i nt erdependence of supply and demand, and of product i on and consumpt i on, treating t hem as whol e identities, ignoring their i ndependent nature. They had speciously depicted the exchange process as CM C instead of accurately describing the capitalist exchange of MCM' , where capital 88 entered the product i on process specifically for an increase in capital. This process is suspended as soon as the conditions for realizing an expected profit are limited. Hence it was not the abstract limits to exchange, but the limits to investment and product i on at a certain rate of profit that was the relevant consi derat i on. 8 9 Dobb, Political Economy and Capitalism, pp. 80-81. M' refers to the original capital-value plus some level of surplus-value. Ibid., p. 115. 57 disruptions. It was also the medium for the so-called 'invisible hand' to appear, and was therefore responsible for the classical laws of the market to be described in their particular form. The second fundamental characteristic, that capitalism exists as a system of production of profit instead of for social development, is a critical feature. Marx thought this aspect was directly responsible for the pursuit of surplus-value, as well as the circumstances favoring its augmentation on behalf of the dominating class that used this surplus as personal revenue. In the capitalist model, profit is seen as the singular motive for production. To study economic crises is to study the dynamics of the economic system as a whole. Marx thought that the only way the system could be properly treated was by examining the form and movements of specific class relations, as wcll as the class revenues which acted as their market-expressions. 87 Marx felt Ricardo and Say had neglected the fact that capitalism was not a system of social production, but of production of profit. They had concentrated exclusively on the interdependence of supply and demand, and of production and consumption, treating them as whole identities, ignoring their indepcndent nature. They had speciously depicted the exchange process as C-M- C' instead of accurately describing the capitalist exchange of M-C-M', where capital entered the production process specifically for an increase in capital. 88 This process is suspended as soon as the conditions for realizing an expected profit are limited. Hence it was not the abstract limits to exchange, but the limits to investment and production at a certain rate of profit that was the relevant consideration. 89 87 Dobb, Political Economy and Capitalism, pp. SO-SI. 88 M' refers to the original capital-value plus some level of surplus-value. 89 Ibid., p. 115. 58 Capitalist product i on is the product i on of profit. This has serious implications for capitalist societies. As Marx put it, "there is periodically a product i on of t oo many means of product i on and necessities of life to permi t of their serving as means for the exploitation of the laborers at a certain rate of profit... (The capitalist mode of product i on) comes to a standstill at a point determined by the production and realization of profit, not by the satisfaction of social needs . " 9 0 If i nvest ment s lose even an iota of profitability, capital t ends to flock away in search of another, more profitable i nvest ment . An overall decline in the rate of profit could easily lead to a scarcity of i nvest ment capital, resulting in a rupture of the overall system. Therefore the rate of profit, and its t endency to fall, provi des the i mpet us for halting product i on in capitalist economi es. Profit for the few replaces progress for the entirety. The I ndus t r i al Res er ve Ar my The size of the labor-supply acts as a limiting factor for the creation of surplus- value, and thus Marx treated it as fundamental. Mar x' s take on crises was not that of ' transitional di sl ocat i on' but of shaping the subsequent long-term trend of the system, largely t hrough the influence of the crisis on the industrial reserve army. In Mar x' s eyes, "crises are al ways moment ary and forcible solutions of existing contradictions, violent eruptions whi ch restore the disturbed equilibrium for a whi l e. " 9 1 The size of the industrial reserve army increases duri ng crises due to the loss of empl oyment from the halt of production. This leads to a cheapeni ng of the price of l abor-power at a rate that is dependent on the strength of the wor ker s' resistance to wage cuts. Al t hough such wage reductions may deepen the crisis t hrough deflationary effects of reduced demand for 9 0 Marx, Capital, Vol. Ill, p. 303. 9 1 Ibid., p. 292. 