University of Southern California Dissertations and Theses

On The Theory Of Value And Market Syndicalism

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On The Theory Of Value And Market Syndicalism

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Content 70-23,172
M cG R A TH , W illiam T errence, 1939-
0N T H E T H E O R Y O F V A L U E A N D M A R K E T SYNDICALISM.
U n iv ersity o f Southern C a lifo r n ia , Ph.D.,
1970
Economics, theory
University Microfilms, A XEROX Company, Ann Arbor, Michigan
O N THE THEORY OF V A LU E A N D
M ARKET SYNDICALISM
by
W illiam T erre n c e McGrath
A D is s e r t a tio n P re s e n te d to th e
FACULTY OF THE G RA D U A TE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In P a r t i a l F u lf illm e n t o f th e
R eq u irem en ts f o r th e Degree
DOCTOR OF PHILOSOPHY
(Economics)
Ja n u a ry 1970
UNIVERSITY O F SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA 9 0 0 0 7
This dissertation, written by
under the direction of Dissertation Com
mittee, and approved by all its members, has
been presented to and accepted by The Gradu
ate School, in partial fulfillment of require
ments of the degree of
D O C T O R OF P H IL O S O P H Y
Dean
n„,„ January 1970
DISSERTATION COMMITTEE
■ hairtnan
I
A C K N O W LED G EM EN TS
F in a n c ia l su p p o rt f o r t h i s stu d y was p ro v id e d by a
g enerous C anada C o u n cil Award. I am in d e b te d to th e e n t i r e
econom ics f a c u l ty o f th e U n iv e rs ity o f S outhern C a l i f o r n i a
fo r t h e i r in d iv i d u a ll y g iv en tim e and i n t e r e s t t h a t made my
g ra d u a te s tu d y in econom ics a v ery e n jo y a b le e x p e rie n c e
and p a r t i c u l a r l y to th e members o f my d i s s e r t a t i o n commit^-
te e who w ere m ost generous in p ro v id in g h e l f u l s u g g e s tio n s .
i i
TABLE OF CONTENTS
CHAPTER PAGE
I . INTRODUCTION.......................................................................... 1
Background .......................................................................... 1
S ta te m e n t o f th e Problem .......................................... 2
The Legacy in th e L i t e r a t u r e ................................. 2
C e n tra liz e d S o c ia lism .......................................... 2
D e c e n tra liz e d S o c ia lis m .......................................... 5
O rg a n iz a tio n a l B ehavior o f E n te r p r is e s . . 8
D e f in itio n o f Terms ................................................... 9
O rg a n iz a tio n o f th e S t u d y ...................................... 10
I I . A REVIEW OF VALUE THEORY............................................... 12
In tro d u c tio n ...................................................................... 12
Adam S m i t h .......................................................................... 12
Theory o f V a l u e ........................................................ 12
The Labor-Command Theory C o n tra d ic tio n . . 14
The C o st Theory o f V a l u e ...................................... 15
D avid R i c a r d o ................................................................ 16
R e p u d iatio n o f Adam S m i t h ................................. 16
R ic a rd o 's Route ........................................................ 17
R icard o and th e Labor T h e o r y ............................ 17
CHAPTER PAGE
K a rl M a r x .......................................................................... 19
R e la tio n s h ip t o Sm ith and R ic ard o . . . . 19
Use V a lu e , Exchange V alue and Commodity
F e t i s h i s m ................................................................. 19
S u rp lu s V alue, th e R ate o f P r o f i t and th e
R ate o f E x p l o i t a t i o n .......................................... 24
The U t i l i t y Theory o f C h o i c e .................................... 31
The C o n c e p t .................................................................. 31
U t i l i t y T heory, P ric e and G en e ral
E q u i l i b r i u m ..................................... 33
I I I . V ALUE THEORY, IDEOLOGY A N D ECONOMIC EFFICIENCY 35
H e u r is tic v e rsu s S c i e n t i f i c V alue Theory . . 35
C r itiq u e o f C la s s ic a l V alue T heory ..................... 36
Adam S m i t h ...................................................................... 36
D avid R i c a r d o ............................................................. 36
K arl M a r x ...................................................................... 37
Shortcom ings o f th e L abor T heory o f V alue . 39
C r itiq u e o f N e o c la s s ic a l V alue Theory . . . 39
Towards a S c i e n t i f i c V alue T heory . . . . 39
The S u p e r io r ity o f U t i l i t y T heory . . . . 40
The A p o lo g e tic N ature o f U t i l i t y Theory . 41
The R a tio n a le f o r P r iv a te S u rp lu s V alue
in C a p i t a l i s m ............................................................. 42
C a p i t a l ........................................................................... 43
L a n d .................................................................................... 44
i v
CHAPTER PAGE
Risk and E n t r e p r e n e u r s h i p ................................. 45
S u m m a ry ............................................................................... 45
IV. . THE PRICING O F THE FACTORS OF PRODUCTION A N D
THE DISTRIBUTION OF THE R E TU R N S....................... 47
The T a s k ............................................................................... 47
Labor—W a g e s...................................................................... 48
O b j e c t i v e s ...................................................................... 48
I n s t i t u t i o n a l l y D eterm in ed Wage D if f e r
e n t i a l s ...................................................................... 48
M arket D eterm ined Wage D i f f e r e n t i a l s . . . 49
Wages and I n c e n t i v e s ............................................... 50
S u rp lu s on L a b o r ........................................................ 51
C a p ita l— I n t e r e s t ........................................................ 52
The P riv a te Consum ption R ate o f I n t e r e s t . 52
The P u b lic Consum ption R ate o f I n t e r e s t . 53
The P ro d u c tiv ity o f In v e stm e n t R ate o f
I n t e r e s t ...................................................................... 55
The P u b lic C onsum ption, In v e stm e n t and
A llo c a tiv e R ate o f I n t e r e s t ....................... 57
The In v estm en t Fund A llo c a tio n Mechanism . 57
S u rp lu s on C a p i t a l .................................................... 58
Land—R ent . .................................................................. 59
The C oncept and D e f in iti o n o f R ent . . . . 59
The Problem and P o s s ib le S o lu tio n s . . . . 61
The M e c h a n is m ............................................................. 62
v
CHAPTER PAGE
E n tre p re n e u rs h ip , R isk — P r o f i t ............................ 64
C o n c l u s i o n s ...................................................................... 67
V. THE THEORY OF THE SOCIALIST F IR M ............................ 69
The O b j e c t i v e ................................................................. 69
S im u la tin g P ure C o m p e t i t i o n ................................. 69
The M o d e l ....................................... .......................... 69
C ritiq u e o f th e M o d e l .......................................... 71
S u m m a ry ........................................................................... 75
The Theory o f th e S o c i a l i s t C o o p e ra tiv e . , 75
In tro d u c tio n ................................................................. 76
The Ward M o d e l............................................................. 76
The Domar M o d e l ........................................................ 82
A R e a l i s t i c T heory o f th e C o o p e ra tiv e . . 91
M oderate S h o rta g e o f L abor ................................. 91
P u re ly C o m p etitiv e O u tp u t and
M o n o p so n istic L abor M arket ............................ 94
Im p e rfe c t O utput M arket and M o n o p so n istic
Labor M a r k e t ............................................................. 95
Abundant S upply o f L a b o r ...................................... 96
Im p lic a tio n s o f th e M o d e l ................................. 100
C o n c l u s i o n s ...................................................................... 100
V I. A GENERALIZED M ODEL A N D THE ROLE OF THE
CENTRAL PLANNING BOARD............................................... 102
The R ole o f th e S upply o f L abor Curve . . . , 102
v i
CHAPTER PAGE
The Model G e n e ra liz e d .............................................. 104
S h o rt Run— The C a p i t a l i s t F i r m ............................. 104
S h o rt Run— The C o o p e r a tiv e ................................. 105
D eterm in in g C o o p e ra tiv e E ffic ie n c y ................... 107
A M oderate L abor S h o rtag e ................................. 107
A bundant L abor ............................................................ 109
The Second O rder C o n d itio n s ............................ 112
The P a th s to C o o p e ra tiv e E ffic ie n c y . . . . 112
A lte r in g th e Number o f F i r m s ................................. 113
A lte r in g P r ic e s ....................................................... 116
The R ole o f th e C e n tr a l P lan n in g Board . . . 119
E lim in a te d F u n c tio n s .............................................. 119
The C .P .B . F u n c tio n s .............................................. 120
C o n c l u s i o n s ..................................................................... 121
V II. OVERALL SUMMARY...................................................................... 122
APPENDIX: THE DETERMINANTS OF SAVINGS IN CAPITALISM 127
The H y p o t h e s i s ................................................................. 127
E v a lu a tio n o f R e g re ssio n R e s u lts ............................. 129
N otes on M e th o d o lo g y ........................................................ 130
The V a ria b le s R e g re ssed .......................................... 131
R e g re ssio n Summary ............................................................. 135
BIBLIOGRAPHY.............................................................................................. 138
v i i
TABLE
I .
I I .
I I I .
LIST OF TABLES
PAGE
The T ra n sfo rm a tio n o f V alues i n t o P ric e s . . 2 8
M arx 's C a lc u la tio n o f th e A verage R ate o f
P r o f i t ........................... ................................................... 29
R e g re ssio n Summary................................................................. 135
v m
LIST OF FIGURES
FIGURE PAGE
5-A. E q u ilib riu m o f th e C o lle c tiv e w ith P a ra m e tric
P ric e s and th e E f f e c t o f an In c re a s e in
F ix ed C o s t s ...................................................................... 78
5-B . E f f e c t o f an In c re a s e in O utput P r ic e in th e
Ward M o d e l ...................................................................... 81
5-C . E f f e c t o f an In c re a s e in O utput P r ic e in th e
Domar M o d e l...................................................................... 83
5-D . E f f e c t o f an In c re a s e in F ix ed C o sts in th e
Domar M o d e l...................................................................... 85
5 -E . E f f e c t o f an In c re a s e in O utput P r ic e in th e
A d ju ste d Domar Model ............................................... 88
5 -F . E f f e c t o f an In c re a s e in F ix ed C o sts in th e
A d ju ste d Domar Model ............................................... 89
5-G . N o n -F u n ctio n in g C o o p erativ e ....................................... 92
5-H . S h o rtag e o f Labor C o o p e ra tiv e .................................. 93
5 - 1 . A bundant L abor C o o p e r a t i v e ....................................... 97
6-A . The T hree P o s s ib le Supply o f L abor C urves to
th e C o o p e r a tiv e ............................................................. 103
6-B . L abor S h o rtag e C o o p erativ e ....................................... 108
6-C . L abor Abundant C o o p erativ e ....................................... 110
FIGURE Page
6-D. E f f e c t of a D ecrease in th e Number o f
C o o p e ra tiv e s on th e L abor S h o rtag e
C o o p e r a tiv e ...................................................................... 114
6-E . E f f e c t o f an In c re a s e in th e Number o f
C o o p e ra tiv e s on th e Labor Abundant
C o o p e r a tiv e ...................................................................... 115
x
CHAPTER I
INTRODUCTION
I . BA CK G RO U N D
"One can n e v e r have s o c ia lis m ; one i s a s o c i a l i s t . "
T his p ro v o c a tiv e p ro v e rb can be in te r p r e t e d as m an's con
s t a n t se a rc h f o r b e t t e r m ethods o f a c h ie v in g human e q u a lity
and m a te ria l abundance. In a tte m p tin g to b u ild a com
p le te ly new p a th to th o s e g o a ls , s o c ia lis m has o fte n
ig n o red th e to o ls t h a t th e o th e r m ajo r s o c ia l system , c a p i
ta lis m , h as d e v e lo p ed . In d e e d , c a p ita lis m has adopted more
o f th e to o ls o f s o c ia lis m f o r a c h ie v in g m a te ria l abundance
and e g a lita r ia n is m th a n v ic e v e r s a . C u rre n tly , how ever,
th e lik e lih o o d o f c r o s s - p o l l i n a t i o n i s in c re a s in g . S o c ia l
i s t academ ia h a s been a d v o c a tin g and im plem enting th e meth
odology and d is c o v e r ie s o f c a p i t a l i s t c o u n te rp a rts in a l l
d is c ip li n e s o f th e s o c i a l s c ie n c e s .
I n th e econom ics b ra n c h , th e problem s o f econom ic
c a lc u la tio n , c o o r d in a tio n and c o n tro l have rev iv e d an o ld
d eb a te on the w orth o f th e m arket system v ersu s c e n t r a l iz a
t i o n . S in ce th e r a m if ic a tio n s o f t h i s c o n tro v e rsy are
c lo s e to i n f i n i t e , t h i s s tu d y w il l em brace only th e a s p e c ts
1
2
o f th e d e te rm in a tio n o f v a lu e , econom ic e f f ic ie n c y and th e
d i s t r i b u t i o n o f w e a lth .
The p red o m in a n t s o c i a l i s t group (M arxist) condemned
th e c a p i t a l i s t r o u te to abundance and e q u a lity due to i t s
r e lia n c e on th e m a rk e t mechanism f o r p ro v id in g econom ic
s ti m u li, c a l c u l a t i o n , c o o rd in a tio n and c o n tr o l. Y e t, i r o n
i c a l l y , a movement to w ard a q u a s i c a p i t a l i s t m arket mechan
ism i s o c c u rrin g among s o c i a l i s t econom ists w h ile a case
may be made t h a t th e o p p o s ite i s tr u e o f c a p ita lis m .
The in c r e a s in g s e v e r ity o f th e problem s o f econom ic
s ti m u li, c a l c u l a t i o n , c o o rd in a tio n and c o n tro l in c e n t r a l l y
p lan n ed s o c i a l i s t econom ies and th e f a ilu r e o f c a p ita lis m
to a d e q u a te ly d e a l w ith th e problem s o f developm ent, i n f l a
tio n and econom ic e q u a l i t y , seem to in d ic a te th a t each sor-
c i a l system h as u n iq u e ly s u p e rio r to o ls in s o lv in g some
problem s b u t i s d e f i c i e n t w here th e o th e r i s s tro n g .
I I . STATEMENT OF THE PROBLEM
Can an o p e r a t io n a ll y e f f i c i e n t s o c i a l i s t econom ic
system be c r e a t e d , b a se d on a c o o p e ra tiv e in d u s tr y s t r u c
t u r e , t h a t i s f a i t h f u l to i t s v a lu e id eo lo g y ? The c r ite r io n
o f e f f ic ie n c y w i l l be t h a t o f i t s c a p i t a l i s t c o u n te r p a r t.
I I I . THE LEGACY IN THE LITERATURE
C e n tra liz e d S o c ia lis m
The dev elo p m en t o f l i n e a r program m ing and in p u t-
3
o u tp u t a n a ly s is and i t s su b se q u en t grow th in to th e a c t i v i t y
a n a ly s is ap p ro ach to s o lv in g many econom ic p ro b lem s, p r o r
v id e d c e n tr a liz e d s o c ia lis m w ith a r a t i o n a l m ethodology on
a t h e o r e t i c a l l e v e l.^ L. V. K a n to ro v ic h 's p u b lic a tio n in
1939 o f M ath em atical Methods o f O rg a n iz a tio n and P ro d u c tio n
d em o n strate d t h a t th e a l lo c a tio n o f s c a rc e re s o u rc e s i n an
economy c o u ld be o p tim a lly d eterm in ed by c a lc u l a ti n g o r
im p u tin g shadow p r ic e s b ased on an exogenous o b je c tiv e
2
fu n c tio n and f ix e d te c h n ic a l c o e f f i c i e n t s .
Many eco n o m ists c o n s id e r t h a t a c t i v i t y a n a ly s is
com pensates f o r th e in a d e q u a c ie s o f th e m a rg in a l c o n c ep ts
in d e s c r ib in g th e c o n d itio n s o f p ro d u c tio n t h a t p r e v a i l in
i n d u s t r i e s .^ They co n ten d t h a t f a c to r s o f p ro d u c tio n a re
n o t s u b s t i t u t a b l e , making p ro d u c tio n fu n c tio n s d is c o n tin ^
uous and hence n o n - d if f e r e n t ia b le .
Y e t, th e a p p lic a tio n o f a c t i v i t y a n a ly s is in cen^
t r a l l y p la n n e d econom ies to s o lv e th e problem s o f econom ic
^•Vida, T. C. Koopmans ( e d . i , A c tiv ity A n a ly s is o f
P ro d u c tio n and A llo c a tio n , Cowles Commission Monograph
No. 13 (New Y ork: W iley, 195 1 ).
^L. V. K an to ro v ic h , "M athem atical Methods o f O rga
n iz in g and P la n n in g P ro d u c tio n ," Management S c ie n c e , VI
( J u ly , 1 9 6 0 ), 366-422.
^L. M alinvaud, A c tiv ity A n a ly sis in th e Theory o f
Growth and P la n n in g , L. M alinvaud and M. V. L. B acharach
(e d s .) (New Y ork: M acm illan, 1967), p . v i i i .
c a lc u l a ti o n w ith r e s p e c t to s c a rc e re s o u rc e s h as demon
s t r a t e d many sh o rtco m in g s.
1. A c tiv ity a n a ly s is does n o t p ro v id e a n a t u r a l
stim u lu s f o r in d iv id u a l o r e n t e r p r i s e p e r ’ -
fo rm an ce.
2. C e n tr a liz e d c a lc u la tio n n e c e s s i t a t e s c e n t r a l
iz e d c o o rd in a tio n and c o n tr o l w hich has pro v en
to be o p e r a tio n a lly v ery burdensom e.
3. C e n tr a liz a tio n o f c a lc u l a ti o n , c o o rd in a tio n
and c o n tr o l i s c o s tly in term s o f th e re s o u rc e s
t h a t a re u t i l i z e d in p e rfo rm in g th e s e f u n c tio n s
and th e com m unications tim e in v o lv e d in cen^
t r a l i z e d a d m in is tra tio n .
4. The problem o f d e te rm in in g th e o u tp u t a s s o r t s
ment o f th e economy demands t h a t th e c e n t r a l
iz e d body have know ledge o f in d iv id u a l p ro d u c t
demand sc h e d u le s w hich a re d i f f i c u l t to a s c e r
t a i n a p r i o r i .
5. J u s t as th e c o n d itio n s o f p ro d u c tio n t h a t p r e
v a i l in in d u s tr ie s may n o t be d e s c rib e d by
smooth is o q u a n t c u rv e s , th e y may a l s o n o t be
d e s c rib e d by l i n e a r i t y . P ro d u c tio n c o e f f i
c ie n ts a ls o may n o t be th e same among firm s in
an in d u s tr y .
5
The f i r s t fo u r m entioned sh o rtco m in g s have le d
s o c i a l i s t c o u n trie s to c a u tio u s ly reexam ine th e m arket
mechanism f o r p ro v id in g econom ic s t i m u l i , c a l c u l a t i o n , co -
o r d in a tio n and c o n tr o l.
