Understanding Capital.pdf

8/14/2019 Understanding Capital.pdf

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American Economic Association

Understanding Capital: Marx's Economic Theory. by Duncan K. FoleyReview by: John E. RoemerJournal of Economic Literature, Vol. 28, No. 4 (Dec., 1990), pp. 1727-1730Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/2727452.

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Book Reviews 1727The new material that economists are likelyto find of greatest interest is in Chapter 6, whichis an eskay on nuclear safety, written with Eliza-beth Nichols. One of the more interesting prob-lems noted by the authors is that testing of

nuclear reactors can often be counterproduc-tive. One would like to ensure that the dieselgenerators for these reactors that might becalled upon in an emergency will be able toprovide sufficient back-up power; but, unfortu-nately, testing of these generators may actuallymake them less dependable after the test.Wildavsky focuses only briefly on the kindsof tradeoffs that are most prominent in treat-ments of risk issues by economists. In particu-lar, Chapter 4 provides a discussion of the costsper life saved for various government policies.However, since this material is based on hiscitation of previous surveys of regulatory agen-cies' value of life that were published more thana decade ago and were based on regulationspromulgated even earlier, it does not provideas up-to-date a treatment of these issues as isavailable elsewhere.From the standpoint of the author's majortheme, this drawback is not essential since theprimary intent is to document the multiple risktradeoffs we face and the importance of eco-nomic growth to improvements in health. Read-ers will find here a diverse and eclectic seriesof examples to support this general view.Some economists might have wished thatWildavsky had gone even farther in his advo-cacy of tradeoffs. Since the U.S. Office of Man-agment and Budget now requires that all riskregulation agencies assess both the benefits andcosts of their regulatory efforts, it may be thatin some cases government risk regulation prac-tices already recognize tradeoffs that go beyondthose advocated here.Although it does not break new economicground, this book provides a useful introductionto risk regulation issues for governmental offi-cials and undergraduates. Furthermore, thefact that it has aroused considerable controversyamong sociologists and political scientists sug-gests that there is a pressing need for additionalrisk management education. Reading Searchingfor Safety would be a good place for these peo-ple to start. W. KiP Viscusi

Duke University

030 HISTORY OF ECONOMIC THOUGHT;METHODOLOGY

Understanding capital: Marx's economic the-ory. By DUNCAN K. FOLEY. Cambridge, MAand London: Harvard University Press, 1986.Pp. viii, 183. $20.00, cloth; $8.50, paper.ISBN 0-674-92088-0, pbk. JEL 87-0376In this succinct yet encompassing book, Dun-can Foley presents his interpretation of Marx'seconomic theory, including his own resolutionof some of the famous paradoxes or inconsisten-cies in the theory. The book should be compre-hensible to the upper-division student and willbe instructive to any reader, as it is the mostcodified and clear expression available of Fo-ley's contribution to Marxist economic theory.Marx based his analysis of the capitalist econ-omy on the labor theory of value (LTV)-inher-ited, with amendment, from Ricardo. His de-velopment of the LTV gave many insights intocapitalism, but also produced some paradoxesand results that seem wrong when confrontedwith modern tools of economic analysis. Themost common reaction of economists has beento discard Marxian economics because of theseparadoxes or mistaken conclusions (Samuelson1971). There have been, in my view, two nota-

ble minority reactions: (1) to admit that Marx'sLTV is wrong in many aspects, but to showthat some of his essential insights about capital-ism can be demonstrated in models that do notassume the LTV (Morishima 1973; Cohen 1979;Roemer 1982, 1988; Elster 1985); and, (2) toretain the LTV as central, but to reinterpretit in a way that allows resolution of the para-doxes/mistakes. Foley's book is, I think, the bestexample of the latter approach. In what follows,I shall contrast these two approaches to Marxisteconomics on four questions.Property rights and exploitation

Foley writes: If you do not accept the postu-late that labor produces the whole value added,you will not see much basis for the claim thatwage-labor is exploitative. I think this is themain reason that the labor theory of value hasfallen into disrepute among orthodox econo-mists (p. 39). Foley's solution is to stick towhat he views as the Marxist guns, namely,the aforementioned postulate. The approach ofCohen (1979) and Roemer (1982, 1988) is to

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1728 Journal of Economic Literature, Vol. XXVIII (December 1990)view value added as produced by both laborand capital, and to say that the distribution ofthat part of it which is surplus to the currentwages of workers depends upon propertyrights. In this view, labor is exploited in capital-ism not because some of the product that italone produces is expropriated from it, butrather because the property rights that give cap-italists a right to part of the product jointly pro-duced by labor and capital are illicit.I think that as Foley frames it, the chargeof exploitation is not credible, because his keyunderlying postulate is not credible.Preserving the LTV and the transformationproblem