58 Capitalist production is the production of profit. This has serious implications for capitalist societies. As Marx put it, "there is periodically a production of too many means of production and necessities of life to permit of their serving as means for the exploitation of the laborers at a certain rate of profit ... (The capitalist mode of production) comes to a standstill at a point determined by the production and realization not by the satisfaction of social needs.,,9o If investments lose even an iota of profitability, capital tends to flock away in search of another, more profitable investment. An overall decline in the rate of profit could easily lead to a scarcity of investment capital, resulting in a rupture of the overall system. Therefore the rate of profit, and its tendency to fall, provides the impetus for halting production in capitalist economies. Profit for the few replaces progress for the entirety. The Industrial Reserve Army The size of the labor-supply acts as a limiting factor for the creation of surplus- value, and thus Marx treated it as fundamental. Marx's take on crises was not that of 'transitional dislocation' but of shaping the subsequent long-term trend of the system, largely through the influence of the crisis on the industrial reserve army. In Marx's eyes, "crises are always momentary and forcible solutions of existing contradictions, violent eruptions which restore the disturbed equilibrium for a while.,,91 The size of the industrial reserve army increases during crises due to the loss of cmployment from the halt of production. This leads to a cheapening of the price 0 f labor-power at a rate that is dependent on the strength of the workers' resistance to wage cuts. Although such wage reductions may deepen the crisis through deflationary effects of reduced demand for 90 Marx, Capital. Vol. 11/, p. 303. 91 Ibid., p. 292. 59 consumabl e goods, it woul d also create the condition for an increased rate of surplus- value, thus prepari ng t he system for the resumpt i on of investment. It also acts as a count er-t endency for the previ ous adjustment in the organic composi t i on of capital, shifting away from machi nery t owards now-profitable labor. Thi s periodic use of the industrial reserve arm appears to act as resistance t owards any ' seri ous encroachment on capi t al -val ues' , compensat i ng itself for the decline in the rate of profit due to capital accumulation. Mar x considered it capi t al i sm' s own law of population. [This] expl ai ned unempl oyment and povert y as existing, not because human product i ve power s were insufficient to wrest a livelihood from nature, but by reason of the limits set to empl oyment and to wages by the condi t i ons for the extraction of surplus-value; not because popul at i on was redundant in any absolute sense, but because capital was redundant relatively to the possibilities of reaping 09 an expect ed rate of profit. Dobb implied that human bei ngs could solve the probl ems of unempl oyment and poverty, but chose not to. Capitalism, by design, ensures the continuation of these social ills. Dobb t hought the distinction bet ween extensive and intensive devel opment of the field of i nvest ment was of ' crucial i mport ance' for the history, devel opment , and ci rcumst ances surroundi ng crisis. It was also responsible for the changi ng form of the proletarian struggle at different stages of devel opment . Duri ng the Gol den Age of capitalism, the periodic recruitment of the industrial reserve army was sufficient for the intensive growt h of capital accumulation. The process of so-called ' pri mi t i ve accumul at i on' , where small producers, peasantry, and artisans were dispossessed of their means of product i on, allowed for capitalists to operate wi t hout fear of an increase in the wage-rat e. Dobb t hought that when recruitment into the industrial reserve army was 9 2 Dobb, Political Economy and Capitalism, p. 123. 59 consumable goods, it would also create the condition for an increased rate of surplus- value, thus preparing the system for the resumption of investment. It also acts as a counter-tendency for the previous adjustment in the organic composition of capital, shifting away from machinery towards now-profitable labor. This periodic use of the industrial reserve arm appears to act as resistance towards any 'serious encroachment on capital-values', compensating itself for the decline in the rate of profit due to capital accumulation. Marx considered it capitalism's own law of population. [This] explained unemployment and poverty as existing, not because human productive powers were insufficient to wrest a livelihood from nature, but by reason of the limits set to employment and to wages by the conditions for the extraction of surplus-value; not because population was redundant in any absolute sense, but because capital was redundant relatively to the possibilities of reaping an expected rate of profit. 92 Dobb implied that human beings could solve the problems of unemployment and poverty, but chose not to. Capitalism, by design, ensures the continuation of these social ills. Dobb thought the distinction bctwcen extensive and intensive development of the field of investment was of 'crucial importance' for the history, development, and circumstances surrounding crisis. It was also responsible for the changing form of the proletarian struggle at different stages of development. During the Golden Age of capitalism, the periodic recruitment of the industrial reserve army was sufficient for the intensive growth of capital accumulation. The process of so-called 'primitive accumulation', where small producers, peasantry, and artisans were dispossessed of their means of production, allowed for capitalists to operate without fear of an increase in the wage-rate. Dobb thought that when recruitment into the industrial reserve army was 92 Dobb, Political Economy and Capitalism, p. 123. 