D e c e n tra liz e d S o c ia lism
D uring th e l a t e 1 9 2 0 's and e a r ly 1 9 3 0 's , many c a p i
t a l i s t eco n o m ists adhered to th e p o s it io n t h a t s o c ia lis m
was a r e l a t i v e l y i n e f f i c i e n t econom ic sy stem in th e o ry and
some even w ent as f a r as a d v o c a tin g t h a t s o c ia lis m as an
econom ic system would n o t w ork. Ludwig von M ises contended
t h a t an e f f i c i e n t a llo c a tio n o f re s o u rc e s in a s o c i a l i s t i c
s t a t e w ould be im p o ssib le w ith s t a t e o w nership o f th e means
o f p ro d u c tio n and th e absence o f a m ark et f o r c a p i t a l to
e s t a b l i s h c a p i t a l p r ic e s . No c r i t e r i a w ould e x i s t to en
s u re t h a t c a p i t a l would be a llo c a te d to th e m ost p r o f i t a b l e
p ro d u c tiv e a l t e r n a t i v e . 4
E n ric o Baron some tw e n ty -fiv e y e a rs e a r l i e r f o l
lowed a P a re to s u g g e s tio n t h a t mere a c c o u n tin g p r ic e s (and
n o t n e c e s s a r ily money p r ic e s ) as d e te rm in e d by a s e t o f
sim u lta n e o u s e q u a tio n s co u ld t h e o r e t i c a l l y s o lv e t h i s p ro b -
lem . Von M ises p ro b a b ly f e l t t h a t t h i s was n o t a p r a c tic a l
^Ludwig von M ise s, "Economic C a lc u la tio n in th e
S o c i a l i s t Commonwealth," C o l l e c t i v i s t Economic P la n n in g ,
e d . F. H. von Hayek (London: R o u tled g e , 1935) , ch ap . I I .
5E n ric o B arone, "The M in is try o f P ro d u c tio n in th e
s o lu t io n , f o r th e d a ta and c a lc u l a ti o n s n e c e ss a ry to d e t e r
mine an e q u ilib riu m s o lu tio n w ould be beyond th e c a p a b i l i
t i e s o f m o rta l s o c i a l i s t s . In a d d itio n , i f ac co u n tin g
p r ic e s w ere i n s t i t u t e d , th e y m ig h t be a r b i t r a r y and n o t
n e c e s s a r ily r a tio n a l. A s im ila r p o s it io n was ta k e n by
F. A. von Hayek and L io n e l Robbins.®
Barone had f e l t t h a t t r i a l and e r r o r co u ld y ie ld
e q u ilib riu m p r ic e s and F red M. T a y lo r o u tlin e d how a C e n -
t r a l P la n n in g Board m ig h t go a b o u t th e t r i a l and e r r o r
p ro c e s s even b e fo re Hayek and R obbins had ad v o cated i t s im
p r a c t i c a b i l i t y . ^ O scar Lange has ta k e n T a y lo r 's c o n trib u
tio n and arg u es t h a t th e t r i a l and e r r o r mechanism would be
much th e same as in c a p ita lis m w here consum ers and in d u s tr y
p
m anagers so lv e th e n e c e s s a ry e q u a tio n s in th e m a rk e tp la c e .
The consum ers and p ro d u c e rs w ould be g iv en a s e t o f m arket
C o l l e c t i v i s t S t a t e ," C o l l e c t i v i s t Economic P la n n in g , edi—
F . A. von Hayek (London: R o u tle d g e , 1 9 3 5 ), A ppendix.
8F. A. von Hayek, "The N a tu re and H is to ry o f th e
P ro b lem ," and "The P r e s e n t S ta te o f th e D eb a te," C o lle c
t i v i s t Economic P la n n in g , c h a p s. I and V; L io n e l R o b b in s,
The G re a t D ep ressio n (London: R o u tle d g e , 1934).
?F red M. T a y lo r, "The G uidance o f P ro d u c tio n in a
S o c i a l i s t S t a te ," A m erican Economic R eview , XIX (M arch,
1929) ; a ls o r e p r in te d in O scar L ange, On th e Economic The
ory o f S o c ia lis m , e d . B enjam ine E. L ip p T n co tt (New York:
McGraw-Hi11 Book Company, 1964) , p p . 39-54.
80 s c a r L ange, On th e Economic Theory o f S o c ia lis m ,
p p . 57-143; f i r s t p u b lis h e d in The Review o f Economic
S tu d ie s , IV, Nos. 1 and 2 (O c to b er, 1936 and F e b ru a ry ,
1937) .
7
p r ic e s and th e n t h e i r b e h a v io r would r e v e a l ex c ess demand
o r su p p ly on in d iv id u a l m a rk e ts. P ric e s would th e n be a l
te r e d to co m pensate. A c o n tin u a l p r ic e ad ju stm e n t p ro c e s s
would ta k e p la c e t h a t was c o n s ta n tly ap p ro ach in g a g e n e ra l
m ic ro -e q u ilib riu m much as a c a p i t a l i s t i c economy i s con
s t a n t l y ap p ro ac h in g an e q u ilib riu m s o lu tio n b u t n e v e r ac
t u a l l y a t t a i n i n g i t .
Consumers w ould be m axim izing t h e i r u t i l i t y g iv en
a b u d g e t c o n s t r a i n t , and e n t e r p r is e s would be m axim izing
p r o f i t s g iv e n f a c t o r and p ro d u c t p r i c e s . Of c o u rs e , th e
n e c e s s a ry assu m p tio n i s t h a t p ro d u c e rs and consum ers fa c e
p a ra m e tric p r ic e s so t h a t n e i t h e r can in flu e n c e p r ic e s
i n d i v i d u a l l y .
Lange e x te n d s th e d e b a te in to an e v a lu a tio n o f th e
s u p e r i o r i t y o f th e c a p i t a l i s t i c v e rsu s d e c e n tr a liz e d so
c i a l i s t i c m odel b u t t h i s i s n o t w ith in th e scope o f t h i s
s tu d y . However, we a re co n cern ed h e re w h eth er an o p e ra
t i o n a l l y e f f i c i e n t s o c i a l i s t i c system can be c r e a te d and
w h eth er th e s o c i a l i s t i c sy stem f u l f i l l s consum er w ants as
w e ll as i t s c a p i t a l i s t i c c o u n te r p a r t.
I t i s t r u e t h a t th e e q u ilib riu m ach iev ed in a
Barone sy stem may n o t be o p tim a l b ecau se m u ltip le e q u i l i b
r i a may e x i s t , b u t t h i s i s a ls o tr u e o f th e c a p i t a l i s t i c
sy stem . R ecen t s tu d i e s have a ls o shown t h a t th e p r ic e ad
ju stm e n t m echanism o f te n does n o t le a d to co n v e rg e n ce ,
8
e s p e c i a l ly when goods a re v ery com plem entary o r th e p ro d u c
t io n tra n s fo rm a tio n cu rv e i s co n c av e .9 T h is p ro b lem i s
beyond th e scope o f t h i s p a p e r.
O rg a n iz a tio n a l B eh av io r
o f E n te r p r is e s
U n til r e c e n tly , l i t t l e a t te n t io n was p a id to how
th e in d iv id u a l e n t e r p r i s e would behave in a c o m p le te ly de
c e n t r a li z e d s o c i a l i s t i c economy. T h is q u e s tio n c a n n o t be
answ ered w ith o u t c o n s id e rin g th e problem o f w o rk e r's and
e s p e c i a lly m a n ag er's in c e n tiv e . L a n g e 's model m e re ly has
th e s t a t e o rd e rin g th e in d iv id u a l w orkers and m anagers to
m axim ize p r o f i t s . To many b e h a v io r is t e c o n o m ists, t h i s i s
n o t s u f f i c i e n t t o in s u re t h a t th e y w i l l do s o . T h e ir mo
t i v a t i o n m ust come from a s e l f i s h i n t e r e s t in a c h ie v in g
p r o f i t m ax im izatio n o th e r th a n u to p ia n c o l l e c t i v e co o p e ra
t i o n .
The problem was ig n o re d a f t e r th e Lange a r t i c l e ,
p ro b a b ly b ecau se th e p r a c t i c a l problem o f an a d e q u a te i n
c e n tiv e sy stem was p r im a r ily c o n sid e re d to be co n c ern ed
w ith a command s o c i a l i s t i c system as h as e v o lv e d in R u s sia
and E a s te rn E urope. But in th e 1960' s , th e S o v ie t b lo c
c o u n tr ie s began to i n s t i t u t e reform s t h a t w ere q u a s i-
9T ak ash i N e g is h i, "The S t a b i l i t y o f a C o m p e titiv e
Economy: A S urvey A r t i c l e ," E co n o m etrica, XXX, No. 4
(O c to b e r, 1 9 6 2 ), 635-669.
9
c a p i t a l i s t i c , m ost im p o rta n t o f w hich i s th e i n s t i t u t i o n o f
p r o f i t s as th e c r i t e r i o n f o r in d iv id u a l e n t e r p r i s e p e r f o r
m ance, r a th e r th a n o u tp u t t a r g e t s .
T his s tim u lu s re v iv e d th e d e c e n tr a liz e d s o c ia lis m
c o n tro v e rs y and r e c e n tly Benjam in Ward‘ d h as ta c k le d th e
problem o f how an in d iv id u a l c o o p e ra tiv e e n t e r p r i s e would
behave w ith in a s p e c if ic in c e n tiv e sy stem .
IV. DEFINITION OF TERM S
S o c ia lis m . T his word has become g e n e ric in t h a t i t
em braces d i f f e r e n t co n cep ts t h a t a re o f te n opposed. U sing
s o c ia lis m to d e s c rib e th e s o c ia l system s o f Sweden, In d ia
and R u ssia le a v e s th e word n e a rly d ev o id o f m eaning. In
t h i s s tu d y , th e d e f i n i t i o n o f s o c ia lis m e v o lv e s from th e
s e a rc h f o r a th e o ry o f v a lu e in C h ap ters I I and I I I . I t i s
d e fin e d as a s t a t e in w hich a l l income from non-human f a c
to r s o f p ro d u c tio n ac c ru e s to th e s t a t e .
C o o p e ra tiv e . T his term h as o f te n been u sed to de
s c r ib e consum ption c o l le c tiv e s in th e w e ste rn w o rld . In
t h i s s tu d y , i t d e s c rib e s a p ro d u c tio n e n t e r p r i s e w here th e
w orkers h i r e m anagem ent, le a s e c a p i t a l and la n d from th e
^ B e n ja m in N. Ward, The S o c i a l i s t Economy—A Study
o f O rg a n iz a tio n a l A lte r n a tiv e s (New Y ork: Random H ouse,
1967) , ch ap s. 8 , 9 , 10; "The Firm in I l l y r i a : M arket
S y n d ic a lism ," Am erican Economic Review , XLVIII (S eptem ber,
1958) , 566-589":
10
s t a t e , p u rch ase and s e l l com m odities from o th e r firm s and
in d iv id u a ls , and s h a re p r o f i t s and lo s s e s on an ag reed f o r
m ula w hich f o r s im p lic ity i s assumed to be e q u a lit y . The
e n t e r p r is e can h i r e and f i r e la b o r and i s d e m o c ra tic a lly
c o n tr o lle d .
S y n d ic a lism . The movement t h a t a ro s e in F rance
d u rin g th e n in e te e n th c e n tu ry to ac h iev e c o n tro l o f s o c ie ty
by tr a d e u n io n s owning th e means o f p ro d u c tio n has t r a d i
t i o n a l l y been la b e le d s y n d ic a lis m . The c o o p e ra tiv e firm
can be th o u g h t o f as an a ll-p o w e rf u l tr a d e u n io n and in d e ed
i t s a c tio n s have econom ic e f f e c t s s im ila r to th o se o f tr a d e
u n io n s as C h ap ters V and VI w i l l i l l u s t r a t e .
V. ORGANIZATION OF THE STUDY
C h ap ter I I . The s t r u c t u r e o f an economy and i t s
b e h a v io ra l r u le s a re d ep en d en t on w hat c o n s titu t e s v a lu e .
T h is c h a p te r p r e s e n ts a c u rs o ry look a t v a lu e th e o ry in th e
l i t e r a t u r e o f th e c l a s s i c a l and n e o c la s s ic a l sc h o o ls in
o rd e r to a r r iv e a t a d e f i n i t i o n o f v a lu e . The re a d e r who
i s f a m ilia r w ith t h i s l i t e r a t u r e may w ish to s k ip t h i s
c h a p te r .
C h ap ter I I I . T h is c h a p te r a tte m p ts to i l l u s t r a t e
t h a t v a lu e th e o ry i s r e l a t i v e to o n e 's id e o lo g y and as such
i s n o t n e c e s s a r ily an o p e r a tio n a lly m ean in g fu l co n c ep t.
11
C h a p ter IV . The problem o f p r ic in g th e f a c to r s o f
p ro d u c tio n in s o c ia lis m i s c o n s id e re d in t h i s c h a p te r and
a m ethodology i s fo rm u la te d t h a t would a l lo c a te re s o u rc e s
as e f f i c i e n t l y as c a p ita lis m w h ile sim u lta n e o u sly p re v e n t
in g econom ic r e n t from a c c ru in g to a p a r t i c u l a r group o r
c la s s in th e economy.
C h a p ter V. The th e o ry o f th e c o o p e ra tiv e as i t
p r e s e n tly s ta n d s i s o u tlin e d and c r i t i c i z e d in t h i s c h a p te r.
C h a p ter V I. A g e n e ra liz e d model o f th e th e o ry o f
th e c o o p e ra tiv e s i s p r e s e n te d and i t i s e v a lu a te d by th e
c r i t e r i o n o f e f f i c i e n c y o f i t s c a p i t a l i s t c o u n te r p a r t. The
r e s u l t s o f t h i s com parison th e n in d ic a t e th e r o le o f th e
c e n tr a l p la n n in g b o ard in s o c i a l i s t m ark et sy n d ic a lism .
C h a p ter V I I . C h ap ter V II sum m arizes th e co n clu
s io n s o f th e s tu d y .
A ppendix. The A ppendix sum m arizes th e r e s u l t s o f a
r e g r e s s io n a n a ly s is on th e d e te rm in a n ts o f sa v in g s in
c a p ita lis m .
CHAPTER I I
A REVIEW OF VALUE THEORY
I . INTRODUCTION
The p u rp o se o f t h i s c h a p te r i s to t e r s e l y tr a c e th e
developm ent o f v a lu e th e o ry in econom ic l i t e r a t u r e . P r io r
to th e w orks o f Adam S m ith, a g r e a t amount o f l i t e r a t u r e
from A r i s t o t l e to Quesnay g iv e s ev id en c e o f a s e a rc h f o r
th e d e te rm in a tio n o f v a lu e b u t i t was n o t u n t i l th e e ig h
te e n th c e n tu ry t h a t th e se a rc h became c o h e re n t. What f o l
lows i s a summary and e v a lu a tio n o f th e e f f o r t s o f Adam
S m ith, D avid R icard o and K a rl Marx o f th e C la s s ic a l S chool
and a s h o r t s y n th e s is o f th e N e o c la s s ic a l S c h o o l's approach.
I I . A D A M SMITH
Theory o f V alue
Adam Sm ith d is tin g u is h e d betw een use v a lu e and mar
k e t exchange v a lu e o f a commodity and c o n s id e re d u se v a lu e
m erely a n e c e s s a ry p r e r e q u i s i t e f o r a commodity to have
exchange v a lu e , r a t h e r th a n use v a lu e h av in g a s p e c i f i c
q u a n t i t a t i v e r e l a t i o n s h i p to exchange v a lu e .^ V alue in use
•*-A dam S m ith , An In q u iry i n t o th e N atu re and Causes
12
13
i s d ete rm in e d by a com m odity’s a b i l i t y to s a t i s f y human
w a n ts, and to S m ith , u se v alu e was n o t th e scope o f h is i n
v e s tig a t io n ; exchange v a lu e d e te rm in a tio n was h is o b je c tiv e .
H is famous b e a v e r and d e e r exam ple i l l u s t r a t e d a
la b o r o n ly d e f i n i t i o n o f v a lu e in t h a t com m odities sh o u ld
exchange a t a r a t i o t h a t in c lu d e d o n ly th e la b o r tim e em
b o d ie d i n a c l a s s l e s s ru d im en tary s o c ie ty w ith o u t c a p i t a l
and w ith la n d l i m i t l e s s . In such an economy th e o n ly c o s t
i s la b o r tim e . A commodity on th e m a rk e tp lac e w ould com
mand an e q u a l q u a n tity o f la b o r em bodied in o th e r commodi
t i e s (assum ing a homogeneous la b o r tim e in d e x ) .
Y et Sm ith was q u ic k to n o tic e t h a t com m odities d id
n o t exchange f o r e q u a l la b o r tim e e m p iric a lly and t h i s d i s
crep an cy he e x p la in e d by th e fo llo w in g :
The w hole produce o f la b o u r does n o t alw ays b e lo n g to
th e la b o u re r. He m u st, in some c a s e s , s h a re i t w ith
th e owner o f th e sto c k w hich em ploys h im .2
. . . as soon as th e la n d o f any c o u n try h as a l l b e
come p r iv a te p ro p e rty th e la n d lo rd s , l i k e o th e r men,
lo v e to re a p w here th e y n e v e r sowed, and demand a
r e n t even f o r i t s n a t u r a l p ro d u c e .3
When f a c t o r s o f p ro d u c tio n become s c a rc e and p r i v a t e l y
owned, th e la b o r e r i s fo rc e d to g iv e up p a r t o f h i s o u tp u t
to th e c a p i t a l i s t o r la n d lo rd . I t would a p p e a r t h a t Sm ith
o f th e W ealth o f N a tio n s (New York: E . P . D utton Company,
1 9 2 9 ) , 1 , 30.
2I b i d . , p . 41. 2I b i d . , p . 43.
14
c o n s id e re d r e n t and p r o f i t to be e x p l o i t a t i v e b u t he was
d e v o id o f th e re v o lu tio n a ry s p i r i t o f Marx and a c c e p te d a
c l a s s s e g re g a te d s o c ie ty as p a r t o f th e n a t u r a l o rd e r.
In an environm ent o f p r i v a t e l y owned f a c to r s o f
p r o d u c tio n , th e r e g u la to r o f th e d e te rm in a n ts o f exchange
v a lu e was no lo n g e r e x c lu s iv e ly la b o r tim e b u t th e e q u i l i b
riu m le v e l o f w ages, p r o f i t and r e n t t h a t y ie ld e d th e
"norm al p r i c e ." In ad v o c atin g t h i s d e te rm in a tio n o f v a lu e ,
Sm ith has r e je c te d th e la b o r th e o ry o f v a lu e as an e m p iri
c a l r e a l i t y and in consequence, a la b o r th e o ry o f v a lu e can
be a t t r i b u t e d to him o n ly in a m e ta p h y s ic a l s e n s e . Con
t r a r y to p o p u la r b e l i e f s , Sm ith in f a c t r e j e c t e d th e em
p i r i c a l v a l i d i t y o f th e la b o r th e o ry o f v a lu e when he em
b a rk e d on h is n a tu r a l p r ic e e x c u rs io n .