In Marx'sview, at the highest level of abstrac-tion, prices should be proportional to the laborembodied in commodities. (This is one facetof the LTV.) If there are several sectors of pro-duction, this assumption is inconsistent withthe equalization of profit rates across sectors,an equilibrium condition driven by competitionof capital. The transformation problem con-sisted in showing how some of the other facetsof the LTV could be maintained while derivinga theory of prices in which profit rates are in-deed equalized.Consider a two sector economy, producingsteel and wheat, with a Leontief technologyin which steel and labor are inputs into bothwheat and steel. The usual representation ofthe price equations are:

Ps= (1 + r)(p,a, + wl,) (1)Pw= (1 + r)(p,a. + wl.), (2)where r is the rate of profit, (a, Is) are the (steel,labor) inputs into the production of steel, etc.There are thus far two equations in four un-knowns (ps, p. r, w). Normalization of pricescan reduce this to three unknowns. How shouldthe system be closed? Morishima's answer wasto assume a real wage of b (in wheat, say) forworkers, and to close the system with:

w = pwb. (3)His argument that this procedure has a goodMarxist pedigree was that this theory of pricesand the profit rate preserved (as a theorem)the statement that a positive profit r is onlyconsistent with a positive rate of exploitation

of workers. A facet of the LTV was therebymaintained.Foley, however, thinks Morishima gives uptoo much of the LTV. Foley's procedure is totreat two parameters as given: the money wage,w, and the hours of labor per dollar value addedin the economy-call this m, Foley's value ofmoney. He adds an equation stating that thetotal value-added (in dollars) per unit labor ex-pended should equal m:m[(p - p,aS)S + (Pw - pa)W]= ls + lW, (3)where (S,W) is the total production of (steel,wheat). (This is a version of Foley's equation(6.7), adapted to the present notation.) GivenS, W, m, and w, prices and the profit rate arenow determined. Foley argues for the Marxistpedigree of this procedure because it preserveswhat he believes to be an important facet ofthe LTV, namely that the amount of labor perdollar valued added is preserved when 'trans-forming' prices from ones proportional to laborvalues to ones that equalize the rate of profit-as given by (1), (2), and (3').I cannot understand the economic motivationfor Foley's (3'). It seems to me to be a deusex machina whose purpose is to maintain certainclaims of the LTV. I can see a general equilib-rium model of a capitalist economy in whichequation (3) appears (as the budget constraintof a worker); but I do not see a general equilib-rium model in which (3') expresses some realconstraint on economic activity.The falling rate of profit (FRP)

Ricardo argued for a falling rate of profit ina corn economy based upon diminishing returnsto labor in the corn industry. Marx proposeda FRP theory that did not depend upon dimin-ishing returns, but rather upon technologicalchange involving increased capital inputs. Sup-pose there is a Leontief technology (constantreturns) for producing corn, whose (corn, labor)input coefficients are (a, 1). Okishio (1961) ar-gued that technological change with a constantreal wage of b units of corn per unit labor wouldnecessarily cause the rate of profit tv rise.Briefly, if with the old technology we have:p= (1 + r) (pa + wl) (4)

pb = w (5)



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Book Reviews 1729and then a new technology (a',l') appears, thencapitalist corn growers will introduce it, ceterisparibus, if it lowers unit costs, i.e., if:

pa' +wl' 0). From (12), we see that if a increases to a',and wm does not decrease, then the rate ofprofit falls: that is, r < r. Now wm is the valueof labor-power, the number of hours embodiedin the corn the worker can purchase with hiswage (p. 36). What Foley has shown is that, ifthe value of labor-power does not decrease,then rational capitalist innovation will cause therate of profit to fall.To be methodologically acceptable, bothOkishio's assumption of a constant real wage(as technology changes) and Foley's assumptionof a constant (or nondecreasing) value of laborpower should be short cuts to a full generalequilibrium analysis, or class-struggle analysis,of the relationship between the purchasing

power of labor and technical change. (Foleyagrees that neither procedure can replace a fulltheory.) I see the Okishio assumption of a con-stant real wage as grounded in a possible sce-nario of a real economy: if labor is abundantrelative to capital in a fixed coefficient technol-ogy, then the real wage will arguably be biddown to some fixed real alternative that workershave outside the capitalist sector (e.g., whatthey could earn returning to the subsistencefarm). This real wage will remain fixed withtechnological change in the capitalist sector (as-suming, always, a relative scarcity of capital).I see no such economic scenario justifying theassumption of a nondecreasing value of laborpower.Socialism

Foley is quite insistent that Marx viewed so-cialism as a society in which money and com-modity production (production for exchange,not use) were not predominant (p. 163). Per-haps so. Yet Foley nowhere challenges Marx'sview, that is, nowhere suggests that socialismmight be compatible with a market economyand commodity production. In my view, social-ism-which means the democratic control ofthe social surplus (profits) by the mass of peoplewho produce it, rather than by a class of capital-ists who come to own it under relations of pri-vate property in capital-is compatible with amarket economy. Public ownership, that is tosay, is compatible with a market (though not alaissez-faire) economy, in which profits are allo-cated to citizens by a political process, and thegovernment intervenes to influence the patternof investment. If I were to believe what appearsto be Foley's view, that socialism is incompati-ble with commodity production, then I wouldconclude socialism is either impossible orgrossly inefficient in any complex economy.This issue was not so imminent when Foleywas writing his book as it is now, after the Fallof 1989. Does Foley conceive of a feasible so-cialism?Finally, Chapter 5 on the reproduction ofcapital is an original and transparent reconstruc-tion of Marx's views on the possibility of bal-anced growth in a capitalist economy. With Fo-ley's help, Marx emerges as a brilliant pioneerof the two sector growth model. This chapter



