no third solution

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Category Archives: Economic Theory

Marx’s General Formula for Capital

February 2nd, 2009

In Chapter 4 of Capital, Marx begins to discuss the transformation of money into capital.

Marx imagines two sorts of abstract circuits of exchange: C-M-C’ and M-C-M’. In the former, Peter brings to market a commodity, C, and sells it in exchange for money, which he then uses to purchase another commodity, C’. In the latter, Paul brings to market money, M, and sells it in exchange for a commodity, C, which he then sells in order to obtain M’.

From the former Marx concludes that, “The circuit C-M-C comes completely to an end, so soon as the money brought in by the sale of one commodity is abstracted again by the purchase of another,” which is to say that Peter has exchanged one commodity for another commodity of equal value. In the latter circuit Marx objects to the “surplus value” created by capitalist Paul, who merely exchanged £100 for £110, the difference of £10 being “surplus value”.

Now let us examine the circuit M-C-M a little closer. It consists, like the other, of two antithetical phases. In the first phase, M-C, or the purchase, the money is changed into a commodity. In the second phase, C-M, or the sale, the commodity is changed back again into money. The combination of these two phases constitutes the single movement whereby … a commodity is bought with money, and then money is bought with a commodity. The result, in which the phases of the process vanish, is the exchange of money for money, M-M. If I purchase 2,000 lbs. of cotton for £100, and resell the 2,000 lbs. of cotton for £110, I have, in fact, exchanged £100 for £110, money for money

At least two objections come immediately to mind:

  1. The M in C-M-C may at any time be either M or M’ in the circuit M-C-M, and that as such, these are not independent circuits but rather interlocking parts of a greater whole.
  2. What Marx is really describing is an arbitrageur, although painted as a thief and usurer.

In the first instance, Peter does not keep the money he receives any longer than is needed for his own security. He may of course immediately effect the C-M-C by exchanging the money he receives for another commodity item. Or, he may enter into an M-C-M circuit, exchanging the money for a commodity, to which he adds his labor over a period of time, the completed product which he expects to exchanges for M’ in the future. The farmer, for instance, spends money M on the purchase of new seeds, stock and tools with which to work the soil, in hopes of selling them in the future for M’.

Is the lack of transformation (as in the example of the farmer) what riles Marx? If so, this is barely worthy of scorn: where the farmer creates value, the arbitrageur has at the very least prevented the destruction of value, thus allowing its creator to realize value in exchange far greater than he could’ve on his own accord. The “capitalist” function in this instance is, if nothing else, Pareto efficient. One must not lose sight of the fact that the arbitrageur performs a valuable service of allocating scarce resources across an economy. Without the “capitalist” in Marx’s M-C-M circuit, the commodity is sold at a steep discount (if it is in-fact sold at all) and the most urgent need as measured by opportunity cost remains entirely unsatisfied. The problem of “surplus value”, posed by the M-C-M appears only as a result of Marx’s imaginary demarcation.

In the real world, C-M-C and M-C-M, are indistinguishable parts of a complex economy, in which economizing individuals are to some extent, constantly in the midst of performing both roles.  Even Marx’s vulgar capitalist holds and acquires money in order to satisfy some future need to consume.

Or, to put it another way, even the vulgar capitalist, at some time in the past had to provide valuable goods; he had to contribute materially to the economy in order to earn that first chunk of money, which Marx scorns.  What he does with it after that is of no man’s concern but his own.

Marx and the Secret of Primitive Accumulation

February 1st, 2009

Marx’s exploitation theory relies in part on the so-called crime of primitive accumulation, without which one struggles to explain the class dichotomy between the haves and the have-nots so crucial to the exploitation theory. The secret of primitive accumulation posits that the economic sins of some people have condemned them and their progeny to the hell of labor, whereas the economic virtues of the others have placed them in a situation far superior to that of the former, viz., in accordance with their virtues, the virtuous have become vicious and themselves worthy of condemnation:.

In times long gone-by there were two sorts of people; one, the diligent, intelligent, and, above all, frugal elite; the other, lazy rascals, spending their substance, and more, in riotous living. The legend of theological original sin tells us certainly how man came to be condemned to eat his bread in the sweat of his brow; but the history of economic original sin reveals to us that there are people to whom this is by no means essential. Never mind! Thus it came to pass that the former sort accumulated wealth, and the latter sort had at last nothing to sell except their own skins. And from this original sin dates the poverty of the great majority that, despite all its labour, has up to now nothing to sell but itself, and the wealth of the few that increases constantly although they have long ceased to work.

This condemnation neglects to account for entrepreneurial failure in a competitive economy, rather, it assumes that capital itself is self-perpetuating: having become possessed of capital one need only sit back and watch wealth multiply (violating the laws of thermodynamics, the idea of self-perpetuating capital is so patently absurd as to deserve no further consideration).

Marx ignores competition between capitalists in a free market (the type of place no “Capitalist” wants to be!), the basis of which should tend towards generally less “exploitative” working conditions, as it would be in any individual capitalist’s best interest (economically speaking) to deviate from the oligopoly’s practices, and therefore even in light of primitive accumulation, one must question how the the oligopoly came to exist, in the absence of a state or pseudo-state. Both Marx and Rodbertus before him observed that some members of the working class will accomplish success, and that these successes are occasionally to be tolerated by the capitalists in order to preserve the illusion of freedom, but as a general rule, he neglects the possibility of entrepreneurship among the proletariat, by means of which they may lift themselves from the alleged depths of poverty they are forced to endure.

And yet we know from experience, that individuals of humble backgrounds have created fortunes with little more than an idea, and that capitalists do fail: fortunes are squandered, resources mis-allocated, projects undertaken which never fulfill their plans of grandeur, etc.

In other news: Marx is damn near unreadable.

The Paradox of Economic Modeling

January 26th, 2009

The Economist recently issued a “special report on the future of finance.” I’m going to comment on a few of these articles in the coming days.

The section on the failure of mathematical modeling was really interesting.

Benoît Mandelbrot, the mathematician who invented fractal theory, calculated that if the Dow Jones Industrial Average followed a normal distribution, it should have moved by more than 3.4% on 58 days between 1916 and 2003; in fact it did so 1,001 times. It should have moved by more than 4.5% on six days; it did so on 366. It should have moved by more than 7% only once in every 300,000 years; in the 20th century it did so 48 times.

In Mr Mandelbrot’s terms the market should have been “mildly” unstable. Instead it was “wildly” unstable.

Many models assume something close to “normal” distribution.  Mandelbrot’s analysis suggests that the distribution is anything but “normal”.

Models are interesting descriptors, but not necessarily as predictors. Even a reasonably “accurate” model only works until it becomes widely accepted, at which point its assumptions become increasingly divorced from reality. When everyone is using the same model, if the model suggests you should buy, you’ll find there are no willing sellers. The other paradox of modeling, is that if you could accurately ascertain the value of X at some time in the future, the prediction would be invalidated by free market arbitrage:

Assume that the price of a commodity at time T0 $500/unit. Let’s assume that you know that the price of a commodity will be $1000/unit at some time (Tf) in the future. Of course, you would like to buy a bunch of $500/commodity at T0 and hold it until Tf, selling it for a riskless profit.

However, as you begin buying at T0, and as others following that model also begin buying, the price should rise, and as long as there is opportunity for “riskless” profit (i.e., the price at Tf minus price at T0 > opportunity cost) the price will continue to rise until it reaches its limit, the $1000 discounted for time preference. The process of arbitrage can occur very rapidly in a free and liquid market.

The paradox is this: because you “knew” the future value would be $1000, the now value is $1000 and a new future value must be established.

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