The Labor-Command Theory
C o n tra d ic tio n
W e have seen t h a t w ith o u t th e e x is te n c e o f c a p i
t a l i s t s o r landow ners, a commodity commanded e q u a l la b o r
v a lu e in exchange. But w ith c a p i t a l i s t s and la n d lo rd s a
p o r tio n o f th e produce o f la b o r m ust b e g iv e n up by th e
la b o r e r s as th e fo llo w in g p a ssag e from The W ealth o f
N a tio n s i l l u s t r a t e s :
In t h i s s t a t e o f th in g s , th e w hole produce does
n o t alw ays belong t o th e la b o u re r. He m ust in m ost
c a se s s h a re i t w ith th e owner o f th e s to c k w hich
em ploys him . N e ith e r i s th e q u a n tity o f la b o u r
. commonly employed in a c q u irin g o r p ro d u c in g any com
m o d ity , th e only circ u m sta n c e w hich can r e g u la te th e
15
q u a n tity w hich i t o u g h t commonly to p u rc h a s e , command,
o r exchange f o r . An a d d i tio n a l q u a n t ity , i t i s e v i
d e n t, must be due f o r th e p r o f i t s o f th e sto c k w hich
advanced th e wages and f u r n is h e d th e m a te r ia ls o f
t h a t la b o u r.^
The e x a c t m eaning o f t h i s p a ssag e i s n o t a t a l l
c l e a r . The f i r s t h a l f sa y s t h a t th e em ployer g e ts p a r t o f
th e l a b o r e r 's o u tp u t and th e second h a l f say s t h a t th e
em ployer i s e n ric h e d by a d d in g on an amount o f p r o f i t and
m a te r ia l c o s t to th e v a lu e o f th e la b o r em ployed. The
f i r s t s ta te m e n t i s c l e a r ly M arxian w here la b o r i s d e p riv e d
o f i t s s u rp lu s v a lu e and th e seco n d i s a c o s t th e o ry o f
v a lu e . One ca n n o t l o g i c a l l y ad h e re to b o th p r o p o s itio n s .
Sm ith w ent on w ith th e l a t t e r and l e f t to Marx th e d ev elo p
ment o f th e form er th e o ry o f exchange v a lu e .
The C ost Theory o f Value
The r o le o f demand in S m ith 's th e o ry o f v a lu e was
lim ite d to th e c r e a tio n o f s h o r t run d iv e rg e n c e s betw een
th e m ark et p r ic e and th e n a t u r a l p r i c e . S m ith 's v a lu e
th e o ry was a c o s t th e o ry , f o r v a lu e in use was n o t a d e te r
m in an t f o r v a lu e in e x c h a n g e .5 Y et i r o n i c a l l y , Adam Sm ith
i n i t i a t e d a c e n tu r ie s l a s t i n g d e fe n se o f a v a lu e th e o ry
t h a t he o p e r a tio n a lly r e j e c t e d , th e la b o r th e o ry o f v a lu e .
^ I b i d . , p . 51.
5R onald L. Meek, S tu d ie s i n th e L abor Theory o f
V alue (London: Lawrence & W is h a rt, 1956) , p . 77.
16
I I I . DAVID RICARDO
R e p u d iatio n o f Adam Sm ith
The two c o n c e p ts o f v a lu e t h a t can be e x tr a c te d
from th e w orks o f Adam Sm ith w ere b o th re p u d ia te d e a r ly in
th e n in e te e n th c e n tu ry by D avid R ic a rd o . R icard o d id n o t
f e e l t h a t th e v a lu e o f a p ro d u c t can be d eterm in ed by th e
amount o f la b o r tim e i t can command on th e m arket b ecau se
i t i s n o t in v a r ia b le as Sm ith co n ten d ed . R icard o s t a t e s :
. . . i s n o t th e v a lu e o f la b o u r e q u a lly v a r ia b le ;
b e in g n o t o n ly e f f e c t e d , as w e ll as o th e r th in g s a r e ,
by th e p ro p o rtio n betw een th e su p p ly and th e demand,
w hich u n ifo rm ly v a r ie s w ith ev ery change in th e con
d i ti o n o f th e com m odity, b u t a ls o by th e v a ry in g
p r ic e o f food and o th e r n e c e s s i t i e s , on w hich th e
wages o f la b o u r a re e x p e n d e d .6
S eco n d ly , R icard o a tta c k e d S m ith 's c o s t th e o ry o r
n a t u r a l p r ic e c o n c e p t o f v a lu e on th e grounds t h a t th e
manner in w hich th e p ro cee d s o f a s a le o f a commodity a re
d iv id e d up among th e s o c i a l c la s s e s does n o t a f f e c t th e
v alu e o f a commodity f o r Adam Sm ith
h as nowhere a n a ly z e d th e e f f e c t s o f th e accu m u latio n
o f c a p i t a l , and th e a p p r o p r ia tio n o f la n d , on r e l a t i v e
v a lu e . I t i s o f im p o rta n c e , th e r e f o r e , to d eterm in e
how f a r th e e f f e c t s w hich a re avowedly prod u ced on th e
ex ch an g eab le v a lu e o f co m m o d ities, by th e co m p arativ e
q u a n tity o f la b o u r bestow ed on t h e i r p ro d u c tio n , a re
m o d ifie d o r a l t e r e d by th e ac cu m u latio n o f c a p i t a l
and th e paym ent o f r e n t . 7
6P ie ro S r a f f a ( e d . ) , D avid R ic a rd o , Works and Cor
resp o n d en ce (Cam bridge: Cambridge P re s s f o r th e Royal
Economic S o c ie ty , 1 9 5 1 ), I , 15.
^I b i d . , p . 23.
17
R ic a rd o 1s Route
R icard o a tte m p te d to j u s t i f y S m ith 's m e ta p h y s ic a l
la b o r th e o ry o f v a lu e by s e a rc h in g f o r an in v a r ia b le v a lu e
in th e form o f an a b s o lu te . Gold and la b o r tim e to produce
and b rin g to m arket a commodity f o r one y e a r a c te d as abso
l u t e v a lu e s in h i s e a r ly works b u t l a t e r he d is c a rd e d them
and tu rn e d h is e f f o r t s to e x p la in in g exchage v a l u e s .
R icard o co u ld n o t r e c o n c ile exchange v a lu e s w ith
th e la b o r th e o ry due to th e d i f f i c u l t i e s t h a t a r i s e when
th e o rg a n ic co m p o sitio n o f c a p i t a l i s n o t hom ogeneous. An
in c r e a s e o r d e c re a se in th e g e n e ra l wage r a t e u n d er v a ry in g
c a p i t a l co m p o sitio n s w i l l n o t have a n e u t r a l e f f e c t on
r e l a t i v e p r i c e s . L ike S m ith, he p la c e d l i t t l e w e ig h t on
th e r o le o f use v a lu e , u t i l i t y o r demand and as a r e s u l t
ended up w ith a c o s t th e o ry in th e s p i r i t o f th e n a t u r a l
p r i c e .
But t h i s does n o t mean t h a t h i s e f f o r t s w ere fu
t i l e . In a tte m p tin g to d eterm in e th e r o le t h a t p r o f i t
p la y e d in d e te rm in in g v a lu e , R icard o added a new dim ension
to p o l i t i c a l economy, nam ely d i s t r i b u t i o n th e o ry t h a t
b ro u g h t f o r th a th e o ry o f r e n t and u t i l i z e d d im in is h in g
m a rg in a l p r o d u c tiv ity . B ut th e th e o ry o f v a lu e i t s e l f was
n o t fu n d a m e n ta lly a l t e r e d from Adam S m ith 's .
R icard o and th e Labor Theory
The q u e s tio n o f w h eth er R icard o ad h ered to a la b o r
18
th e o ry o f v a lu e h as s t i l l n o t been s e t t l e d . For exam ple,
h i s fo rem o st d i s c i p l e , J . R. M cCullock i n t e r p r e t s R icard o
as f o llo w s ;
Mr. R icard o m a in ta in s , in t h i s w ork, th e fu n d a
m en tal p r i n c i p l e , t h a t th e ex c h an g eab le v a lu e o f
com m odities o r t h e i r r e l a t i v e w o rth , as com pared w ith
each o t h e r , depends e x c lu s iv e ly on th e q u a n t i t i e s o f
la b o r n e c e s s a r ily re q u ire d to p ro d u ce them , and b rin g
them to m a rk e t.8
But m ost eco n o m ists would n o t i n t e r p r e t R icard o so
s t r i n g e n t l y a s , f o r exam ple, Mark B lau g h , "Under c o n d itio n s
o f p e r f e c t c o m p e titio n , r e l a t i v e p r ic e s o f r e p ro d u c ib le
com m odities te n d to be p r o p o r tio n a l to r e l a t i v e q u a n t i t i e s
Q
o f em bodied la b o r ."
R icard o d ie d in 1823 and th e r e f o r e d id n o t have th e
b e n e f i t o f th e c o n trib u tio n s o f th e E n g lis h u t i l i t y th e o
r i s t s who s t a r t e d to g a in re c o g n itio n in th e 1 8 3 0 's . The
same c a n n o t be s a id f o r K arl Marx. But to a v o id s e p a r a tin g
b e d fe llo w s , a glim pse o f M arxian v a lu e th e o ry w i l l ta k e
p rec e d en c e o v er a c h ro n o lo g ic a l p r e s e n ta tio n o f th e v a lu e
th e o ry d e b a te .
8J . R. M cCullock, "N ature o f th e L if e and W ritin g s
o f Mr. R ic a rd o ," The D evelopm ent o f Economic T hought, ed .
H. W . S p ie g a l (New York: M acm illan, 1952) , p p . 165-v 166.
9Mark B laugh, R ic a rd ia n Econom ics (New Haven:
Y ale U n iv e r s ity P r e s s , 1958), p . 35.
19
IV. KARL M A R X
R e la tio n s h ip to S m ith
and R icard o
A lthough Marx s e v e r e ly c r i t i c i z e s b o th R icard o and
S m ith ,10 h i s v a lu e th e o ry was in th e same t r a d i t i o n as b o th
Sm ith and R ic a rd o . S m ith 's ru d im en tary economy and M arx's
sim p le exchange economy o f Volume I o f C a p it a l , b o th a re
b a se d on a la b o r command th e o ry o f v a lu e ; Volume I I I i l l u s
t r a t e s t h a t M arx 's s o lu tio n to th e tr a n s fo rm a tio n o f v a lu e s
i n t o p r ic e s i s v ery s i m i l a r to th e norm al p r ic e o f Sm ith
and th e c o s t th e o ry o f R icard o i f p r o f i t i s th o u g h t to
in c lu d e r e n t and i n t e r e s t .
The r e a l u n iq u e n ess o f M arx 's v a lu e th e o ry i s in
i t s s e t t i n g and i t s u se as a p r e d ic tiv e t o o l . The combina
t i o n o f H eg elian h is t o r ic is m and th e la b o r th e o ry o f v alu e
e n a b le d Marx to u se th e la b o r th e o ry to p r e d i c t th e f u tu re
problem s o f c a p ita lis m . But t h i s i s n o t p e r ti n e n t to th e
scope o f t h i s p a p e r f o r i t i s v a lu e th e o ry in w hich we a re
i n t e r e s t e d .
Use V a lu e , Exchange V alue
and Commodity F e tis h is m
I t i s M arx's r e s t r i c t i v e d e f i n i t i o n o f th e scope
o f econom ics t h a t le a d s to h is r e s u l t i n g la b o r th e o ry o f
10F or a good o u tl i n e o f M arx 's c r i t i c i s m v id a
R. L. Meek, S tu d ie s in th e Labor T heory o f V alue (London:
Lawrence & W is h a rt, 1 9 5 6 ), chap. IV.
20
v a lu e . The E n g lis h u t i l i t y sc h o o l had j u s t begun to be a
v o c a l e n t i t y when Marx was w r itin g C a p ita l b u t s in c e Marx
assumed t h a t th e scope o f v a lu e th e o ry was n o t th e r e l a
tio n s h ip betw een p e o p le and th in g s b u t betw een p eo p le and
p e o p le , he r e j e c t e d th e u t i l i t y sc h o o l ap p ro ach . The sub
je c t i v e e v a lu a tio n o f th e r e la tio n s h i p betw een a p e rso n and
a th in g h id e s th e r e a l e s se n c e o f v a lu e , namely th e ex
change o f la b o r tim e t h a t i s r e a l l y ta k in g p la c e . As he
s t a t e s i t , " I f th e n we le a v e o u t o f c o n s id e ra tio n th e u se -
v a lu e o f co m m o d ities, th e y have o n ly one common p ro p e rty
l e f t , t h a t o f b e in g p ro d u c ts o f la b o u r ." - ^
The d i s t i n c t i o n betw een u se v a lu e and exchange
v a lu e i s th e n c r u c i a l to an u n d e rs ta n d in g o f M arx's v alu e
th e o ry . The fo llo w in g e x c e rp ts i l l u s t r a t e M arx's p o s itio n :
The u t i l i t y o f a th in g makes i t a u se -v a lu e . . .
t h i s p ro p e rty o f a commodity i s in d e p en d e n t o f th e
amount o f la b o u r r e q u ir e d to a p p ro p ria te i t s u s e f u l
q u a l i t i e s . . . . Exchange v a lu e , a t f i r s t s i g h t ,
p r e s e n ts i t s e l f a s a q u a n t i t a t i v e r e l a t i o n , as th e
p r o p o rtio n in w hich v a lu e s in use o f one s o r t a re
exchanged f o r th o s e o f a n o th e r s o r t , a r e l a t i o n con
s t a n t l y ch an g in g w ith tim e and p la c e . . . . As u s e -
v a lu e s , com m odities a r e , above a l l , o f d i f f e r e n t
q u a l i t i e s b u t as exchange v a lu e s th e y are m erely d i f
f e r e n t q u a n t i t i e s , and c o n se q u e n tly do n o t c o n ta in
an atom o f u s e - v a lu e . I f th e n we le a v e o u t o f con
s i d e r a t i o n th e u s e -v a lu e o f com m odities, th e y have
o n ly one common p r o p e r ty l e f t , t h a t o f b e in g p ro d u c ts
o f la b o u r.
•^ K a rl M arx, C a p i t a l , e d . F re d e ric k E ngels (New
York: Modern L ib r a r y , 1 9 3 6 ), I . 44.
21
W e have seen t h a t when com m odities a re exchanged,
t h e i r exchange v a lu e m a n ife s ts i t s e l f as som ething
t o t a l l y in d e p e n d e n t o f t h e i r u s e -v a lu e . , . .A s
v a lu e s , a l l com m odities a re only d e f i n i t e m asses o f
co n g e aled la b o u r-tim e . . .
A th in g can have u s e -v a lu e , w ith o u t h av in g v a lu e .
T h is i s th e c ase w henever i t s u t i l i t y to man i s n o t
due to la b o u r , such as a i r , v ir g in s o i l , n a t u r a l
meadows, &c. A th in g can be u s e f u l, and th e p ro d u c t
o f human la b o u r , w ith o u t b ein g a commodity. Whoever
d i r e c t l y s a t i s f i e s h i s w ants w ith th e produce o f h is
own la b o u r, c r e a t e s , in d e e d , u s e -v a lu e s , b u t n o t
co m m o d ities. In o rd e r to produce th e l a t t e r , he m ust
n o t o n ly p ro d u ce u s e - v a lu e s , b u t u s e -v a lu e s fo r
o t h e r s , s o c i a l u s e -v a lu e s . L a s tly , n o th in g can have
v a lu e w ith o u t b e in g an o b je c t o f u t i l i t y . 12
The exchange v a lu e o f a commodity i s d eterm in ed by
th e q u a n tity and q u a l it y o f s o c ia ll y n e c e s s a ry la b o r ex
pended upon i t . S o c ia lly n e c e ss a ry d eterm in e s th e q u a n tity
o f la b o r t h a t sh o u ld be em bodied in a p ro d u c t.
The la b o u r tim e s o c i a l l y n e c e ss a ry i s t h a t r e
q u ir e d to p ro d u ce an a r t i c l e under th e norm al co n d i
tio n s o f p ro d u c tio n , and w ith th e av erag e d eg ree o f
s k i l l and i n t e n s i t y p r e v a le n t a t th e t i m e .1- *
The v a lu e o f a com m odity, th e r e f o r e , v a r ie s
d i r e c t l y a s th e q u a n t ity , and in v e rs e ly as th e p ro
d u c tiv e n e s s , o f th e la b o u r in c o rp o ra te d in i t . 1^
T h is c o n c e p t o f v a lu e le a d s to a sim p le r e s u l t .
I f i t ta k e s two h o u rs f o r a w eaver to make a c o a t
and one h o u r f o r a c o b b le r to make a sh o e , th e n one
c o a t h a s th e exchange v a lu e o f two sh o e s. But i f
w eaving te c h n o lo g y im proves and i t o n ly ta k e s one
h o u r to weave a c o a t, th e n one c o a t i s w orth one shoe
and t h a t sh o u ld be i t s exchange v a l u e .15
i 2 l b i d . , p p . 36-4 1 .
^ i b i d . , p . 40.
• ^ I b i d . , p . 39.
■^I b i d . , p . 44.
22
I t may be t h a t w eaving i s a much more s k i l l f u l a r t
th a n c o b b lin g b u t Marx e lim in a te s such problem s by
u s in g a la b o u r in d ex and re d u c in g a l l la b o u r to a
homogeneous n a t u r e .16
In p e r c e iv in g th e r e a l v alu e o f co m m o d ities, th e r e
i s a d if f e r e n c e betw een th e form and su b s ta n c e o f th in g s .
The n e u t r a l m a rk e tp la c e makes th e w orld a p p e a r to be an
in te r c o u r s e o f th in g s , and com m odities and m an's r o le
seems t o be a r e la tio n s h i p betw een man and com m odities.
The p ro d u c tio n p ro c e s s e s o f com m odities d i c t a t e m an's
a c tio n s . B ut once we ig n o re th e f e t i s h n a tu re o f commodi
t i e s we d is c o v e r th e r e a l esse n c e o f p o l i t i c a l economy,
th e s o c ia l r e l a t i o n s h i p s o f man to man t h a t a re m erely
m a n ife s te d by th e exchange o f com m odities. The exchange o f
com m odities i s an exchange o f m an's la b o r b u t man has d e
v elo p ed a commodity f e tis h is m b e c a u se ,
A commodity i s th e r e f o r e a m y ste rio u s th in g ,
sim p ly b ec a u se in i t th e s o c ia l c h a r a c te r o f m en's
la b o u rs ap p e a rs to them as an o b je c tiv e c h a r a c te r
stam ped upon th e p ro d u c t o f t h a t la b o u r: b ecau se th e
r e l a t i o n o f th e p ro d u c e rs to th e sum t o t a l o f t h e i r
own la b o u r i s p re s e n te d to them as a s o c i a l r e l a t i o n ,
e x i s t i n g n o t betw een th e m se lv e s, b u t betw een th e
p ro d u c ts o f t h e i r la b o u r .17
T h e ir own s o c i a l v a lu e ta k e s th e form o f th e
a c tio n o f o b je c ts , w hich r u le th e p ro d u c e rs in s te a d
o f b e in g r u le d by th e m .18
16l b i d . , p . 45.