60 easy, crises ' whi l e sharp and vi ol ent ' were relatively short-lived and ' easy to cure' . But as the system devel oped, so did labor organization and class tension, compl i cat i ng the progress of exploitation. By the end of the 19 t h century, workers had become sufficiently organi zed as to resist periodic cheapeni ng of labor-power. Ne w social arrangement s became necessary, and as these new met hods became redundant and ineffective, further devel opment was needed to ensure the rate of profit remai ned relatively high. When brute force became t aboo, coercion became vogue. In Dobb' s words, "To-day capital sows dragons' teeth, alike in the home and in the colonial field; and the peopl e reap the har vest . " 9 3 I n Defense of Ma r x Al t hough the t endency for the rate of profit to fall had captured the attention of later theorists, including Dobb' s famed cont emporary J. M. Keynes, Dobb did not feel it necessary to describe their approaches is his t reat ment of economi c crises. Instead, Dobb chose to critically respond to Mar x' s detractors. It had been said that Mar x had failed to explain why a decrease in i nvest ment should result from a fall in the profit-rate, as well as why crises should be attributed to the failure of the rate of interest to fall, not to a falling rate of profit. Dobb quickly pointed out, "the practical implication of this emphasi s presumabl y bei ng that the trouble is not attributable to capitalism per se, but can be remedi ed by an appropriate monet ary policy whi ch, as i nvest ment proceeds, permi t s the rate of interest to fall pari passu. " 9 4 Mai nst ream cont emporary economi st s had rejected Mar x' s critique on capitalism, opting instead to apologize for and shroud the failings of their ideology. They limited their search for causes of economi c crises to 9 3 Ibid., p. 126. 9 4 Ibid., p. 117. 60 easy, crises 'while sharp and violent' were relatively short-lived and 'easy to cure'. But as the system developed, so did labor organization and class tension, complicating the progress of exploitation. By the end of the 19 th century, workers had become sufficiently organized as to resist periodic cheapening oflabor-power. New social arrangements became necessary, and as these new methods became redundant and ineffective, further development was needed to ensure the rate of profit remained relatively high. When brute force became taboo, coercion became vogue. In Dobb's words, "To-day capital sows dragons' teeth, alike in the home and in the colonial field; and the people reap the harvest. ,,93 In Defense of Marx Although the tendency for the rate of profit to fall had captured the attention of later theorists, including Dobb's famed contemporary 1.M. Keynes, Dobb did not feel it necessary to describe their approaches is his treatment of economic crises. Instead, Dobb chose to critically respond to Marx's detractors. It had been said that Marx had failed to explain why a decrease in investment should result from a fall in the profit-rate, as well as why crises should be attributed to the failure of the rate of interest to fall, not to a falling rate of profit. Dobb quickly pointed out, "the practical implication of this emphasis presumably being that the trouble is not attributable to capitalism per .'Ie, but can be remedied by an appropriate monetary policy which, as investment proceeds, permits the rate of interest to fall pari passu. ,,94 Mainstream contemporary economists had rejected Marx's critique on capitalism, opting instead to apologize for and shroud the failings of their ideology. They limited their search for causes of economic crises to 93 Ibid., p. 126. 94 Ibid., p. 117. 61 variables within the syst em, thereby protecting the system from critical exami nat i on. They focused their attention on how to solve a crisis once it had begun, and unsurprisingly, they found their answers in variables wi t hi n the system itself. Dobb t hought the attack on Mar x had more to do wi t h defending capitalism than intellectual progression. At no point did Mar x procl ai m that higher wages woul d prevent crises and cure depressi ons, or that insufficient consumpt i on was the mai n cause of economi c sl owdowns. He also never claimed that crises were caused by under-consumpt i on. Nonet hel ess, his analysis was and is often mi st aken as an underconsumpt i on theory. Al t hough it could not be denied that Marx had assumed the level of consumpt i on was a limiting factor on the realization of profits, he also thought that over-product i on only occurred when i nvest ment appeared without an accompanyi ng new source of consumpt i on. Dobb broke down t wo often cited passages by those who interpreted Mar x' s theory as one of under-consumpt i on. The first passage states: "The last cause of all real crises al ways remai ns the poverty and restricted consumpt i on of the masses, as compared wi t h the i mpul se of capitalist product i on to devel op the product i ve forces as if only the absolute power of consumpt i on of society were their l i mi t . " 9 5 Thi s statement on its own could certainly be construed as an under-consumpt i on theory, but Dobb thought that in vi ew of all that Marx has written el sewhere, specifically his repudiation of the Rodbert us vi ew of under-consumpt i on, the assumpt i on was false. The second passage goes as follows: The conditions of direct exploitation and t hose of the realization of surplus-value are not identical. They are separated logically as well as by t i me and space. The first is only limited by the productive power of society, the last by the 9 5 Marx, Capital, Vol. Ill, p. 568. 