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1730 Journal of Economic Literature, Vol. XXVIII (December 1990)is, I think, the single best rendition in Englishof what Capital, Volume II, was trying to ac-complish.

Understanding Capital is clearlywritten, andthe economic models are no more complex thannecessary. It displays at work a talented eco-nomic theorist and a serious historian of eco-nomic thought. I have proposed some chal-lenges, as an innovative work deserves no less,and because I believe, but cannot here amplifyupon, that one's views on these matters, andon the real nature of capitalism and socialism,are closely intertwined.JOHN E. ROEMERUniversity of California, Davis

REFERENCESCOHEN, G. A. 1979. The LabourTheory of Valueand the Concept of Exploitation, PhilosophyandPublicAffairs, 1979, 7, pp. 338-60.ELSTER, JON. Making sense of Marx. Cambridge:CambridgeU. Press, 1985.MORISHIMA, MicHio. Marx's economics. Cambridge:CambridgeU. Press, 1973.OKISHIO, N. Technical Change and the Rate ofProfit, Kobe U. Econ. Rev., 1961, 7, pp. 86-99.ROEMER, J. E. A general theory of exploitationandclass. Cambridge, MA: Harvard U. Press, 1982.. Free to lose: An introduction o Marxisteco-

nomic philosophy. Cambridge, MA: Harvard U.Press, 1988.SAMUELSON, PAUL. Understandinghe MarxianNo-tion of Exploitation:A Summaryof the So-CalledTransformation roblem Between MarxianValuesandCompetitive Prices, J. Econ. Lit., June 1971,9(2), pp. 399-431.Ricardo's economics: A general equilibrium the-ory of distribution and growth. By MICHIO

MORISHIMA. New York and Melbourne:Cambridge University Press, 1989. Pp. viii,254. $39.50. ISBN 0-521-36630-5.JEL 90-0044Attempts at mathematical reformulation ofRicardo's economics have a history stretchingback over more than one hundred and fiftyyears. Starting with William Whewell's first at-tempt in the 1830s, beginning to be better ap-preciated these days, down to Morishima'spresent book, theorists of great distinction havetried to dissect Ricardo's classic Principles ofPolitical Economy and Taxation in a mathemati-cal fashion. There are good reasons for this.

Apart from the complexity of Ricardo's argu-

ment relating value to growth, his reason-ing resembled a form of verbal algebra, whichinvited the application of explicit mathematicaltechniques. That these reformulations haveturned out to vary considerably (some are criti-cally reviewed in Morishima's book), suggeststhat Ricardo may have had in mind more thanone model.Before the 1950s, probably the most remark-able contribution on value theory was madeby Dmitriev, the Russian economist, whose ob-scure work formed the acknowledged basis ofLadislaus von Bortkiewicz' long paper onValue Calculation and Price Calculation inMarx, a paper that shed as much light on Ri-cardo as on Marx and incidently did not fail todo justice to J. S. Mill's early essays on politicaleconomy. While Bortkiewicz' paper is still ofinterest, there is little doubt that a large partof the recent revival of interest in Ricardo'seconomics is due to Piero Sraffa, especially asthe result of his introduction to Volume 1 ofRicardo's Collected Works, edited with the as-sistance of Maurice Dobb. Since its publicationin 1960, Sraffa'sbook, Production of Commodi-ties by means of Commodities, has been a fur-ther landmark in this area.While Sraffa'sattempted reconstruction of Ri-cardo's value analysis has been very influential,Sraffa left out the explicitly dynamic compo-nents of Ricardo's economics. That job was per-formed to a certain extent by Luigi Pasinetti'svaluable article published in 1960. However,Pasinetti's mathematical analysis was simplifiedby a number of assumptions, such as a fixwage hypothesis, absence of a production lagin agriculture, and adherence to a labor theoryof value. Morishima has generalized Pasinetti'sdynamic analysis in a number of useful direc-tions but most notably by relaxing the assump-tion of a labor theory of value as well as byexplicating the time structure involved in Ricar-do's production theory. This has made it possi-ble to have an extensive discussion of the ma-chinery question in Ricardo, which deviatesfrom the presentation given by John Hicks inCapital and Time by stressing interindustrialrepercussions.Morishima's book seeks to establish a directintellectual lineage between Ricardo, Marx,and Walras. His analysis on this point wouldnot find favor with economists who draw a rigid


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