17i b i d . , p . 72. l® I b i d ., p . 75.
23
M arx's d i s t i n c t i o n o f use and exchange v a lu e s i s
much more lu c id and s u c c in c t th a n t h a t o f Adam S m ith , b u t
n o t as l o g i c a l l y com plete and c o n s is te n t as t h a t o f th e
m a rg in a l u t i l i t a r i a n s f o r he does n o t p ro v id e a r a t i o n a l e
f o r consum er c h o ic e , f o r exam ple;
A ll com m odities a re n o n -u s e -v a lu e s fo r t h e i r
o w n ers, and u s e -v a lu e s fo r t h e i r n o n -o w n ers. Conse
q u e n tly th e y m ust change h an d s. B ut t h i s change o f
hands i s w hat c o n s t it u t e s t h e i r ex ch an g e, and th e
l a t t e r p u ts them in r e l a t i o n w ith each o th e r as v a lu e s ,
and r e a l i z e s them as v a lu e s . Hence com m odities m ust
be r e a l iz e d as v a lu e s b e fo re th e y can be r e a l i z e d as
u s e -v a lu e s . On th e o th e r h an d , th e y m ust show t h a t
th e y a re u s e -v a lu e s b e fo re th e y can be r e a l iz e d as
v a lu e s . F or th e la b o u r s p e n t upon them co u n ts e f f e c
t i v e l y , o n ly in s o f a r as i t i s s p e n t in a form t h a t i s
u s e fu l to o th e rs .
When one exchanges a good on th e m a rk e t, t h a t a c t
does n o t im ply t h a t th e good h as no u t i l i t y f o r him b u t
m erely t h a t th e good re c e iv e d h as a h ig h e r u t i l i t y . And
M arx's c o n s ta n t in h e re n t c o n tr a d ic tio n t h a t to have v alu e
i t m ust be exchanged b u t t o be ex c h an g eab le i t m ust have
u t i l i t y i s c o n fu sin g b u t n o t d is a s te r o u s . What i s c r u c i a l
i s t h a t u s e -v a lu e and exchange v a lu e a re n o t synonymous b e
cau se u s e -v a lu e i s a q u a l i t a t i v e phenomenon w h ile exchange
v a lu e i s a q u a n t it a t i v e r e l a ti o n s h i p in v o lv in g th e exchange
o f la b o r tim e in h e re n t in th e co m m o d ities.2 ®
1 9 l b i d ., p . 85.
20T h is te rm in o lo g y was d ev elo p ed by an A u s tria n
ec o n o m ist, F ran z P e tr y .
24
S u rp lu s V a lu e , th e R ate o f P r o f i t
and th e R ate o f E x p lo ita tio n
In th e sim p le exchange economy o f Volume I o f
C a p i t a l/ com m odities a re s o ld o r exchanged a t t h e i r v a lu e s ,
t h a t i s , a t exchange r a t e s e q u a l to th e s o c i a l l y n e c e s s a ry
la b o r t h a t i t took to produce them . C o m p etitio n w ould
in s u r e t h a t p r ic e would be a t an e q u ilib riu m r a t e on a l l
m a rk e ts. But when th e c a p i t a l i s t e n te r s th e p r o c e s s , he
em ploys la b o r a t a wage below th e v a lu e t h a t th e la b o r e r
c o n tr ib u te s and s in c e m achines and m a te r ia ls m erely p a ss on
b u t do n o t c r e a te v a lu e , th e c a p i t a l i s t g a in s th e d if f e r - '
ence betw een th e v a lu e th e la b o r e r c r e a te s and th e wage
t h a t th e c a p i t a l i s t pays la b o r. T his d if f e r e n c e Marx
c a lle d s u rp lu s v a lu e .
C le a rly th e n , t o t a l v a lu e has th r e e com ponents; th e
m achinery and m a te r ia ls used up i n th e p ro d u c tio n p ro c e s s
(C) w hich he c a lle d c o n s ta n t c a p i t a l , th e p r ic e p a id to
la b o r (V) o r la b o r c o s t p lu s s u r p lu s v a lu e (S) as p r e v i
o u sly d e fin e d . Hence t o t a l v a lu e = C + V + S. To Marx,
C
— =— was th e r a t e o f p r o f i t b u t Joan R obinson has c o r-
C + V * s
r e c t l y p o in te d o u t t h a t Marx sh o u ld have s p e c if ie d c + v
in w hich C i s th e used up m achines and m a te r ia ls d u rin g th e
p ro d u c tio n p e rio d and V i s th e wage fu n d . T h is w ould av o id
25
21 22
th e s to c k -flo w co n fu sio n o f Volume I I I . '
To Marx, c a p i t a l and la n d w ere n o t in th em selv es
p ro d u c tiv e and as such d id n o t d e se rv e a rew ard . T h e ir
r o le was to in c re a s e th e p r o d u c tiv ity o f th e la b o r t h a t
accom panied them and hence in c r e a s e l a b o r 's v a lu e . Thus,
o n ly la b o r c o u ld c r e a te s u rp lu s v a lu e when la b o r re c e iv e d
a wage t h a t was le s s th a n th e v a lu e la b o r c r e a te d . T his
p o in t w i l l be d is c u s s e d a t le n g th in th e fo llo w in g c h a p te r .
I f a man i s p a id a d a y 's wage t h a t i s e q u a l to th e
v a lu e o f 5 h o u rs o f h is la b o r b u t he h as to p u t in a 10
h o u r day f o r h is em p lo y er, he i s w ork in g f o r 5 p a id h o u rs
S / 5 \
and 5 s u rp lu s o r u n p aid h o u rs . The r a t i o y \ T o f Marx
c a lle d th e r a t e o f e x p l o i t a t i o n .
The T ra n sfo rm a tio n Problem
The Problem
W e have seen t h a t in Volume I o f C a p i t a l , Marx
ad h e re s to th e p o s itio n t h a t in an exchange economy a c tu a l
m ark et exchange p r ic e s w ould be e q u a l t o th e la b o r v a lu e s
o f th e com m odities. But Marx was q u ic k to re c o g n iz e t h a t
in a c a p i t a l i s t s o c ie ty t h i s was n o t so and he a tte m p te d
2 Joan R obinson, An E ssay on M arxian Economics
(New Y ork: S t. M a rtin 's P r e s s , 1 9 6 6 ), p p . 6-7T
22P au l S w eezy's p r e s e n ta tio n o f th e T ra n sfo rm a tio n
Problem in h is Theory o f C a p i t a l i s t D evelopm ent (New York:
M onthly Review P r e s s , 1 9 5 6 ), ch ap . V II c o n ta in s th e same
s to c k -flo w c o n fu sio n as M arx's p r e s e n ta ti o n .
26
in Volume I I I to r e c o n c ile h is la b o r th e o ry o f v alu e w ith
th e problem o f exchange v a lu e s in c a p ita lis m .
S in ce th e o n ly so u rc e o f s u rp lu s v a lu e i s from
/ S \
la b o r i n p u t s , th e n th e r a t e o f p r o f i t on c a p i t a l l c + y J
would be e q u a l in a l l i n d u s t r i e s i f th e o rg a n ic co m p o sitio n
(c\
o f c a p i t a l l y / was e q u a l in a l l i n d u s t r i e s . An in C api
ta lis m , Marx re c o g n iz e d t h a t th e r a t e o f p r o f i t on c a p i t a l
te n d s to be e q u a l due to th e f a c t t h a t c a p i t a l te n d s to
flow to th e m ost p r o f i t a b l e v e n tu re s and d im in is h in g r e
tu r n s p r e v a i l . I f th e r a t e s o f p r o f i t on c a p i t a l in in d u s
t r i e s a re e q u a l, b u t th e o rg a n ic c o m p o sitio n s o f c a p i t a l
were u n e q u a l, t h i s w ould im ply t h a t r a t e s o f s u rp lu s v a lu e
among in d u s t r i e s w ere u n e q u a l.
But w ith a to m is itc la b o r m a rk e ts , th e r a t e o f s u r
p lu s v alu e among a l l m ark ets m ust be e q u a l, th e r e f o r e w ith
v a ry in g o rg a n ic co m p o sitio n s o f c a p i t a l , exchange r a t i o s
(p ric e s ) m ust d iv e rg e from v a lu e (em bodied l a b o r ) .
M arx’s S o lu tio n
In Volume I I I , P a r ts 1 and 2 o f C a p i t a l , Marx a t
tem p ts to s o lv e t h i s problem by a rg u in g t h a t th e amount o f
p r o f i t w hich th e c a p i t a l i s t s in each b ran ch o f in d u s try r e
c e iv e w i l l be t h a t s u f f i c i e n t to g iv e them an amount e q u a l
to th e av erag e r a t e o f p r o f i t on th e t o t a l c a p i t a l i n th e
economy. Hence th e amount o f p r o f i t t h a t th e y re c e iv e may
d i f f e r from th e amount o f s u r p lu s v a lu e t h a t t h e i r in d u s try
(I)
27
c r e a te s , some g r e a t e r , some s m a lle r. But t o t a l p r o f i t s in
th e e n t i r e economy w i l l e q u a l t o t a l s u rp lu s v a lu e c r e a te d .
The ta b le s on th e fo llo w in g pages by R. L. Meek,
w hich a re an am algam ation o f th o s e on pages 183 and 185 o f
Volume X II o f C a p ita l w ith some o f th e f ig u r e s re a rra n g e d ,
23
i l l u s t r a t e M arx 's p o s i t i o n .
Marx c a lc u la te d th e av era g e r a t e o f p r o f i t f o r th e
s
e n t i r e economy in A o f T ab le I I as ^ + The ag g reg a te
s u rp lu s v a lu e o f th e economy i s r e d i s t r i b u t e d to c a p i t a l
i s t s ac c o rd in g to th e am ount o f t o t a l c a p i t a l th e y employ
(C + V) and n o t j u s t th e am ount o f c o n s ta n t c a p i t a l (C ),
T his im p lie s t h a t th e m a jo rity o f com m odities do n o t s e l l
a t th e em bodied la b o r tim e n e c e s s a ry to produce them , b u t
a t p r ic e s o f p ro d u c tio n t h a t in c lu d e s an av erag e r a t e o f
p r o f i t on c o n s ta n t c a p i t a l . Only i f an in d u s t r y 's o rg a n ic
co m p o sitio n o f c a p i t a l w ere e q u a l to t h a t o f th e economy as
a whole would exchange p r i c e s be e q u a l to v a lu e s .
M arx 's s o lu tio n i l l u s t r a t e s t h a t i f p r ic e s w ere to
eq u a l v a lu e s , th e r a t e o f s u rp lu s v a lu e w ould n o t be e q u a l
in a l l i n d u s t r i e s , a c o n d itio n t h a t Marx s a id would n o t
e x i s t . Many c a p i t a l i s t e c o n o m ists, m ost n o ta b ly Bohm-
Bawerk24 have a s s e r te d t h a t th e v a lu e th e o ry o f Volume I I I
23Ronald L. Meek, "Some N otes on th e T ra n sfo rm atio n
P roblem ," Economic J o u r n a l, LXVI (M arch, 1 9 5 6 ), 97.
24Eugen von Bohm-Bawerk, K a rl Marx and th e C lose o f
His System (London; T. F . Unwin. 189 8 ). ~_______________ ■
TABLE I
THE TRANSFORMATION OF VALUES INTO PRICESa
In d u s try C a p ita l Used up
C
C o st
P ric e
S u rp lu s
V alue
V alue P r o f i t P ro d u c tio n
D e v ia tio n
o f P ric e
from Value
I 80C + 20V 50 70 20 90 22 92 +2
I I 70C + 30V 51 81 30 111 22 103 -8
I I I 60C + 40V 51 91 40 131 22 113 -18
IV 85C + 15V 40 55
1 5
70 22 77 +7
V 95C + 5V 10 15 5 20 22 37 +17
110 422 110
aT here a re no in te rm e d ia te goods; a l l c a te g o r ie s a re in d e p e n d e n t. Meek h as
c o r r e c te d th e sto c k -if low e r r o r .
to
00
TABLE I I
MARX'S CALCULATION OF THE AVERAGE RATE OF PROFIT3
In Terms o f V alues
B
In Terms o f P ric e s
I . C -,^ + V1 + S1 =
I . C + V + P(C1 + V ) = P
I I . c2 + v2 + s 2 = w2 I I . C0 + V0 + P(C0 + V0 ) = P.
I I I . c 3 + V3 + S3 = W 3 I I I . C3 + V3 4 - P ( c 3 + v 3) = P3
IV. C4 + V4 + S4 = W 4 IV. C. + V. + P(C . + V J = P .
4 4 4 4 4
V. Cc + V_ + Sc = W _
b b b b
C + V + ~S =~W~
v. c 5 + v 5 + P(C5 + v5) = P5
c +”v + P(C + V) = P
aP, th e av erag e r a t e o f p r o f i t e q u a ls
C + V
as d eterm in ed in A.
to
VO
30
c o n tr a d ic ts t h a t o f Volume I s in c e com m odities do n o t ex
change a t t h e i r v a lu e s in Volume I I I . T his ap p ears to be
a v ery weak a tta c k on th e M arxian system s in c e in Volume
I I I , Marx was p o in tin g o u t t h a t th e e x is te n c e o f th e c a p i
t a l i s t p re v e n ts th e c o n c lu s io n s o f th e sim ple exchange
economy o f Volume I from b e in g e m p iric a lly tr u e in c a p i
ta lis m .
N e v e rth e le s s , a g r e a t many eco n o m ists have c o n s id
e re d i t n e c e s s a ry to come to th e d e fe n se o f Marx. Most
n o ta b ly L a d is la u s von B o rtk ie w ie z 25 and J . W in te rn itz 2* 5 who
have managed to m a th e m a tic a lly tra n s fo rm v a lu e s in to p r ic e s
w ith th e a id o f th e v ery r e s t r i c t i v e assum ptions t h a t th e r e
a re no in te rm e d ia te goods and one o f th e in d u s tr ie s h as an
o rg a n ic co m p o sitio n o f c a p i t a l e q u a l to th e av erag e o f th e
w hole economy and th e u n i t o f o u tp u t o f t h a t in d u s try i s
assumed to be th e a c c o u n tin g u n i t . Hence i t s p r ic e i s de
fin e d and i s n o t an unknown. Such assu m p tio n s a re to o
r e s t r i c t i v e f o r a g e n e ra l s o lu tio n o f th e tra n s fo rm a tio n
problem .
2 ^ L a d is la u s von B o rtk ie w ie z , "Value and P ric e in
th e M arxian S y ste m ," r e p r in te d in I n te r n a ti o n a l Economic
P a p e rs , No. 2 , 1952.
2®J. W in te r n itz , "V alue and P r ic e s : A S o lu tio n o f
th e S o -c a lle d T ra n sfo rm a tio n P ro b lem ," Economic J o u r n a l,
June 1948, p . 596.
31
V. THE UTILITY THEORY OF CHOICE
The C oncept
From th e days o f th e Greek S o p h ists a co n cep t o f
s u b je c tiv e ly d e te rm in e d v a lu e q u ite fo re ig n to th e la b o r
th e o ry had been s u g g e s te d , b ased on th e p le a s u re and p a in
p h y sio lo g y o f man. The p r e c u rs o rs and c o n tr ib u to r s to t h i s
v a lu e sc h o o l a re to o numerous to c i t e , hence w hat fo llo w s
w i l l be a t e r s e sum m ation o f th e p r e s e n t s t a t e o f i t s t e
n e ts and p ro b le m s .2^
For th e m ost p a r t we saw t h a t th e C la s s ic a l Eco
nomic Theory o f S m ith , R icard o and Marx p a id l i t t l e a t t e n
tio n to th e co n c ep t o f use v a lu e . The u t i l i t y sc h o o l f e e l s
t h a t i t i s use v a lu e t h a t i s th e r e a l b a s ic in g r e d ie n t o f
v a lu e th e o ry . An in d iv id u a l w eighs th e p le a s u re o r p a in
t h a t a commodity o r en d eav o r p o s s e s s e s fo r him a g a in s t th e
p le a s u re o r p a in t h a t he w i l l e x p e rie n c e from an a l t e r n a
t i v e commodity o r en d e a v o r. In a d d itio n , th e more o f a
p a r t i c u l a r a r t i c l e t h a t one p o s s e s s e s , th e le s s a p p e a lin g
27por th e r e a d e r who w ish es to e x p lo re t h i s t o p i c ,
th e fo llo w in g su rv ey a r t i c l e s a re su g g e ste d : Frank H.
K n ig h t, "M arg in al U t i l i t y E conom ics," E ssays in Economic
T hought: A r i s t o t l e to M a rs h a ll, e d s . Joseph A. S p e n g le r
and W illiam R. A lle n T c h ic a g o : Rand McNally & C o ., 1 9 6 0 ),
pp . 596-605; N ic h o la s G eorgescu-R oegen, " U t i l i t y , " I n t e r
n a tio n a l E n c y c lo p ed ia o f th e S o c ia l S c ie n c e s , e d . D avid
L. S i l l s (New Y ork: The M acm illan Co, and The F ree P r e s s ,
196 7 ), XVI, 2 36-237; George J . S t i g l e r , "The D evelopm ent
o f U t i l i t y T h eo ry ," The J o u rn a l o f P o l i t i c a l Economy, LV III
(A u g u st-O cto b er, 1 9 5 0 ).
32
i t becomes o r , in o th e r w o rd s, one e x p e rie n c e s d im in is h in g
m a rg in a l u t i l i t y from in c r e a s in g amounts o f a p a r t i c u l a r
commodity o r en d e av o r.
The u t i l i t y th e o ry o f v a lu e becomes a th e o ry o f
consum er b e h a v io r when we add th e assum ption t h a t each con
sumer w i l l w eigh th e u t i l i t y t h a t an item p o s s e s s e s f o r him
a t th e m argin and e q u a te i t w ith th e p r ic e o f th e ite m so
t h a t he w i l l choose a o v e r b as long as one more u n it
o f a i s such t h a t th e m a rg in a l u t i l i t y o f a d iv id e d by
th e p r ic e o f a i s g r e a t e r th a n th e m arg in al u t i l i t y o f b
d iv id e d by th e p r ic e o f b . H ence, th e consum er w i l l con
sume goods so t h a t th e
M U a M U b _ M U n
The p arad o x o f v a lu e (w a ter has a low p r ic e b u t g r e a t use
v a lu e , diam onds th e o p p o s ite ) t h a t had p la g u ed th e e a r l i e r
c l a s s i c a l eco n o m ists now had a c o n s is te n t r a t io n a l e b u t th e
m easurem ent o f u t i l i t y tu rn e d o u t to be a fo rm id a b le ta s k
t h a t rem ains u n s o lv e d .28
Jo sep h Schum peter in h is H is to ry o f Economic A nal
y s is had p o in te d o u t t h a t th e u t i l i t y th e o ry o f v a lu e i s
n o t a th e o ry o f consum er b e h a v io r b u t m erely a th e o ry o f
28V ida George S t i g l e r , o p . c i t . , f o r an e x c e ll e n t
summary o f th e problem s and a tte m p te d s o lu tio n s .