61 variables within the system, thereby protecting the system from critical examination. They focused their attention on how to solve a crisis once it had begun, and unsurprisingly, they found their answers in variables within the system itself. Dobb thought the attack on Marx had more to do with defending capitalism than intellectual progressIOn. At no point did Marx proclaim that higher wages would prevent crises and cure depressions, or that insufficient consumption was the main cause of economic slowdowns. He also never claimed that crises were caused by under-consumption. Nonetheless, his analysis was and is often mistaken as an underconsumption theory. Although it could not be denied that Marx had assumed the level of consumption was a limiting factor on the realization of profits, he also thought that over-production only occurred when investment appeared without an accompanying new source of consumption. Dobb broke down two often cited passages by those who interpreted Marx's theory as one of under-consumption. The first passage states: "The last cause of all real crises always remains the poverty and restricted consumption of the masses, as compared with the impulse of capitalist production to develop the productive forces as if only the absolute power of consumption of society were their limit.,,95 This statement on its own could certainly be construed as an under-consumption theory, but Dobb thought that in view of all that Marx has written elsewhere, specifically his repudiation of the Rodbertus view of under-consumption, the assumption was false. The second passage goes as follows: The conditions of direct exploitation and those of the realization of surplus-value are not identical. They are separated logically as well as by time and space. The first is only limited by the productive power of society, the last by the 95 Marx, Capital. Vol. III, p. 568. 62 proportional relations of the various lines of product i on and by the consumi ng power of society. The latter is not determined either by the absolute product i ve power nor by absolute consumi ng power, but by consumi ng power that is based on antagonistic condi t i ons of distribution, whi ch reduce the consumpt i on of the great mass of the popul at i on to a variable mi ni mum within more of less narrow l i mi t s. 9 6 Al t hough he did say the realization of surplus-value was det ermi ned by consumi ng power, Mar x was also saying consumpt i on was only one variable of the equation. Economi st s could not properly exami ne the relationship bet ween levels of consumpt i on and economi c crises wi t hout considering distribution. That said, Dobb did think Mar x had assumed an increase in consumpt i on to be the most enduri ng way of increasing profit. Thi s was partly due to an increase in the demand for future capital-goods, whi ch tended to delay the tendency for new t echnol ogy to lower the rate of profit. An increase in mass consumpt i on t hrough an increase in wages woul d have the effect of raising costs, thereby limiting the possibility for consumpt i on to increase proport i onat e to productivity. Increased investment altered the organic composi t i on of capital, a falling profit-rate for the near future. Vi ewed from this perspect i ve, consumpt i on became an ' i nci dent ' in the total setting. Al t hough the conflict bet ween productivity and consumpt i on was one facet of crises, Dobb t hought it was simply one element of the capitalist contradiction that found expression in a periodic breakdown of the system. [Marx] considered the contradiction within the sphere of product i ont he contradiction bet ween growi ng product i ve power, consequent on accumul at i on, and falling profitability of capital, bet ween the productive forces and the 97 productive relations of capitalist soci et yas the essence of the matter. Ibid., p. 287. Dobb, Political Economy and Capitalism, p. 121. proportional relations of the various lines of production and by the consuming power of society. The latter is not determined either by the absolute productive power nor by absolute consuming power, but by consuming power that is based on antagonistic conditions of distribution, which reduce the consumption of the great mass of the population to a variable minimum within more ofless narrow 1 . 96 Imlts. Although he did say the realization of surplus-value was determined by consuming power, Marx was also saying consumption was only one variable of the equation. Economists could not properly examine the relationship between levels of consumption and economic crises without considering distribution. 