The Language of Capitalism

Going back to David Ricardo, equality of wages and price occurs only when profit rate is zero when the economy reaches a “steady state” or when capital to labor ratio is constant (that is, the capital equipments which capitalists provide to their workers represent values created by other workers employed by other capitalists, hence capital-labor ratio must be constant in all industries if profit rate to reach zero). This tendency for capital-labor ratio to equalize is verifiable in the great depression when price of labor and capital is close to unity. In fact, studies conducted by Anwar Shaikh in 1947, two years after WW II, from the collection of 190 sectors by Wassily Leontif in the United States, show that the coefficient of variation of capital-labor ratio for non vertical industries is 1.14 and 0.6 for vertical industries. These ratios are close to unity and isn't it enough to confirm Marx's LTV. Moreover, this is further confirmed by Anwar Shaikh in his study of various industries in Italy which show that 92 percent of the temporal variation of prices of production explain the variation of relative values of labor.

Some recent economists like Cocchshott, Cottrel, Ochoa, and Petrovic have found empirical results in favor of Marx's LTV. Marx believes that capital equipments which capitalists provide to their workers merely represent values created by other workers who were exploited by other capitalists. Thus, the surplus value represents the sum of earnings paid out in the form of rents, profits, and interests that are actually generated by productivity of labor. It appears that Marx's LTV and of Ricardo's labor theory of price approximate “theory of prices” quite reliably and provide perhaps a better framework for empirical research than the classical model guided by the blind forces of the invisible hand. Both Marx and Ricardo recognize labor as the efficient means of production while capital and land as instruments.

Whether capitalism is practically necessary or otherwise, that is beside the point. Up to now Marx's LTV stays in solitary exile, yet, controversial questions remain specifically on the questions of surplus of labor value. After all, Marx and Ricardo simply use LTV for reasons of its connection with the distribution of the means of production with the thought that the economic system cannot be well conducted by WHOM but in what manner the economic activities are done to produce due effect

Albeit Marx's LTV is arithmetically difficult to quantify and be proven empirically, we can see its social relevance even if we cannot foresee its application. What we can possibly do as of now is to use the often misused neoclassical Cobb-Douglasproduction function ( Y = kxayb) as the mathematical model of the resource market of capital and labor (supply side of the economy) to show Marx's point. We need to balance this production function with the demand side (what people buy) using the GNP equation Y = C + I + G + X-M. The two equations describe the aggregate supply and demand which jointly determine both prices and output and with more interpretations determine wages, interests, rents and other stuff. What makes the equations appealing is not only that they seem to match each other (adjustment of prices in the economy ensures that what is produced is what is demanded) they also seem to match with empirical data.

However, when using Cobb-Douglas production function to represent aggregate supply of the economy, caution should be considered on its inherent assumptions as follows: (a) constant return to scale, (b) elasticities and cost shares, (c) diminishing return to capital and labor, and (d) complementarity between capital and labor. The assumption on constant return to scale represents the sum of elasticities/coefficient of capital a (lumped by neoclassical economists with land) and labor b equal to one. This means if we increase labor and capital equi-proportionately we get the same proportionate increase in income (GNP). The coefficients a and b as the neoclassical suggest represents the contribution of each factor input labor and capital to GNP. As such they demonstrate the sources of economic growth which I will show later do not. They also do not match with the distribution of output (income in monetary terms) to the factors of production. The coefficients suggest that doubling the total factor productivity leads to the doubling of output and to no change in income in the form of wages, interest, and rents. To demonstrate this let me use the empirically established Cobb-Douglas production function and equate it with national income

Y = A* K0.3 L0.7 = GDP (C + I G + X-M)

The coefficients 0.3 and 0.7 are parameters of labor (L) and capital (K) in the economy. The fact that the exponents on L and K sum to 1 ensures constant return toscale which means that if we double L and K, the output doubles. Conversely if we reduce L and K by half, the output reduces to one half but the coefficients 0.3 and 0.7 remain the same. This means that the 70 % share of labor and 30 % of capital to GDP are the same irrespective of output level. This is a graceful proportion. But the neoclassical economists presume that quantities and prices of input and output are determined simultaneously and mutually in all markets with tastes, technologies, and endowments as given data. Hence, the allocation of inputs via production processes ending up as consumer goods are determined by equilibrium prices. In such case, if market is in equilibrium, costs of production tend toward market prices of commodities.