33
r a t i o n a l c h o ic e w hich i s lo g ic a l ly d ed u cted from i t s a s -
su m p tio n s, e . g . , m ax im izatio n o f s a t i s f a c t i o n .
U t i l i t y T h e o ry , P ric e and
G en eral E q u ilib riu m
In 1838 th e F ren ch eco n o m ist A ntoine A u gustin
C ournot f i r s t d e riv e d a demand curve from u t i l i t y t h e o r y .30
A lfre d M a rsh a ll com bined th e u tility -d e m a n d th e o ry o f th e
u t i l i t y s c h o o l w ith th e R ic a rd ia n c o s t-s u p p ly th e o ry o f
v a lu e and p ro v id e d an in te g r a te d th e o ry o f exchange o r m ar
k e t v a lu e t h a t u n if ie d c o s t and u t i l i t y th e o ry b ased on th e
assu m p tio n s o f consum er u t i l i t y m axim ization and p e r f e c t
c o m p e titio n among s u p p l i e r s . 31
The I t a l i a n eco n o m ist V ilfre d o P a re to b ro u g h t tO'-
g e th e r th e p ro d u c tio n (supply) and consum ption (demand)
phenomena to g e th e r in a t h e o r e t i c a l m a th e m a tic a lly s o lv a b le
system t h a t y ie ld e d an i n f i n i t e number o f o p tim a l s o lu tio n s
in w hich t o t a l s o c i a l u t i l i t y was m axim ized in th e se n se
t h a t one p e rs o n c a n n o t be made b e t t e r o f f w ith o u t a n o th e r
29Jo se p h S chum peter, H is to ry o f Economic A n a ly s is
(New Yorks O xford U n iv e r s ity P re s s , 1 9 5 4 ), p p . 1148-^9.
30A ugustin C o u rn o t, R esearch es in to th e M athem atical
P r in c ip le s o f th e Theory o f W ealth (New York: K e lle y ,
1 9 6 0 ). F i r s t p u b lis h e d in F ren ch in 1838.
31
A lfre d M a rs h a ll, "The Pure Theory o f D om estic
V a lu e s," S e r ie s o f R e p rin ts o f S carce T ra c ts in Economic
and P o l i t i c a l S c ie n c e (London: London School o f Econom ics
ancr P o l i t i c a l S c ie n c e , 1 9 3 0 ), No. 1.
34
b e in g made w orse o f f . N ich o las K aldor has p o in te d o u t t h a t
t o t a l u t i l i t y can be in c re a s e d i f com m odities a re r e d i s -
O O
t r i b u t e d and th e g a in e rs com pensate th e l o s e r s .
32(;eorgescu-R oegen, 0 £ . c i t .
CHAPTER I I I
VALUE THEORY, IDEOLOGY A N D
ECONOMIC EFFICIENCY
I . HEURISTIC VERSUS SCIENTIFIC VALUE THEORY
The p re c e d in g c h a p te r i l l u s t r a t e s one p o in t , namely,
t h a t an o p e r a tio n a lly t e s t a b l e th e o ry o f v a lu e h as been a
v ery e lu s iv e th in g . T h eo ries o f v a lu e have been as common
p la c e as e c o n o m is ts , b u t i f a n e c e s s a ry c o n d itio n o f a
s c i e n t i f i c th e o ry i s t h a t i t sh o u ld be c a p a b le o f e m p iric a l
v a l i d a t i o n , a l l th e o r ie s o f v a lu e c o n ju re d to d a te m ust be
c o n s id e re d h e u r i s t i c r a th e r th a n s c i e n t i f i c .
T h e re fo re , one i s le d to a s k , "Does an a b s o lu te
v a lu e e x i s t? Does a s c i e n t i f i c th e o ry o f v a lu e e x i s t? And
i f we m e d ita te on th e p h y sio lo g y o f man, o u r c o n c lu sio n
m ig h t be t h a t v a lu e i s r e l a t i v e to tim e , p la c e and p e rs o n .
V alue i s n o t an o p e r a tio n a l s c i e n t i f i c c o n c e p t f o r i t i s
m e ta p h y sic a l in n a tu re b e in g d eterm in ed by id e o lo g y . Con
c e iv a b ly , th e r e a re as many v a lu e th e o r ie s as dogmas.
V alue i s a g e n e ric word t h a t em braces id e o lo g ie s .
^•Joan R obinson, Economic P h ilo so p h y (C hicago:
A ld in e P u b lis h in g Company, 1 9 6 2 ), p p . 2 6 -4 6 .
35
36
I I . CRITIQUE OF CLASSICAL V ALUE TH EORY
Adam Sm ith
Adam Sm ith th o u g h t t h a t in a ru d im en tary economy,
b e a v e r and d e e r would exchange f o r th e la b o r tim e th a t was
n e c e s s a ry to h u n t them . But v a lu e i s a r b i t r a r y to th e
s o c ia l system . Could n o t a p e rc e n ta g e o f th e b ea v er and
d e e r go to th e King? Sm ith f e l t t h a t in a ru d im en tary
economy i t would o n ly be f a i r i f com m odities exchanged a t
t h e i r la b o r tim e . When he a p p lie d th e same a n a ly s is to
e ig h te e n th c e n tu ry E n g lan d , he found t h a t h is v alu e th e o ry
was e m p iric a lly w an tin g b u t r a t h e r th a n d is c a rd in g h is
m e ta p h y sic a l c o n v ic tio n , he t r i e d to ammend h is v alu e th e
o ry and a r r iv e d a t a "norm al p r i c e ” t h a t r e a l l y i s a c o s t
th e o ry o f v a lu e . H is "norm al p r ic e " can be th o u g h t o f as
a j u s t p r ic e i f s o c ie ty c o n s id e rs t h a t la n d lo rd s and c a p i
t a l i s t s a re p ro d u c tiv e a g e n ts t h a t d e se rv e a r e tu r n .
A gain, t h i s p re su p p o se s a s e t o f m oral ju d g m en ts.
D avid R icardo
R icard o began w ith a more f r u i t f u l q u e s tio n th a n
Sm ith; w hat d e te rm in e s th e d i s t r i b u t i o n o f a s o c i e t y 's
o u tp u t b u t h is u ltim a te o b je c tiv e was an a b s o lu te and s c i
e n t i f i c th e o ry o f v a lu e . A lthough th e b y -p ro d u c ts o f h is
l i f e - l o n g s e a rc h a r e a g r e a t le g a c y , h i s s c i e n t i f i c ap
p ro ac h was r e s t r i c t e d by th e id e o lo g y o f la b o r v a lu e . H is
37
r e je c tio n o f u s e -v a lu e i s o th e rw is e d i f f i c u l t to u n d erstan d .
In a d d itio n , he c o u ld be accu sed o f a p o lo g iz in g f o r th e
e x i s tin g th e o ry o f v a lu e by a t t r i b u t i n g to c a p i t a l th e
w a itin g p e rio d r a t i o n a l e t h a t su p p o sed ly j u s t i f i e s i t s r e
tu r n . W e w i l l r e tu r n to t h i s to p ic a l i t t l e l a t e r in t h i s
c h a p te r.
K arl Marx
Marx to o k o v e r Adam S m ith 's v a lu e judgm ent t h a t
com m odities sh o u ld exchange f o r t h e i r la b o r tim e and he
tu rn e d i t in to a s c i e n t i f i c h y p o th e s is . Only Marx was
f a i t h f u l to th e id e o lo g y t h a t la b o r i s th e c r e a to r and
hence th e m easure o f v a lu e . H is c l a s s i c a l p re d e c e s s o rs
s t a r t e d w ith a s i m i l a r id e o lo g y b u t ended up w ith a th e o ry
o f v alu e t h a t su p p o rte d th e id e o lo g y o f th e s o c ia l system
t h a t em braced them .
Marx r e a l i z e d t h a t th e la b o r th e o ry o f v a lu e d id
n o t e m p iric a lly h o ld in c a p ita lis m b ecau se th e id e o lo g y of
c a p ita lis m was d i f f e r e n t and hence th e r u le s o f exchange
were d i f f e r e n t . To M arx, c a p ita lis m i s n o t u n ju s t ac co rd
in g to i t s r u le s b u t th e r u le s a re u n ju s t because th e id e
o logy i s u n ju s t. The r u le s o f c a p ita lis m p re v e n t th e c r e a
t o r s o f v a lu e , la b o r e r s , from r e a l i z i n g th e f r u i t s o f t h e i r
c r e a tio n . I n a d v e r te n tly , Marx i l l u s t r a t e d t h a t v a lu e th e
o ry i s an a r b i t r a r y s o c i a l c o n v e n tio n t h a t i s founded in
p o l i t i c a l s e n tim e n ts .
38
The r e a l s u p e r i o r it y o f M arxian econom ics i s in
th e f i e l d o f e x p la in in g and a n t ic i p a tin g a p ro c e s s o f e c o
nomic e v o lu tio n . M arx 's a p p r e c ia tio n o f th e i n s t i t u t i o n a l
fram ework o f c a p ita lis m e n a b le d him to s p e c ify th e econom ic
p ro c e s s e s o f c a p ita lis m from an e v o lu tio n a ry v ie w p o in t.
The s u p e r i o r i t y o f M arxian econom ics in a n a ly z in g
c a p ita lis m i s n o t due to th e econom ic co n c ep ts u sed by
Marx (th e la b o r th e o ry o f v a lu e ) b u t to th e e x a c t s p e c i f i
c a tio n o f th e i n s t i t u t i o n a l datum d is tin g u is h in g c a p ita lis m
2
from th e c o n c e p t o f an exchange economy in g e n e ra l.
The la b o r th e o ry o f v a lu e can n o t be made co m p atib le
w ith th e u t i l i t y th e o ry v a lu e u n le s s s e v e r a l lim i t i n g a s
sum ptions a re in tro d u c e d such as a u n iform o rg a n ic com posi
tio n o f c a p i t a l th ro u g h o u t th e economy and two homogeneous
f a c t o r s o f p ro d u c tio n .
W ith r e s p e c t to v a lu e th e o ry , S m ith , R icard o and
Marx a l l e n c o u n te re d th e tra n s fo rm a tio n problem o f re c o n
c i l i n g v a lu e s and p r ic e s in c a p ita lis m and as a r e s u l t a l l
th r e e ended up w ith a c o s t th e o ry o f v a lu e .
^O scar L ange, "M arxian Economics and Modem Eco
nomic Theory" in th e Review o f Economic S tu d ie s , Ju n e 1935.
A lso r e p r in te d in Marx and Modern Econom ics, e d . D avid
H orow itz (London: MacGibbon & Kee L td ., 196 8 ), p . 76.
3
L e if Jo h an sen h as a tte m p te d to do so in h i s "Labor
Theory o f V alue and M arg in al U t i l i t i e s , " Economics o f P la n
n in g , I I I , No. 2 (S eptem ber, 1963), 89-103.
39
I I I . SHORTCOM INGS OF THE LABOR THEORY
OF VALUE
1. The tra n s fo rm a tio n o f v a lu e s i n t o p r ic e s ca n n o t
be acco m p lish ed i f o th e r th a n la b o r income e x i s t s o r i f th e
o rg a n ic co m p o sitio n o f c a p i t a l i s h e te ro g e n e o u s among i n
d u s t r i e s .
2. When o th e r th a n la b o r income e x i s t s , th e
e q u a lit y o f p r ic e to av erag e c o s t p lu s norm al p r o f i t i s
a ls o in c lu d e d in th e c a p i t a l i s t th e o ry o f g e n e ra l e q u i l i b
rium .
3. A th e o ry o f m ark et demand c a n n o t be deduced
from a la b o r th e o ry o f v a lu e , hence a th e o ry o f g e n e ra l
e q u ilib riu m r e q u ir e s a d d itio n a l d a ta .
4. The la b o r th e o ry o f v a lu e does n o t p ro v id e a
c r i t e r i o n o r mechanism f o r th e a l l o c a ti o n o f re s o u rc e s
b ased on t h e i r p r o d u c tiv ity when re s o u rc e s a re s c a rc e and
m ust be econom ized.
IV; CRITIQUE OF NEOCLASSICAL VALUE THEORY
Towards a S c i e n t i f i c
V alue Theory
(
v
The co n c ep t o f v a lu e re c e iv e d a s c i e n t i f i c r a t i o
n a le from th e m a rg in a l u t i l i t y ec o n o m ists i n th e se n se t h a t
v a lu e th e o ry was lin k e d to consum er b e h a v io r. Use v a lu e
and exchange v a lu e , th e q u a l i t a t i v e and q u a n t i t a t i v e
40
d im ensions o f v a lu e w ere com bined b u t th e r e s u l t i s f a r
from an im m utable, e t e r n a l and a b s o lu te fo rm u la o f v a lu e
t h a t i s p r e c is e ly q u a n t i f i a b l e . The u t i l i t y approach does
n o t i d e n t i f y th e d e te rm in a n ts o f v a lu e n o r a tte m p t to mea
s u re v a lu e a b s o lu te ly f o r u n its o f u t i l i t y a re l i k e
R ic a r d o 's a b s o lu te v alu e o r M arx's a b s t r a c t la b o r . Only
th e m a rg in a l u t i l i t i e s o f ite m s o f v a lu e a re d is c e r n ib le on
th e m a rk e tp la c e . U t i l i t y th e o ry i s an e x p la n a tio n o f con
sumer c h o ic e u n d er a b u d g et r e s t r a i n t t h a t i s a r e s u l t o f
an in d iv id u a l h ie ra rc h y . Y et u t i l i t y th e o ry i s an
o p e r a tio n a l co n cep t o f v a lu e t h a t h as e m p ir ic a lly been v a l
id a te d in th e sen se t h a t i t i s a th e o ry o f r e l a t i v e p r ic e s
and in t h i s r e s p e c t i s s c i e n t i f i c a l l y s u p e r io r to th e la b o r
th e o ry o f v a lu e .
The S u p e r io r ity o f U t i l i t y Theory
U t i l i t y th e o ry e lim in a te s th r e e c r i t i c is m s t h a t
w ere p re v io u s ly c i t e d f o r a la b o r th e o ry o f v a lu e , nam ely:
1. Demand cu rv es can be deduced from in d if f e r e n c e
c u rv e s .
2. The co m p o sitio n o f an econom ic o u tp u t can be
d eterm in ed in ac co rd an ce w ith th e p re fe re n c e s
o f th e in h a b ita n ts a s m a n ife s te d by M arket
c h o ic e .
3. A c r i t e r i o n e x i s t s f o r th e m ost e f f i c i e n t
a llo c a tio n o f s o c i e t y 's r e s o u r c e s .
41
Y et u t i l i t y th e o ry h as n o t u n iv e r s a lly p r e v a ile d
o v e r th e la b o r th e o ry o f v a lu e due t o i t s f a i l u r e to i n d i
c a te a m o ra lly o p tim a l d i s t r i b u t i o n o f an econom y's o u tp u t.
The A p o lo g e tic N atu re o f
U t i l i t y Theory
W ith th e e x is te n c e o f f a c t o r incom es o th e r th an
w ages, th e d i s t r i b u t i o n o f an u n c o n tro lle d econom y's o u tp u t
i s a fu n c tio n o f f a c t o r endow m ents, a s t a t e t h a t i s mor
a l l y u n a c c e p ta b le to many. In d e e d , u n d er such c o n d itio n s ,
th e q u e s tio n o f income d i s t r i b u t i o n i s l o g i c a l l y p r i o r to
th e d e te rm in a tio n o f o u tp u t a s s o rtm e n t and re s o u rc e a llo ^
c a tio n f o r incom e d i s t r i b u t i o n d e te rm in e s demand c u rv e s .
The w e lfa re econom ics o f th e u t i l i t y th e o ry o f ch o ic e s id e
s te p s th e m oral is s u e o f th e d i s t r i b u t i o n o f income by d e
f in in g numerous o p tim a l c o m p e titiv e e q u ilib riu m s o lu tio n s
to th e d i s t r i b u t i o n o f income d e c is io n o f an economy where
th e o u tp u t d i s t r i b u t i o n c r i t e r i o n i s t h a t p ro d u c tio n can n o t
be re a rra n g e d i f someone i s made w orse o f f even though an
o th e r i s made b e t t e r o f f . ^ The u nique o p tim a l s o lu tio n i s
^For a com plete and d e t a i l e d p r e s e n ta tio n o f th e
im p lic a tio n s o f and assu m p tio n s n e c e s s a ry f o r an o p tim a l
e f f ic ie n c y e q u ilib riu m se e R o b e rt E. K uenne's The Theory o f
G en eral Economic E q u ilib riu m (P rin c e to n : P rin c e to n U n iv er-
s i t y P r e s s , 1 9 6 3 ), 590 p p . F o r a m ath em atic al p r e s e n ta tio n
o f th e r o le o f th e p r ic e sy stem in a c h ie v in g o p tim a l r e
so u rc e a l lo c a tio n see T j a i l i n g C. Koopmans, A llo c a tio n o f
R eso u rces and th e P ric e System . T hree E ssay s on th e S ta te
o f Economic S cien ce (New Y ork: M cG raw -H ill, 1 5 T 7 ), p p . 1-
126:
42
d ep en d en t upon th e i n i t i a l d i s t r i b u t i o n o f w e a lth . The
com pensation p r i n c i p l e p re v io u s ly m entioned ca n n o t o p e ra
t i o n a l l y p ro v id e a unique s o lu tio n to th e o u tp u t d e c is io n
when m illio n s o f tr a d e s m ust be co n d u cted .
T h e re fo re , th e n e o c la s s ic a l eco n o m ists who ad v o c ate
t h a t th e scope o f econom ics i s m erely th e achievem ent o f a
P a re to optimum, s id e s te p th e m oral is s u e o f th e d i s t r i b u
tio n o f th e o u tp u t and in doing so im p l i c i t l y condone th e
e x i s ti n g d i s t r i b u t i o n . E ff ic ie n c y r a th e r th a n v a lu e th e o ry
becomes th e scope o f econom ics. Joan R obinson f e e l s , "T h is
i s an id e o lo g y t o end id e o lo g ie s , f o r i t has a b o lis h e d th e
m oral p ro b lem ."
Not a l l n e o c la s s ic a l eco n o m ists ig n o re d th e m oral
q u e s tio n f o r many c o n tr ib u te d to th e c o n s tru c tio n o f an
e la b o r a te r a t i o n a l e t h a t su p p o sed ly j u s t i f i e d r e tu r n s to
th e ow ners o f f a c t o r s o f p ro d u c tio n o th e r th a n la b o r.
V. THE RATIONALE FOR PRIVATE SURPLUS
VALUE IN CAPITALISM
T h is group co n ten d s t h a t fo u r f a c to r s o f p ro d u c tio n
a re n e c e s s a ry to an e f f i c i e n t econom ic system and f o r them
to be fo rth co m in g in a p r i v a t e p ro p e rty m ark et economy each
m ust re c e iv e a r e tu r n a t l e a s t e q u a l to i t s m a rg in a l p r o -
^R obinson, o£. c i t . , p . 53.