62 That said, Dobb did think Marx had assumed an increase in consumption to be the most enduring way of increasing profit. This was partly due to an increase in the demand for future capital-goods, which tended to delay the tendency for new technology to lower the rate of profit. An increase in mass consumption through an increase in wages would have the effect of raising costs, thereby limiting the possibility for consumption to increase proportionate to productivity. Increased investment altered the organic composition of capital, a falling profit-rate for the near future. Viewed from this perspective, consumption became an 'incident' in the total setting. Although the conflict between productivity and consumption was one facet of crises, Dobb thought it was simply one element of the capitalist contradiction that found expression in a periodic breakdown of the system. [Marx] considered the contradiction within the sphere contradiction between growing productive power, consequent on accumulation, and falling profitability of capital, between the producliveforces and the productive relations of capitalist the essence of the matter. 97 96 Ibid., p. 287. 97 Dobb, Political Economy and Capitalism, p. 121. 63 There are some who presume Marx based his theory of wages on the Mal t husi an l aw of popul at i on like Ricardo had, but this is an incorrect assessment. Mar x' s assumpt i on that wages stood at the subsistence level was only a ' first approxi mat i on' and no way an ' i ron l aw' . In this case, the relevant question is; what are the condi t i ons of the second approxi mat i on that prevents the price of l abor-power from increasing to the point where it equaled the val ue of the product ? What was to prevent capital accumul at i on, with the increasing demand for labor whi ch it engendered, from raising the wage level until surplus-value disappeared, so that capitalism of its own moment um should extinguish 98 the class inequality on whi ch it was reared? Mar x t hought capitalism had built in defensive mechani sms that protected the ideology from its own self-extinction and protected the status quo of the existence of class divisions. Specifically, Mar x thought the periodic recruitment of the industrial reserve army kept social stratification alive and well. This was not an ethical concl usi on of a moral question as much as a description of the system itself. Capitalist reactions included "t he t endency of capitalist economy to have a bias t owards "l abor-savi ng" changes, i.e. investing in machi nery that decreased the number of necessary laborers, as well as "the t endency for accumul at i on to be retarded and for i nvest ment to recoil when signs of any appreciable fall in the rate of profit appear ed. " 9 9 From the standpoint of capital, crises occur when wages are too high, but this stance assumes a certain mi ni mum return of capital as necessary for product i on to begi n with. Such an assumpt i on justified the policies that depressed wages to a point where the rate of profit could be considered ' t ol erabl e' to the capitalists. Ibid., p. 124. Ibid., p. 125. 63 There are some who presume Marx based his theory of wages on the Malthusian law of population like Ricardo had, but this is an incorrect assessment. Marx's assumption that wages stood at the subsistence level was only a 'first approximation' and no wayan 'iron law'. In this case, the relevant question is; what are the conditions of the second approximation that prevents the price of labor-power from increasing to the point where it equaled the value of the product? What was to prevent capital accumulation, with the increasing demand for labor which it engendered, from raising the wage level until surplus-value disappeared, so that capitalism of its own momentum should extinguish the class inequality on which it was reared?98 Marx thought capitalism had built in defensive mechanisms that protected the ideology from its own self-extinction and protected the status quo of the existence of class divisions. Specifically, Marx thought the periodic recruitment of the industrial reserve army kept social stratification alive and well. This was not an ethical conclusion of a moral question as much as a description of the system itself. Capitalist reactions included "the tendency of capitalist economy to have a bias towards "labor-saving" changes, i.e. investing in machinery that decreased the number of necessary laborers, as well as "the tendency for accumulation to be retarded and for investment to recoil when signs of any appreciable fall in the rate of profit appeared. ,,99 From the standpoint of capital, crises occur when wages are too high, but this stance assumes a certain minimum return of capital as necessary for production to begin with. Such an assumption justified the policies that depressed wages to a point where the rate of profit could be considered 'tolerable' to the capitalists. 98 Ibid., p. 124. 99 Ibid., p. 125. 