43
d u c t i v i t y in i t s n e x t b e s t a l t e r n a t i v e u s e . A d d itio n a lly ,
th e r e m ust be a mechanism p r e s e n t to e n s u re t h a t th e s e
f a c t o r s a r e o p tim a lly a llo c a te d and o n ly u n d er in d iv id u a l
o w n ersh ip w i l l th e s e f a c to r s be s u p p lie d to t h e i r m ost p ro
d u c tiv e a l t e r n a t i v e b ecau se o n ly i f one g e ts th e r e tu r n
w i l l one u t i l i z e a f a c t o r o p tim a lly . The s p e c i f i c a rg u
m ents f o r c a p i t a l , la n d and e n tre p re n e u rs h ip a re p re s e n te d
and c r i t i c i z e d in th e rem ain d er o f t h i s c h a p te r .
C a p ita l
The n e o c la s s ic a l econom ists argue t h a t c a p i t a l i t
s e l f i s p ro d u c tiv e to th e e x te n t o f th e in c re a s e d o u tp u t i t
c r e a t e s , hence th e owners o f c a p i t a l sh o u ld r e c e iv e i t s r e
w ards . In a d d i t i o n , consum ption now i s d e s ir e d more th a n
consum ption in th e f u tu r e ; th e r e f o r e , th o s e who sav e sh o u ld
be rew arded f o r t h e i r a b s tin e n c e . T h is i s a v e ry ten u o u s
p o s it io n b o th t h e o r e t i c a l l y and e m p ir ic a lly .
In d e e d , consum ption in th e f u tu r e may be p r e f e r r e d
o v e r th e p r e s e n t due to u n c e rta in f u tu r e incom e l e v e ls even
i f th e consum ption r a t e o f i n t e r e s t was n e g a tiv e . The em
p i r i c a l d a ta o f p o s i t i v e sav in g s when th e i n f l a t i o n r a t e i s
g r e a t e r th a n th e i n t e r e s t r a t e i s im p re s siv e e v id e n c e . On
th e e m p iric a l s id e , th e r e g r e s s io n a n a ly s is sum m arized in
th e A ppendix i l l u s t r a t e s t h a t th e r e l a t i o n betw een s a v in g s
and i n t e r e s t r a t e s i s i n s i g n i f i c a n t w h ile incom e le v e ls a re
h ig h ly c o r r e la te d w ith s a v in g s . The c o e f f i c i e n t o f th e
44
i n t e r e s t r a t e o fte n i s n e g a tiv e , w hich m ight be c o n s tru e d
as s u p p o rt to th e h y p o th e s is t h a t s a v in g s and th e i n t e r e s t
r a t e a re in v e r s e ly r e l a t e d s in c e a t h ig h e r i n t e r e s t r a t e s
one need save le s s to ac h iev e t h e i r w e a lth o b je c tiv e .
A nother argum ent f o r th e r e tu r n to c a p i t a l i s t h a t
accu m u latio n i s n e c e s s a ry f o r in v e stm e n t and hence econom ic
g row th. T h e re fo re i t i s to th e ad v an tag e o f th e low income
group to have a w e a lth owning c l a s s . Marx i r o n i c a l l y f a l l s
i n t o t h i s h e re sy f o r he f e l t t h a t th e c a p i t a l accu m u latio n
o f c a p ita lis m was a n e c e s s a ry s ta g e on th e p a th to commun
ism . H is c o n g re g a tio n has e m b arra ssed him on t h i s p o in t by
i l l u s t r a t i n g t h a t p u b lic ow nership and p u b lic p la n n in g a c
c e l e r a t e th e accu m u latio n o f c a p i t a l . F o r tu n a te ly , such
argum ents have n o t g ain ed f u l l a c c e p ta n c e among n e o c la s s i
c a l e c o n o m ists. Even Keynes f e l t , " I t i s th e s c a r c i t y o f
c a p i t a l goods, n o t th e p ro d u c tiv e n e s s o f tim e w hich makes
income from p ro p e rty p o s s ib le ." * ’
Land
Land has n o t re c e iv e d a m o ral j u s t i f i c a t i o n by th e
n e o c la s s ic a l sc h o o l e x c e p t t h a t anyone who happens to have
in v e s te d in r e a l e s t a t e i s w a itin g l i k e th e c a p i t a l i s t and
d e s e rv e s a r e tu r n .
®J. M. K eynes, The G en eral T heory o f Employm ent,
I n t e r e s t and P ric e s (New York: H a rc o u rt, B ra c e , 1936) ,
ch a p . I .
45
The lo n g -s ta n d in g d eb a te o f w h eth er la n d and c a p i
t a l a re p ro d u c tiv e in th em selv es o r i f th e y r e a l l y j u s t
in c re a s e th e p r o d u c tiv ity o f la b o r i s s t e r i l e w ith r e s p e c t
to th e d i s t r i b u t i o n o f an econom y's w e a lth when th e s e f a c
to r s a re c o l l e c t i v e l y owned.
R isk and E n tre p re n e u rs h ip
S in ce th e r a t e o f i n t e r e s t sh o u ld t h e o r e t i c a l l y
e q u a l th e p r o d u c tiv ity o f c a p i t a l , in a p o s itio n o f long
run e q u ilib riu m u n d er c o n d itio n s o f c e r t a i n t y , b o th th e
r a t e o f p r o f i t and th e r a t e o f i n t e r e s t would be z e ro . B ut
th e r a t e o f p r o f i t i s u s u a lly g r e a t e r th a n th e r a t e o f i n
t e r e s t in a grow ing economy, and t h i s i s u s u a lly j u s t i f i e d
by a rg u in g t h a t th e c a p i t a l i s t m ust be rew arded f o r th e
r is k s t h a t he u n d e rw rite s and th e management t a l e n t he
s u p p lie s . Consum ption tim e p re fe re n c e s co u ld a ls o be p o s i
tiv e i f u n c e r ta in ty e x i s t s .
V I. S U M M A R Y
W e have seen t h a t v a lu e th e o ry i s an in d iv id u a lly
s u b je c tiv e phenomenon and a s e a rc h f o r an a b s o lu te th e o ry
o f v a lu e has been and i s l i k e l y to be a f r u i t l e s s s e a rc h .
The la b o r th e o ry o f v a lu e i s a m e ta p h y sic a l co n c e p t t h a t
does n o t y i e l d a c r i t e r i o n f o r d e c id in g th e co m p o sitio n o f
an econom y's o u tp u t o r th e m ethod o f p ro d u cin g i t .
The u t i l i t y th e o ry o f c h o ice o f f e r s a much s u p e r io r
46
m echanism f o r d e c id in g th e co m p o sitio n , th e m ethod o f p ro
d u c tio n and th e d i s t r i b u t i o n o f an econom y's o u tp u t w ith
th e one m ajo r drawback t h a t th e i n i t i a l ow nership o f th e
means o f p ro d u c tio n e f f e c t s th e d i s t r i b u t i o n o f o u tp u t. I f
we a c c e p t th e M arxian s o lu tio n to th e d i s t r i b u t i o n problem
o f e lim in a tin g th e p r iv a te ow nership o f a l l f a c t o r s o f p ro
d u c tio n , we a re s t i l l l e f t w ith th e problem o f e s t a b l i s h i n g
a mechanism f o r e f f i c i e n t l y a l lo c a tin g and u t i l i z i n g s o c i
e t y 's re s o u rc e s a c c o rd in g to th e u t i l i t y th e o ry o f c h o ic e .
The fo llo w in g c h a p te r a tte m p ts to develop such a m echanism .
S in ce u t i l i t y th e o ry i s an o p e r a tio n a l g e n e r a liz a
tio n o f c h o ic e r a t h e r th a n an a l t e r n a t i v e m e ta p h y s ic a l
th e o ry o f v a lu e to th e la b o r th e o ry o f v a lu e , a s o c i a l i s t
economy t h a t ad o p ts th e income d i s t r i b u t i o n a l c r i t e r i a o f
th e la b o r th e o ry need n o t r e j e c t th e u t i l i t y c r i t e r i a o f
w hat to p ro d u c e .
The A ppendix in d ic a te s t h a t i n t e r e s t ca n n o t be em
p i r i c a l l y j u s t i f i e d on th e grounds t h a t s a v in g i s th e p o s t
ponem ent o f consum ption t h a t r e q u ir e s a rew ard .
CHAPTER IV
THE PRICING OF THE FACTORS OF PRODUCTION
A N D THE DISTRIBUTION OF THE RETURNS
I . THE TASK
The o b je c tiv e o f t h i s c h a p te r i s to c o n s tr u c t a
m ethod and mechanism f o r p r ic in g th e f a c t o r s o f p ro d u c tio n
in an economy w here la b o r i s th e o n ly p r i v a t e l y owned fa c
t o r o f p ro d u c tio n and a l l form s o f income o th e r th a n wages
m ust a c c ru e to th e s t a t e . Our economy m ust ad h e re to th e
M arxian dogma t h a t th e way to e lim in a te s e v e re income i n
e q u a lit y i s to av o id th e m o n o p o liz a tio n o f th e f a c t o r s o f
p ro d u c tio n by a p a r t i c u l a r s o c ia l c l a s s , th u s e lim in a tin g
p r i v a t e m onopoly income o th e r th a n la b o r . P u b lic monopoly
incom e i s c o n s id e re d j u s t i f i a b l e on th e grounds t h a t income
p a id to th e s t a t e i s u sed f o r p u b lic e x p e n d itu r e s , i n v e s t
m ent o r d iv id e n d s .
The p re v io u s c h a p te r i l l u s t r a t e d th e s u p e r i o r i t y o f
a u t i l i t y th e o ry o f ch o ice as a c r i t e r i o n f o r d e te rm in in g
th e co m p o sitio n o f an econom y's o u tp u t. T h is c h o ic e i s
p a r t l y d ep en d en t on th e a l t e r n a t i v e c o s ts o f d i f f e r i n g o u t
p u t c o m b in a tio n s, th e r e f o r e th e p r o d u c tiv ity and s c a r c i t y
47
48
o f th e f a c t o r s o f p ro d u c tio n m ust be acco u n ted f o r in th e
r e l a t i v e p r ic e s o f th e f i n a l o u tp u ts . To d eterm in e th e s e
a l t e r n a t i v e c o s ts , a method o f c a lc u l a ti n g th e p r o d u c tiv ity
o f th e f a c to r s o f p ro d u c tio n m ust be i n s t i t u t e d . Once t h i s
c a lc u la tio n has been made and th e re s o u rc e s a l lo c a te d , a
system o f c o o rd in a tio n and c o n tr o l m ust e x i s t to e n s u re th e
e f f i c i e n t u t i l i z a t i o n o f th e f a c t o r s o f p ro d u c tio n by th e
p ro d u c in g e n t e r p r i s e s .
I I . LABOR—W A G ES
O b je c tiv e s
S in ce an o b je c tiv e o f o u r econom ic system i s to
p ro v id e th e g r e a t e s t p o s s ib le s a t i s f a c t i o n , a mechanism
f o r re c o rd in g th e d i s u t i l i t y o f la b o r m ust be i n s t i t u t e d .
A d d itio n a lly , th e a v a ila b le la b o r m ust be e f f i c i e n t l y a l l o
c a te d to a c h ie v e an optimum o u tp u t. To a c h ie v e th e s e con
d it i o n s a system o f wage d i f f e r e n t i a l s m ust e x i s t t h a t
w ould com pensate f o r d i f f e r i n g d i s u t i l i t y o f la b o r fu n c
ti o n s and sim u la ta n e o u s ly a t t r a c t la b o r to i t s m ost p ro d u c
t i v e uses* Two methods a r e p o s s i b le .
In s t i t u t i o n a l l y D eterm ined
Wage D i f f e r e n t i a l s
The s t a t e co u ld s e t wage d i f f e r e n t i a l s b ased on an
a r b i t r a r y c o l l e c t i v e c r i t e r i a r e f l e c t i n g t h e i r co n c e p tio n
o f an av erag e d i s u t i l i t y o f la b o r in d e x f o r jo b s and on th e
49
s t a t e 's e s tim a tio n o f p r o d u c tiv ity d i f f e r e n t i a l s . Such a
sy stem has th e added b e n e f i t o f a llo w in g th e c o l le c tiv e
id e a o f a j u s t d i s t r i b u t i o n o f income to be im plem ented
s im u lta n e o u s ly , how ever a number o f s e rio u s draw backs a re
in h e r e n t in such a sy stem , nam ely:
1. The d i s u t i l i t y o f la b o r in d ex i s an average and
a ls o a g u ess w hich p ro b a b ly w i l l n o t y ie ld an
optimum u t i l i t y d i s t r i b u t i o n .
2. A g r e a t d e a l o f in fo rm a tio n i s r e q u ire d to
e s t a b l i s h a p r o d u c tiv ity d i f f e r e n t i a l in d ex and
e x a c t accu ra c y i s p ra g m a tic a lly im p o s sib le .
3. Both u t i l i t y fu n c tio n s and p r o d u c tiv i tie s a re
c o n s ta n tly ch an g in g n e c e s s i ta t i n g c o n s ta n tly
changing wage r a t e s .
4. A m acro-econom ic e q u ilib riu m r e q u ir e s t h a t
t o t a l wages e q u a l th e v a lu e o f a v a ila b le con
sum ption g o o d s, th e r e f o r e when one wage r a t e
changes o th e r s m ust a ls o to have th e a g g re g a te
wage fund b a la n c e . A d d itio n a lly , as when wages
ch an g e, demand c u rv e s s h i f t n e c e s s ita t in g a
change in o u tp u ts and p r i c e s .
5. S ta te wage a d m in is tr a tio n i s v e ry c o s tly .
M arket D eterm ined Wage
D i f f e r e n t i a l s
L abor m o b ility and m a rk e t d eterm in e d wage d if f e r e n -
t i a l s w i l l e lim in a te th e sh o rtco m in g s o f 1 , 2 and 5. I f
o u tp u t p r ic e s and q u a n t i t i t e s w ere a ls o m arket d e term in ed ,
o b je c tio n s 3 and 4 w ould a u to m a tic a lly be com pensated fo r
by th e i n t e r a c t i o n o f th e la b o r and goods m a rk e ts.
However, th e d i s t r i b u t i o n o f income would now be a
fu n c tio n o f a b i l i t y and s c a r c i t y w hich may be o b je c tio n
a b le , depending on th e id e o lo g y o f e q u a lity o f th e s o c ie ty .
S ince a b i l i t i e s a re n o t hom ogeneous, a r e n t o f a b i l i t y
would ac cru e t o th o s e who p o s s e s s t a l e n t s in s h o r t su p p ly .
An i n s t i t u t i o n a l l y p ro g re s s iv e income ta x co u ld
red u ce th e r e n t o f a b i l i t y b u t such a ta x d i s t o r t s th e
m arg in al c o n d itio n s o f th e la b o r m a rk e t. However, th e re i s
a good d e a l o f e v id e n c e t h a t s u g g e s ts w orkers choose occu
p a tio n s on th e b a s is o f g ro s s wages r a th e r th an n e t wages
and th e y c o n s id e r ta x e s as a s o c i a l datum .
Wages and I n c e n tiv e s
A b a s ic assu m p tio n o f c a p ita lis m i s t h a t man works
h a rd e r i f h is wage i s d ep en d en t upon h is e f f o r t , y e t th e
d e te rm in a tio n o f wages in c a p ita lis m m ost o fte n does n o t
employ in c e n tiv e co m p en satio n . The fo llo w in g c h a p te r p re
s e n ts a th e o ry o f th e firm t h a t i s e n t i r e l y owned by th e
em ployees and t h e i r re m u n e ra tio n p a r t l y depends on t h e i r
e f f o r t s . A s tr o n g argum ent can be made t h a t in such an
en vironm ent th e e f f o r t p u t i n t o la b o r c o u ld be g r e a t e r th a n
51
t h a t in a c a p i t a l i s t i c en v iro n m e n t. ^
S u rp lu s on L abor
I f th e m a rg in a l p h y s ic a l p ro d u c t o f la b o r i s dim in^
is h in g and i f th e la b o r e r o n ly r e c e iv e s a wage e q u a l to th e
m a rg in a l v a lu e p ro d u c t (m arg in al p h y s ic a l p ro d u c t m u lti
p lie d by p r ic e o f th e p ro d u c t) o f th e l a s t la b o re r h ir e d ,
th e n th e work o f a l l th e o th e r la b o r e r s m ust produce a
m a rg in a l v a lu e p ro d u c t g r e a t e r th a n t h e i r wage r a t e . The
summation o f th e s u rp lu s e s pro d u ced by each w orker would be
e q u iv a le n t to M arx 's s u rp lu s v a lu e .
I f we ad h ere to th e id e o lo g y t h a t o n ly la b o r and
n o t la n d , c a p i t a l and e n tre p re n e u r s h ip i s p ro d u c tiv e and we
d i s t r i b u t e s u rp lu s v a lu e to th e w o rk e rs , we do n o t have a
mechanism f o r d e te rm in in g th e m ost e f f i c i e n t a l lo c a tio n o f
r e s o u r c e s .2 An a l t e r n a t i v e i s to have th e s u rp lu s v a lu e
( r e n t, i n t e r e s t and p r o f i t ) go to th e s t a t e where i t can be
d i s t r i b u t e d as i s i n s t i t u t i o n a l l y d e te rm in e d . How t h i s can
be done and y e t have re s o u rc e s e f f i c i e n t l y a llo c a te d i s th e
s u b je c t o f th e rem ain d er o f t h i s c h a p te r .
^■Indeed, la b o r p r o d u c tiv ity u s u a lly in c re a s e s in
c a p i t a l i s t i c e n t e r p r is e s when a p r o f i t s h a rin g p la n i s i n
tro d u c e d , v id a The S can lo n P la n , e d . F re d e ric k G. L e s ie u r
(New York: John W iley & S ons, I n c . , 1958), P a r t I I I ,
pp. 81-124.
In an economy w ith o u t an i n t e r e s t r a t e on c a p i t a l ,
th e tra n s fo rm a tio n problem d is c u s s e d in C h ap ter I I would
n o t e x i s t , i . e . , an economy w ith a z e ro i n t e r e s t r a t e .
52
I I I . CAPITAL— INTEREST
The p r e s e n t ta s k i s to d eterm in e th e o p tim a l p r ic e
o f c a p i t a l goods in a s o c i a l i s t economy b e a rin g in mind
t h a t a l l c a p i t a l i s s t a t e owned and income from c a p i t a l
goods can n o t a c c ru e to any p a r t i c u l a r in d iv id u a l, c l a s s o r
group in th e s o c ie ty . The answ er to t h i s problem i s depen
d e n t on th e p r i c e o f c a p i t a l goods and to d eterm in e t h i s
s e v e r a l c o n c e p ts o f an i n t e r e s t r a t e m ust be c o n s id e re d .
The P r iv a te Consum ption
R ate o f I n t e r e s t
P re s e n t consum ption d e s ir e s o f in d iv id u a ls may f a l l
s h o r t o f o r ex ceed o n e 's w e a lth o r incom e. Some may d e s ir e
to c u r r e n tly spend more th a n t h e i r p r e s e n t w e a lth , w h ile
o th e r s may w ish to spend l e s s th a n t h e i r w e a lth . S avers
may be w i l l i n g to lo a n t h e i r sa v in g s i f th e y r e c e iv e a p r e
mium o f e x t r a f u tu r e consum ption f o r d o in g s o . O th ers may
be w il l i n g to pay a premium o f l e s s f u tu r e consum ption f o r
g r e a t e r p r e s e n t co n su m p tio n . L ending may be p o s i t i v e l y
c o r r e la te d w ith th e premium o r ex ogenously d ete rm in e d as
th e e m p iric a l e v id e n c e o f th e Appendix would i n d i c a t e , b u t
b o rro w in g w ould be n e g a tiv e ly c o r r e la te d .
P r iv a te le n d in g and b o rrow ing a c h ie v e s th e r e d i s
t r i b u t i o n o f consum ption a c c o rd in g to th e d i f f e r e n t con
sum ption tim e p r e f e r e n c e s o f in d iv id u a l consum ers. The
b o rro w in g -le n d in g premium would be one t h a t e q u a liz e d
53
consum ption le n d in g and borrow ing so t h a t th e v a lu e o f th e
m a rg in a l u n i t o f p r e s e n t v e rs u s f u tu re consum ption i s made
e q u a l f o r sp e n d e rs and s a v e r s . T his premium i s th e p r i v a t e
consum ption r a t e o f i n t e r e s t .
In a s o c i a l i s t economy, f in a n c ia l i n s t i t u t i o n s
co u ld o p e ra te a m ark et t h a t would y ie ld th e e q u ilib r iu m
p r iv a te consum ption r a t e o f i n t e r e s t .
The P u b lic Consum ption
R ate o f I n t e r e s t
In C h a p te r I I i t was p o in te d o u t t h a t c a p i t a l i s t
i n t e r e s t r a t e th e o ry i s r a t i o n a l i z e d on th e grounds t h a t
sa v in g d e s e rv e s a r e tu r n due to th e p re fe re n c e f o r p r e s e n t
consum ption o v e r f u tu r e consum ption. Schum peter a t t r i b u t e s
th e o r i g i n a l i t y o f i n t e r e s t b e in g a rew ard f o r w a itin g to
S e n io r, and Bohm-Bawerk t r a n s l a t e d th e argum ent t h a t i f we
e x p e c t to g e t r i c h e r in th e f u tu r e , th e m a rg in a l u n i t we
consume now w i l l be v a lu e d more th a n t h a t we consume in th e
f u t u r e . 3
T h is argum ent was p re v io u s ly q u e s tio n e d as an i n d i
v id u a l tru is m b u t in th e a g g re g a te i t would seem re a s o n a b le
to e x p e c t t h a t th e av erag e consum ption tim e p r e f e r e n c e i s
p o s i t i v e f o r th e w hole economy and in c re a s e s and d e c re a s e s
^S chum peter, 0 £ . c i t . , p . 639; Eugen von Bohm-
Bawerk, C a p ita l and I n t e r e s t (London: M acm illan, 1890) ,
chap. I I .
54
as consum ption a b s tin e n c e in c r e a s e s , as long as th e mar
g in a l u t i l i t y o f p r e s e n t consum ption i s d e c re a s in g . I f th e
a g g re g a te tim e p re fe re n c e were n o t p o s i t i v e , t h i s w ould
im ply e i t h e r a s t a t i o n a r y s t a t e o r t h a t in v e stm e n t does n o t
even m atch d e p r e c ia tio n . A n e g a tiv e i n t e r e s t r a t e would
im ply t h a t in th e a g g re g a te , p eo p le e x p e c te d t h e i r f u tu r e
income to be l e s s . Schum peter co n ten d s t h a t th e consump
tio n r a t e o f i n t e r e s t would be zero i f a l l p eo p le have con
s t a n t n e e d s , d im in is h in g m a rg in a l u t i l i t y , a c o n s ta n t in
come flow and a known l i f e e x p e c ta n c y .4 W ithout com plete
c e r t a i n t y o f o n e 's l i f e ex p e cta n cy , p r e s e n t consum ption
w i l l be more h ig h ly v a lu e d th a n f u tu re consum ption m aking
th e p r e s e n t consum ption r a t e o f i n t e r e s t p o s i t i v e .
In v e stm e n t i s made a t th e expense o f p r e s e n t con
sum ption and s in c e fh arg in al u t i l i t y i s .d im in is h in g , th e
g r e a t e r th e in v e stm e n t to d a y , th e g r e a te r th e m a rg in a l
u t i l i t y o f p r e s e n t consum ption. The g r e a t e r th e i n v e s t
m ent, th e g r e a t e r th e f u tu r e consum ption, hence th e m ar
g in a l u t i l i t y o f f u tu r e consum ption d e c re a s e s as p r e s e n t
in v e stm e n t in c r e a s e s . I t w ould ap p ear th e n , t h a t th e pub
l i c p r e s e n t consum ption r a t e o f i n t e r e s t in c r e a s e s as
p r e s e n t in v e stm e n t in c r e a s e s . E xcept in th e b i z a r r e c a se s
4Branko H o rv a t, Towards a Theory o f P lan n ed Economy
(B eograd: Y ugoslav I n s t i t u t e o f Economic R e se a rc h , 1 9 6 4 ),
p . 60.
55
p r e v io u s ly c i t e d , th e p u b lic p r e s e n t consum ption r a t e o f
i n t e r e s t w i l l be p o s i t i v e .
The m agnitude o f th e in v e stm e n t (consum ption ab
s tin e n c e ) i s th e n e x t q u e s tio n to be d e te rm in e d and to do
s o , i t i s n e c e s s a ry t o in v e s tig a te a t h i r d d e f i n i t i o n a l
i n t e r e s t r a t e .
The P r o d u c tiv ity o f In v estm en t
R ate o f I n t e r e s t
In v estm en t goods can be d e fin e d as ite m s t h a t a re
n o t p ro d u ced f o r th em selv es b u t f a c i l i t a t e an in c re a s e in
p o s s ib le o u tp u t in f u tu r e tim e p e r io d s . The e x t r a o u tp u t
o v e r th e am o rtiz ed in v e stm e n t can be d e fin e d as th e r a t e o f
r e tu r n o r i n t e r e s t on in v e stm e n t. In a s t a t i o n a r y s t a t e ,
t h i s r a t e o f r e tu r n i s c o n c e p tu a lly ze ro i f th e economy i s
s a tu r a te d w ith in v e stm e n t goods to th e e x te n t t h a t a d d i
t i o n a l in v e stm e n t does n o t y i e l d a p o s i t i v e r e t u r n . Then,
o n ly rep la cem e n t in v e stm e n t w i l l o c c u r. Such an e n v iro n
ment i s h ig h ly u n lik e ly f o r two re a s o n s .
F i r s t l y , an economy i s a dynam ic and n o t a s t a t i c
e n t i t y , w ith in n o v a tio n s and ch anging demands th e r u le
r a t h e r th a n th e e x c e p tio n . S eco n d ly , even w ith d im in ish in g
r e t u r n s , th e shape o f th e p ro d u c tio n fu n c tio n may be such
t h a t o u tp u t may in c re a s e i n f i n i t e l y w ith s u c c e s s iv e do ses
o f in v e s tm e n t. In such a s i t u a t i o n , th e r e w ould be no
56
5
c a p i t a l s a tu r a tio n p o in t. T h ir d ly , i f r i s k e x i s t s to
c a p i t a l s to c k , th e c a p i t a l i s t w il l n o t c o n tin u e in v e s tin g
u n t i l th e r a t e o f r e tu r n o f th e l a s t in v e stm e n t p r o je c t
j u s t e q u a ls th e i n t e r e s t r a t e . T h is w i l l cau se th e r a t e o f
r e tu r n o f th e in v e stm e n t p r o je c ts to be u n d e rv a lu e d o r an
im puted r a t e o f i n t e r e s t f o r c a p i t a l r i s k s .
In an economy w ith an i n f i n i t e number o f in v e stm e n t
o p p o r tu n iti e s , th e re a re v a ry in g r a t e s o f r e tu r n on each
in v e s tm e n t. I f th e p u b lic consum ption i n t e r e s t r a t e were
z e ro , th e n th e o p tim a l amount o f in v e stm e n t w ould be th e
maximum in v e stm e n t f o r a l l in v e stm e n t w ith a p o s i t i v e r a t e
o f r e tu r n and would in c re a s e t o t a l u t i l i t y o v er a tim e
s e r i e s . But w ith a p o s it iv e p u b lic consum ption r a t e o f
i n t e r e s t th e optimum in v e stm e n t i s f i n i t e .
I f a m arket fo r c a p i t a l goods e x i s t s , th e p r ic e o f
c a p i t a l goods w i l l e q u a l th e r a t e o f r e tu r n o f th e l a s t
in v e stm e n t p r o je c t u n d e rta k e n . T h e re fo re , th e p r i c e o f
c a p i t a l goods i s dependent on th e le v e l o f in v e s tm e n t.
In v estm en t n e c e s s ita t e s l e s s consum ption to d ay f o r
more tom orrow , th e r e f o r e th e tim e p r e f e r e n c e s f o r consump
tio n o f th e s o c ie ty w i l l in f lu e n c e th e le v e l o f in v e stm e n t
^For an e x p o s itio n o f such a s i t u a t i o n s e e T. C.
Koopmans, A llo c a tio n o f R esources and th e P r ic e S ystem ,
o p . c i t . , p p . 122-125.
57
and th e p r ic e o f c a p i t a l goods. The o p tim a l amount o f
in v e stm e n t in a s o c ie ty i s depen d en t on b o th th e p r o d u c tiv
i t y o f in v e stm e n t o p p o r tu n itie s and th e p u b lic consum ption
tim e p re fe re n c e o f th e s o c ie ty .
The P u b lic C onsum ption,
In v e stm e n t and A llo c a tiv e
R ate o f I n t e r e s t
W ith th e p u b lic consum ptive r a t e o f i n t e r e s t p o s i
t i v e l y slo p e d and th e p r o d u c tiv ity o f in v e stm e n t r a t e o f
i n t e r e s t n e g a tiv e ly s lo p e d , th e r e e x i s t s a u n iq u e i n t e r e s t
r a t e t h a t d eterm in es th e optimum amount o f c u r r e n t in v e s t
ment b e a rin g in mind t h a t th e o b je c tiv e o f in v e stm e n t i s to
m axim ize consum ption a c c o rd in g to th e consum ption tim e
p re fe re n c e s o f consum ers. I f in v e stm e n t funds a re d i s
t r i b u t e d to p r o je c ts t h a t y ie ld a r e tu r n e q u a l to o r
g r e a t e r th a n t h i s i n t e r e s t r a t e , t h i s r a t e a ls o s e rv e s as
th e c r i t e r i o n f o r th e m ost e f f i c i e n t a l l o c a t i o n o f r e
s o u rc e s to in v e stm e n t p o s s i b i l i t i e s .
The slo p e o f th e p u b lic consum ption r a t e o f i n t e r
e s t i s a c o l l e c t i v e d e c is io n s in c e in d iv id u a l p re fe re n c e s
a re e x tre m e ly h e te ro g e n e o u s. T his d e c is io n i s th e r e f o r e
a r b i t r a r y and depen d en t upon th e p o l i t i c a l d e c is io n making
system o f th e s o c ie ty .
The In v estm en t Fund
A llo c a tio n Mechanism
W ith th e a g g re g a te amount o f in v e stm e n t and th e
58
i n t e r e s t r a t e d e te rm in e d , th e ta s k now i s to e s t a b l i s h a
s c re e n in g p ro c e s s f o r d i s t r i b u t i n g th e in v e stm e n t funds
o n ly to th o se p r o je c ts t h a t w i l l y i e l d a r a t e o f r e tu r n a t
l e a s t e q u a l to th e i n t e r e s t r a t e . The c o s t o f h av in g a
c e n tr a liz e d body g a th e r and e v a lu a te th e p r o f i t a b i l i t y of
a l l p o t e n t i a l in v e stm e n t o p p o r tu n itie s would be s u b s t a n t i a l
and would d u p lic a te th e in v e s tig a tio n and e v a lu a tio n o f
in v e stm e n t p o t e n t i a l t h a t i s done by d e c e n tr a liz e d o rg a n i
z a tio n s .
I f th e in d iv id u a l econom ic e n t e r p r is e s o p e ra te on
a p r o f i t c r i t e r i o n , th e y w ould u n d e rta k e o n ly th o s e in v e s t
m ents t h a t would y i e l d a r a t e o f r e tu r n a t l e a s t e q u a l to
th e p r ic e o f c a p i t a l . A f r e e m ark et on th e deamnd s id e f o r
in v e stm e n t funds would e n s u re t h a t th e y w ere r a t i o n a l l y
a llo c a te d . The e n t e r p r is e s t h a t p u rc h ase in v e stm e n t funds
co u ld th e n buy goods w ith th e funds from o th e r firm s on
th e open m a rk e tp la c e .
S u rp lu s on C a p ita l
I f d im in ish in g r e tu r n s to in v e stm e n t e x i s t s , th en
a l l in v e stm e n t p r o je c ts e x c e p t th e l a s t one w i l l y ie ld a
g r e a t e r r a t e o f r e tu r n th a n th e c o s t o f c a p i t a l w hich i s
th e e q u ilib riu m i n t e r e s t r a t e ch arg ed th e e n t e r p r i s e .
T his d if f e r e n c e betw een th e r a t e o f r e tu r n and th e i n t e r e s t
r a t e we s h a l l c a l l s u r p lu s on c a p i t a l .
I f th e e n t e r p r is e d ete rm in e d o u tp u t w here m a rg in al
59
c o s t eq u a led m a rg in a l rev en u e and i f th e m arket p r ic e was
above th e average c o s t a t t h i s p o in t, th e e n t e r p r i s e 's
p r o f i t would e x i s t due to s u rp lu s on c a p i t a l ( f o r g e ttin g
f o r th e moment la n d and e n tre p re n e u rs h ip ) and i t m ust be
ta x e d away by a lump sum ta x s in c e s u rp lu s can n o t accru e to
any one group by M arxian i n s t i t u t i o n a l dogma. An e x -p o s t
lump sum ta x , alth o u g h c o n c e p tu a lly la u d a b le , m ost lik e ly
would have a n e g a tiv e e f f e c t on econom ic e f f ic ie n c y due to
th e d e s tr u c tio n o f th e p e rs o n a l in c e n tiv e t h a t i t e n t a i l s .
However, i f th e firm p ro d u ces w here M C = A C = p r i c e , th e
su rp lu s i s e lim in a te d by a re d u c tio n o f th e p r ic e o f th e
o u tp u t. I f th e s o c i a l i s t e n t e r p r i s e o p e ra te d in a p u re ly .
c o m p e titiv e m a rk e t, th e s u r p lu s w ould n o t e x i s t and th e r e
would be no reaso n to have lump sum ta x e s . T his p o s s i b i l
i t y i s p u rsu ed in th e n e x t two c h a p te r s .
IV. LAND—RENT
The C oncept and D e f in itio n
o f Rent
R ent has been a much d is p u te d co n c ep t in econom ic
l i t e r a t u r e and th e m ost b ro a d d e f i n i t i o n o f i t s su b sta n c e
i s t h a t i t i s th e s u rp lu s g e n e ra te d o v e r th e a l t e r n a t i v e
use o f a fa c to r.® In t h i s s e n s e , i t i s an o p p o rtu n ity r e n t
6Joan R obinson, The Econom ics o f Im p e rfe c t Com peti
tio n (London: M acm illan, 1 9 4 6 ), p . 164.
60
and i s c re a te d by a l l f a c t o r s o f p ro d u c tio n .
Land R ent in a m ark et economy i s t h a t p a r t o f th e
p r ic e o f la n d w hich i s g r e a t e r th a n th e minimum su p p ly
p r ic e o f la n d .? I f la n d i s h e te ro g e n e o u s an d , o r c o n s id
e re d as a g i f t o f n a tu r e , th e minimum su p p ly p r ic e o f th e
l a s t p ie c e o f la n d em ployed i s z e ro , b u t r e n t can e x i s t
from fo u r c a u s e s :8
1. The s c a r c i t y o f la n d .
2 . I f la n d i s ab u n d an t y e t m onopolized, i t s su p p ly
can become s c a rc e and owners can e x p lo it
dem anders.
3. When la n d i s n o t homogeneous and th e p r ic e o f
la n d v a r ie s w ith th e p r o d u c tiv ity o f la n d com
p a re d w ith th e l e a s t p ro d u c tiv e p ie c e em ployed.
T h is i s r e n t o f f e r t i l i t y .
4. A p a r t i c u l a r p ie c e o f la n d can have a lo c a tio n
ad v a n tag e due to i t s n e a rn e s s to th e m ark et f o r
i t s o u tp u t. M arxian v a lu e th e o ry n e c e s s ita t e s
t h a t such r e n t a c c ru e to th e c o l le c tiv e s o c ie ty
r a t h e r th a n an in d iv id u a l o r group o f th e
s o c ie ty .
?H o rv at, 0 £ . c i t . , p . 50.
8I b i d . , p p . 3 7 -4 1 .
61
The Problem and P o s s ib le
S o lu tio n s
Our ta s k i s to a l l o c a t e la n d re s o u rc e s f o r r e t a i l
in g , a g r ic u ltu r e o r m ining to t h e i r m ost p ro d u c tiv e u s e .
The in fo rm a tio n and a d m in is tr a tiv e c o s ts o f d o in g t h i s
c e n t r a l l y would be e x o r b ita n t i f a t a l l p o s s i b le . The ex
p e rie n c e to d a te o f th e c e n t r a l l y p lan n ed econom ies in t h i s
r e s p e c t i s im p re s s iv e e v id e n c e . P ro d u c tiv e e f f i c i e n c i e s o f
re s o u rc e s a re b e s t c a lc u la te d by d e c e n tr a liz e d b o d ie s t h a t
m ust u t i l i z e them b u t to compare e f f i c i e n c i e s o f a l t e r n a
t i v e u ses o f re s o u rc e s t h i s d a ta m ust be c o lle c te d and
an a ly z e d u n le s s an a to m is tic m arket fo r them e x is ts , in a
p r o f i t o r ie n te d e n v iro n m e n t. A d d itio n a lly , i f re s o u rc e s
a re to be a l lo c a te d c o rre sp o n d in g to a consum er u t i l i t y
c r i t e r i a , th e in fo rm a tio n and c a lc u la tio n n e c e s s a ry f o r a
c e n tr a liz e d body i s overw helm ing.