64 Concl usi ons Inquiries into the cause of a declining rate of profit led early political economi st s to visualize crises as the result of underconsumpt i on. This consideration provi ded a foundation for future mai nst ream economi st s, who have continued to treat economi c crises along similar lines. Marx realized that the roots of the probl em lay not wi t h consumpt i on, but wi t h the system of capitalism itself. Karl Mar x' s groundbreaki ng analysis was percei ved as a direct threat to capitalist product i on, and t hus he was vilified by bot h capitalists and the intellectuals they empl oyed. Before Marx, economi st s had a limited perspective on why crises occurred, but after Marx, economi st s did what ever t hey could to figure out how to recover from crises. They were unabl e to prevent t hem from occurring as they failed to address the fundamental reasons why t hey happened in the first place. Capitalism is a collection of contradictory and conflicting forces that can only achieve bal ances accidently. It is a system that lacks coordination, wi t h traits such as the anarchy of product i on prohibiting it from keepi ng any coherent structure. Capi t al i sm by definition is a product i on process intended for profit, not social progression. Because of this, product i on stops at a point determined by profitability, not functionality. Even if an industry is still seeing a profitable return, there is no guarantee that capital will fund its existence, as it is not profitability but the rate of profit that is crucial. If a return on an investment is expected to be less profitable than it used to be, many capitalists will choose to hold on to their capital, waiting until a t i me when the rate of profit for their investment is ' sufficient' . Dobb thought it correct to say crises occur because the expected rate of profit was too high, agreeing wi t h Marx that "the real barrier of capitalist 64 Conclusions Inquiries into the cause of a declining rate of profit led early political economists to visualize crises as the result of underconsumption. This consideration provided a foundation for future mainstream economists, who have continued to treat economic crises along similar lines. Marx realized that the roots of the problem lay not with consumption, but with the system of capitalism itself. Karl Marx's groundbreaking analysis was perceived as a direct threat to capitalist production, and thus he was vilified by both capitalists and the intellectuals they employed. Before Marx, economists had a limited perspective on why crises occurred, but after Marx, economists did whatever they could to figure out how to recover from crises. They were unable to prevent them from occurring as they failed to address the fundamental reasons why they happened in the first place. Capitalism is a collection of contradictory and conflicting forces that can only achieve balances accidently. It is a system that lacks coordination, with traits such as the anarchy of production prohibiting it trom keeping any coherent structure. Capitalism by definition is a production process intended for profit, not social progression. Because of this, production stops at a point determined by profitability, not functionality. Even if an industry is still seeing a profitable return, there is no guarantee that capital will fund its existence, as it is not profitability but the rate of profit that is crucial. If a return on an investment is expected to be less profitable than it used to be, many capitalists will choose to hold on to their capital, waiting until a time when the rate of profit for their investment is 'sufficient'. Dobb thought it correct to say crises occur because the expected rate of profit was too high, agreeing with Marx that "the real barrier of capitalist 65 production is capital i t sel f. " 1 0 0 The periodic recrui t ment of the industrial reserve army helps to keep capitalism from going extinct, but it is really only effective for ensuring capitalists reap where they have never sown. When the system crosses the t hreshol d of disproportion, crises act as equilibrating forces, movi ng the system back to a point of functionality. Crises are therefore a necessary phenomenon in capitalism. Wi t hout t hem, the system woul d stop functioning entirely. Mauri ce Dobb' s revi ew of classical t akes on economi c crises was i mport ant in that it remi nded the reader that things did not simply appear as t hey are, but evolved slowly over t i me, changi ng to reflect different t hought s and conditions. Political economi st s often think crises can be avoided t hrough monet ary policies and changes in interest rates, but these are only second approxi mat i ons. The first approxi mat i on must be that capitalism can in fact work uninterrupted. If the goal of capitalism is simply harvesting surplus-value from one group for another, t hen it does work. However, if the objective of capitalism is to bring prosperity for all, it appears to have too many inconsistencies and contradictions to make achi evi ng the goal realistic. By revi ewi ng historical perspect i ves, Dobb called into question t hose failed to understand their own self-imposed limited scope. To study economi cs is to study the syst em in its entirety, including distribution. By ignoring fundamental variables, mai nst ream economi st s have failed to see the forest for the trees. They have operated quite elegantly within the box, but all of their movement s have become dependent on the confines of the box itself. Charles Darwi n once said, "Mat hemat i ci ans are like blind men in a dark room looking for a black cat whi ch i sn' t t here. " I think the same could be said about economi st s, except that the cat 1 0 0 Marx, Capital, Vol. Ill, p. 293. 65 production is capital itself."loo The periodic recruitment of the industrial reserve army helps to keep capitalism from going extinct, but it is really only effective for ensuring capitalists reap where they have never sown. When the system crosses the threshold of disproportion, crises act as equilibrating forces, moving the system back to a point of functionality. Crises are therefore a necessary phenomenon in capitalism. Without them, the system would stop functioning entirely. Maurice Dobb's review of classical takes on economic crises was important in that it reminded the reader that things did not simply appear as they are, but evolved slowly over time, changing to reflect different thoughts and conditions. Political economists often think crises can be avoided through monetary policies and changes in interest rates, but these are only second approximations. The first approximation must be that capitalism can in fact work uninterrupted. If the goal of capitalism is simply harvesting surplus-value from one group for another, then it does work. However, if the objective of capitalism is to bring prosperity for all, it appears to havc too many inconsistencies and contradictions to make achieving the goal realistic. By reviewing historical perspectives, Dobb called into question those failed to understand their own self-imposed limited scope. To study economics is to study the system in its entirety, including distribution. By ignoring fundamental variables, mainstream economists have failed to see the forest for the trees. They have operated quite elegantly within the box, but all of their movements have become dependent on the confines of the box itself. Charles Darwin once said, "Mathematicians are like blind men in a dark room looking for a black cat which isn't there." I think the same could be said about economists, except that the cat 100 Marx, Capital, Vol. 1/1, p. 293. 66 does exist. Capi t al i sm is an ideology, a set of abstract beliefs, but a system that has a very real impact on the lives of everyone involved. It is therefore an ideology that should be critiqued necessarily. If we are to assume the point of education is progression, then capitalism should not be defended blindly by the political economi st s who attempt to describe it. 66 does exist. Capitalism is an ideology, a set of abstract beliefs, but a system that has a very real impact on the lives of everyone involved. It is therefore an ideology that should be critiqued necessarily. Ifwe are to assume the point of education is progression, then capitalism should not be defended blindly by the political economists who attempt to describe it. SELECTED BI BLI OGRAPHY Bharadwaj , Kri shna. Cambridge Journal of Economics, Vol. 2. Cambri dge: Cambri dge University Press, 1978. Dobb, Mauri ce. Capitalism Yesterday and Today. London: Lawrence and Wishart, 1958. Dobb, Mauri ce. Political Economy and Capitalism. London: Greenwood Press Reprint, 1972. Dobb, Mauri ce. Theories of Value & Distribution Since Adam Smith. Ne w York: Cambri dge University Press, 1973. Hunt , E.K. History of Economic Thought: A Critical Perspective. Ar monk: M. E. Sharpe, 2002. Smith, Adam. The Wealth of Nations. Ne w York: P. F. Collier & Son, 1914. Myrdal , Gunnar. Das politische Element in der Nationalokonomischen Doktrinbildung Berlin: Ne w Press, 1932. Marx, Karl. Capital: A Critique of Political Economy, Volume III. Ne w York: Penguin Classics, 1993. Ri cardo, Davi d. Essay on the Influence of a Low Price of Corn on the Profits of Stock. Whitefish: Kessi nger Publishing, 2009. Ricardo, David. Letters of David Ricardo to Thomas Malthus, 1810-1823. Oxford: Cl arendon Press, 1887. SELECTED BIBLIOGRAPHY Bharadwaj , Krishna. Cambridge Journal of Economics, Vol. 2. Cambridge: Cambridge University Press, 1978. Dobb, Maurice. Capitalism Yesterday and Today. London: Lawrence and Wishart, 1958. Dobb, Maurice. Political Economy and Capitalism. London: Greenwood Press Reprint, 1972. Dobb, Maurice. Theories of Value & Distribution Since Adam Smith. New York: Cambridge University Press, 1973. Hunt, E.K. History of Economic Thought: A Critical Perspective. Armonk: M.E. Sharpe, 2002. Smith, Adam. The Wealth of Nations. New York: P.F. Collier & Son, 1914. Myrdal , Gunnar. Das politische Element in der Nationalokonomischen Doktrinbildung Berlin: New Press, 1932. Marx, Karl. Capital: A Critique of Political Economy, Volume Ill. New York: Penguin Classics, 1993. Ricardo, David. Essay on the Influence of a Low Price of Corn on the Profits of Stock. Whitefish: Kessinger Publishing, 2009. Ricardo, David. Letters of David Ricardo to Thomas Malthus, 1810-1823. Oxford: Clarendon Press, 1887.
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