C o n c e p tu a lly , a lump-sum ta x c o u ld e x t r a c t th e
la n d r e n t b u t (1) th e m agnitude o f such a ta x i s d i f f i c u l t
t o d eterm in e s in c e p r o f i t r e p r e s e n ts th e s u rp lu s g e n e ra te d
by a l l th e f a c t o r s o f p ro d u c tio n and how much was la n d r e n t
v e rs u s s u rp lu s on c a p i t a l i s n o t e v id e n t, (2) even i f th e
amount o f la n d r e n t co u ld be d e te rm in e d , th e ta x would have
to be le v ie d a f t e r th e la n d was u t i l i z e d , d e s tro y in g an
econom ic in c e n tiv e o f a p r o f i t o r ie n te d e n t e r p r i s e . T h ere
f o r e , th e o n ly s o lu t io n a p p e ars to be a m ark et m echanism
t h a t w ould have th e p r ic e o f la n d r e f l e c t th e r e l a t i v e
62
p r o d u c tiv ity o f a l t e r n a t i v e re s o u rc e u s e s . Y e t, econom ic
r e n t m ust n o t be d i s t r i b u t e d to an in d iv id u a l o r group in
th e economy a c c o rd in g to th e v a lu e th e o ry o f s o c i a l i s m .
The Mechanism
A g ric u ltu r e and R e ta ilin g
A m ark et f o r la n d in w hich th e s t a t e owns b u t
le a s e s la n d f o r a f i n i t e tim e p e rio d to th e h ig h e s t b id d e r
in s u r e s t h a t la n d w i l l be a llo c a te d to i t s m ost p ro d u c tiv e
u s e . E n te r p r is e s b id f o r th e use o f urban and r u r a l lan d
and i t i s a llo c a te d to th e h ig h e s t b id d e r . The p r ic e o f
th e la n d i s r e n t p a id to th e s t a t e . I f th e p r ic e p a id i s
seen ex p o s t to be le s s th an th e s u rp lu s g e n e ra te d by th e
la n d , in th e n e x t tim e p e rio d i t would b e n e f i t a n o th e r
c o l l e c t i v e to b id h ig h e r f o r th e use o f th e la n d . In a
w o rld o f p e r f e c t c e r t a i n t y a l l econom ic r e n t (s u rp lu s ) o f
th e la n d w ould a c c ru e to th e s t a t e . I f s u r p lu s d id a c c ru e
t o th e e n t e r p r is e due to ex a n te -e x p o s t d is c r e p a n c ie s , i t
may o r may n o t be d i s t r i b u t e d to th e e n t e r p r is e w o rk e rs,
f o r t h i s i s th e in g r e d ie n t o f th e fo llo w in g c h a p te r .
N e v e rth e le s s , la n d r e n t can o n ly a c cru e to a p a r t i c u l a r
group i f th e ex p o s t c e t e r i s p a rib u s c o n d itio n s a re d i f f e r
e n t th a n th o s e t h a t p r e v a ile d when th e ex a n te b id d in g
o c c u rre d ( e . g . , demand fo r th e f i n a l p ro d u c t in c re a s e s ) o r
i f an e r r o r o f c a lc u la tio n o c c u rs .
63
M ining Rent
The same m arket mechanism can a ls o be u t i l i z e d to
a l l o c a t e m ining re s o u rc e s e f f i c i e n t l y and a l l m ining r e n t
on la n d would n o t accru e to a p a r t i c u l a r group in s o c ie ty .
Y et, a f a c t o r i s p r e s e n t w ith m in e ra ls t h a t i s u n iq u e .
S hould a d e p o s it be t o t a l l y e x tr a c te d t h i s y e a r , o r o v er
two y e a r s , o r te n y e a rs from now?
Again we e n c o u n te r th e consum ption now v e rsu s
tomorrow d e c is io n o f s o c ie ty , th e m agnitude o f w hich was
r e f l e c t e d by th e c o l le c tiv e consum ption tim e p re fe re n c e o f
th e s o c ie ty , w hich we c a lle d th e p u b lic consum ption r a t e o f
i n t e r e s t . The use o f m in e ra l re s o u rc e s today m ust a t l e a s t
be as p ro d u c tiv e as th e i n t e r e s t r a t e ch arg ed on c a p i t a l ,
o th e rw is e s o c i e t y 's u t i l i t y w ould be g r e a t e r i f th e m in erals
w ere m ined and consumed in a f u tu r e tim e p e r io d . To e n su re
t h a t m in e ra ls a re e x tr a c te d a c c o rd in g to s o c i e t y 's c o lle c
t i v e consum ption tim e p r e f e r e n c e , th e p u b lic consum ption
r a t e o f i n t e r e s t m ust be ch arg ed on th e c o s t o f p ro d u c tio n .
Such a charge sh o u ld n o t be co n fu sed w ith a r o y a lty .
A r o y a lty i s a c o n s ta n t v a r ia b le ch a rg e b ased on o u tp u t
t h a t r a i s e s th e c o s t cu rv es and r e s t r i c t s o u tp u t by d i s
t o r t i n g th e tr u e econom ic c o s t o f th e m in e ra l. Many econo
m is ts have ad v o cated a r o y a lty as a ty p e o f d e p r e c ia tio n
(d e p le tio n ) as w ith a m achine, w hich w i l l o f f s e t th e lo s s
64
g
o f d e p le te d n a t u r a l r e s o u r c e s . S in ce n a tu r a l re s o u rc e s
a re n o t r e p r o d u c ib le , a r o y a lty o r d e p le tio n fund m erely
p o stp o n es t h e i r consum ption by s o c ie ty , and t h a t d e c is io n
i s p ro p e rly answ ered by c h a rg in g th e p u b lic consum ption
r a t e o f i n t e r e s t .
The s t a t e 's income from m ining i n t e r e s t and th e
revenue i t r e c e iv e s f o r th e le a s e o f m ining la n d c o u ld be
used fo r f u r th e r m in e ra l e x p lo ra tio n r a t h e r th a n th e c a p i
t a l i s t system o f e x p lo r a tio n by p r iv a te gam bling w ith p r i
v a te monopoly as th e rew ard .
V. ENTREPRENEURSHIP, RISK—PROFIT
The j u s t i f i c a t i o n f o r p r o f i t a c c ru in g to a c la s s in
c a p ita lis m i s v ery n eb u lo u s and te r m in o lo g ic a lly c o n fu sin g .
T r a d itio n a l econom ic th e o ry has c r e a te d a d i s t i n c t i o n b e
tw een norm al p r o f i t and econom ic p r o f i t w here norm al p r o f i t
i s d e fin e d as th e c a p i t a l i s t 's a l t e r n a t i v e c o s t o r t h a t
j u s t s u f f i c i e n t to e n t ic e him in to th e b u s in e s s .
F rank K n ig h t p o p u la riz e d th e co n cep t o f econom ic
p r o f i t as th e rew ard f o r th e r i s k in h e re n t to a b u s in e s s
e n t e r p r i s e t h a t o p e r a te s in an u n c e rta in w o rld .-1 -0 I f n o r-
9For exam ple, R. L. H a ll, The Economic System in a
S o c i a l i s t S ta te (London: M acm illan, 1 9 3 7 ), p . 96.
10F rank H. K n ig h t, R is k , U n c e rta in ty and P r o f i t
(B oston: Houghton M i f f l i n , 1921).
65
mal p r o f i t in p u re c o m p e titio n i s c o n sid e re d a r e tu r n to
r i s k b e a r in g , th e n i t i s r e a l l y a c o s t. I f , in p e r f e c t
c o m p e titio n , th e e n tre p re n e u r c o n trib u te s la n d , la b o r and
c a p i t a l , norm al p r o f i t can be c o n sid e re d to be e q u a l to h is
w ag es, r e n t and i n t e r e s t a l t e r n a t i v e s in a n o th e r en d e av o r.
Normal p r o f i t th e n red u ce s to w ages, r e n t and i n t e r e s t . In
lo n g -ru n p e r f e c t c o m p e titio n e q u ilib riu m th e n , th e r e tu r n
t o th e b u sin essm an i s r e a l l y a wage.
I f c a p ita lis m i s a system t h a t prom otes econom ic
g ro w th , an in c e n tiv e m ust e x i s t to in d u ce in n o v a tio n s t h a t
b r in g f o r t h grow th. The c l a s s i c c o n tr ib u tio n to such a
th e o ry i s Jo se p h Schum peter who j u s t i f i e s econom ic p r o f i t
as an in c e n tiv e to in n o v a tio n . The e n tre p re n e u r i s an i n
n o v a to r who g e ts a p r o f i t f o r th e com m ercial a d a p ta tio n o f
an in v e n tio n o r th e im p lem en tatio n o f a new p ro d u c tio n p ro
c e s s . 11 P u ttin g new id e a s in to p r a c tic e i s a s p e c ia l s k i l l
t h a t i s j u s t as im p o rta n t as th e in v e n tio n i t s e l f f o r w ith -
12
o u t such h a p p e n in g s, grow th would n e v e r be a r e a l i t y .
However, th e p ro m o ter o r e n tre p re n e u r i s n o t u su
a l l y th e r i s k b e a r e r f o r he n o rm ally borrow s c a p i t a l from
c r e d i t o r s who r e c e iv e i n t e r e s t . I f th e e n t e r p r i s e sh o u ld
11Jo se p h A. S chum peter, The Theory o f Econom ic De
velopm ent (C am bridge: H arvard U n iv e rs ity P r e s s , 1 9 5 9 ),
ch ap . IV.
^ J o s e p h A. S chum peter, S o c ia lis m , C a p ita lis m and
Democracy (New Y ork: H arp er, 1958, chap. X.
66
f a i l , th e c r e d i to r s w i l l be th e l o s e r s , hence th e y a re th e
r i s k b e a r e r s . 13 To Schum peter, i n t e r e s t i s th e r e tu r n to
r i s k and, as su c h , i s a c o s t. E n tr e p r e n e u r ia l p r o f i t i s
th e s u rp lu s o v e r c o s t t h a t e x i s t s in th e s h o r t run b e fo re
c o m p e titio n e lim in a te s i t . 14
In a s o c i a l i s t c o o p e ra tiv e e n t e r p r i s e economy,
r i s k s a r e b o rn e by th e w orkers and th e s t a t e . I f th e en
t e r p r i s e e x p e rie n c e s an econom ic l o s s , th e w o rk ers w i l l
r e c e iv e le s s th a n t h e i r c o n tr a c tu a l w age. In such an en
v iro n m en t, w o rk ers would b u ild t h i s c o n s id e r a tio n i n to th e
wage demands f o r t h e i r la b o r. P r o f i t i s th e n n o t n e c e s s a ry
t o in d u c e in d iv id u a ls to u n d e rw rite th e r i s k s o f b u s in e s s
u n c e r t a i n t i e s . The o n ly r i s k t h a t th e in n o v a to r in th e so
c i a l i s t e n t e r p r i s e b e a rs i s t h a t h is e x p e c te d p o s i t i v e g a in
from in n o v a tin g may n o t m a te r ia liz e and h i s o n ly n e g a tiv e
lo s s i s h i s e f f o r t .
I f th e s o c i a l i s t c o o p e ra tiv e e n t e r p r i s e goes bank
r u p t , th e s t a t e w i l l lo s e p a r t o r a l l o f i t s c a p i t a l i n
v e s tm e n t. C a p ita l r i s k s a re th u s b o rn e c o l l e c t i v e l y by
s o c ie ty and s in c e r is k b e a rin g i s n o t p r i v a t e l y u n d e rta k e n ,
t h i s c o s t i s e lim in a te d in th e s o c i a l i s t economy s in c e th e
i n t e r e s t r a t e t h a t th e c o o p e ra tiv e pay s th e s t a t e f o r i t s
13S chum peter, Theory o f Economic D evelopm ent, o p .
c i t . , p . 137.
14I b i d . , p . 128.
. 67
c a p i t a l does n o t in c lu d e a r i s k premium. I f th e s t a t e d id
add to th e i n t e r e s t r a t e a r i s k prem ium , th e p u b lic con-
su m p tio n -in v estm en t r a t e o f i n t e r e s t would be o v e r s ta te d
and some in v e stm e n t p r o je c ts t h a t sh o u ld be u n d ertak en
w ould n o t b e. The s t a t e co u ld recoup i t s c a p i t a l lo s s e s by
ta x in g s h o r t- r u n econom ic e n tr e p r e n e u r ia l p r o f i t s .
D isre g a rd in g r i s k th e n , p r o f i t in s o c ia lis m i s
m erely a s p e c ia l k in d o f wage t h a t i s th e rew ard f o r th e
la b o r o f e n tre p re n e u rs h ip o r in n o v a tio n and as such i s a
j u s t i f i a b l e r e tu r n in th e s p i r i t o f M arxian v a lu e th e o ry .
The m agnitude o f th e rew ard f o r e n tre p re n e u r s h ip can th e n
be m ark et d eterm in ed w ith th e e n tre p re n e u r p la c in g a p r ic e
on h is la b o r and th e e n t e r p r is e ( i n d i r e c t l y consum ers) o f
f e r in g a p r i c e . A m a n a g e ria l c la s s w ould e x i s t t h a t r e
c e iv e d a r e n t o f a b i l i t y in th e form o f a wage.
V I. CONCLUSIONS
1. M arket d eterm in ed wage d i f f e r e n t i a l s w i l l
a l l o c a t e h etero g en eo u s la b o r to i t s m ost p ro d u c tiv e use and
an i n s t i t u t i o n a l l y d eterm in ed income ta x can r e d i s t r i b u t e
th e r e n t o f a b i l i t y t h a t may be s o c i a l l y u n d e s ira b le .
2 . The o p tim a l le v e l o f in v e stm e n t i s a fu n c tio n
o f th e a g g re g a te tim e p re fe re n c e o f th e economy and th e
p r o d u c tiv ity o f in v e stm e n t. The a l l o c a t i o n o f in v e stm e n t
funds i s e f f i c i e n t when p r o f i t o r ie n te d firm s a re charged
68
th e e q u ilib riu m i n t e r e s t r a t e .
3. Land can be r a t i o n a l l y a llo c a te d by le a s in g i t
to th e h ig h e s t b id d e r and th e le v e l o f re s o u rc e d e p le tio n
can be o p tim a lly c o n tr o lle d by c h a rg in g th e p u b lic consump
tio n r a t e o f i n t e r e s t . S in ce la n d r e n t i s th e g i f t o f a
d e i ty , i t sh o u ld n o t a c c ru e to th e u t i l i z e r s of th e la n d
b u t to th e s t a t e . B id d in g f o r la n d le a s e s a ls o e n s u re s
t h i s .
4. P r o f i t i s a n o th e r form o f w ages, s in c e in a
c o o p e ra tiv e ly s tr u c t u r e d economy, r i s k i s c o l l e c ti v e l y
borne by th e w o rk e r-s h a re h o ld e rs . E n tre p re n e u rs h ip i s j u s t
a n o th e r form o f la b o r .
CHAPTER V
THE THEORY OF THE SOCIALIST FIRM
I . THE OBJECTIVE
In th e p re c e d in g c h a p te rs we saw t h a t i t i s p o s
s i b l e to r a t i o n a l l y p r ic e th e f a c to r s o f p ro d u c tio n a c c o rd
in g to t h e i r m a rg in a l p r o d u c t i v i t i e s w ith o u t econom ic r e n t
a c c ru in g to a p a r t i c u l a r income c l a s s . T his c h a p te r 's ta s k
i s to exam ine th e th e o ry o f s o c i a l i s t e n te r p r is e in m ark et
s o c ia lis m as i t p r e s e n tly s ta n d s . The c r i t e r i a em ployed
w i l l be th e e f f ic ie n c y o f re s o u rc e a llo c a tio n and u t i l i z a
tio n o f th e c a p i t a l i s t c o u n te r p a r t.
I I . SIMULATING PURE COMPETITION
The Model
So f a r , e f f ic ie n c y w ith r e s p e c t to re s o u rc e a l lo c a
tio n and u t i l i z a t i o n has depended upon th e p a ra m te r p r ic e
o f p u re c o m p e titio n f o r we have seen t h a t in a m ark et econ
omy, i f p r ic e s a re n o t c o n s id e re d as exogenous to th e ma
n ip u la tio n s o f in d iv id u a l econom ic u n i t s , i n e f f ic i e n c y can
r e s u l t . A num ber o f a tte m p ts have been made to t h e o r e t i
c a lly s im u la te a p u re ly c o m p e titiv e en vironm ent in a s o c ia l
i s t s t a t e .
69
70
E n ric o B arone, in s p i r e d by th e work o f P a r e to ,
m a th e m a tic a lly d e m o n stra te d by a system o f sim u lta n eo u s
e q u a tio n s t h a t a s o c i a l i s t economy c o u ld ac h iev e s im ila r
e f f ic ie n c y o f p ro d u c tio n as th e c o m p e titiv e s o lu tio n en
t a i l s in c a p ita lis m .^ The s t a t e c o u ld , by m erely s e t t i n g
a c c o u n tin g p r ic e s f o r a l l goods and th e n a d ju s tin g them by
t r i a l and e r r o r to c l e a r m a rk e ts, r a t i o n a l l y a l l o c a t e r e
so u rc e s b a se d on th e r e s u l t i n g e q u ilib riu m ac c o u n tin g
p r i c e s . F red M. T ay lo r a p p lie d B a ro n e 's t r i a l and e r r o r
m ethodology to th e p r ic in g o f th e f a c t o r s o f p ro d u c tio n
and e s ta b li s h e d g u id e lin e s on how th e s t a t e co u ld im plem ent
th e p ro c e s s w ith o u t a c tu a l m a rk e ts. 2
O scar Lange in c o rp o ra te d Barone and T a y lo r 's m eth
odology i n t o th e fo llo w in g s e t o f r u le s t h a t a s t a t e cen
t r a l p la n n in g b o ard w ould have to i n s t i t u t e f o r th e p u re
c o m p e titio n e f f ic ie n c y r e s u l t t o o c c u r. 2
1 . The u t i l i t y th e o ry o f c h o ic e d e te rm in e s demand
c u rv e s .
2 . P ro d u c e rs m ust c o n s id e r t h a t in p u t and o u tp u t
p r ic e s a re n o t a f f e c t e d by any o f t h e i r own a c tio n s .
O th e rw ise , an e n t e r p r i s e c o u ld r e s t r i c t p r e s e n t o u tp u t even
^B arone, o p . c i t .
2 T a y lo r, o p . c i t .
3L ange, o p . c i t .
71
to th e p o in t o f s u f f e r in g a s h o r t term lo s s in a n t ic i p a tio n
o f a m ark et c le a r in g p r ic e in c re a s e by th e c e n t r a l p la n n in g
b o a rd .
3. Each e n t e r p r i s e m ust p ro d u ce w here m a rg in a l
c o s t e q u a ls p r ic e th u s e n s u rin g t h a t th e firm chooses th e
o p tim a l s c a le o f o p e r a tio n s .
4. Each e n t e r p r i s e m ust choose th e lo w e st p o s s ib le
m a rg in a l c o s t curve th u s e n s u rin g th e o p tim a l co m b in atio n
o f th e f a c t o r s o f p ro d u c tio n .
5. In d u s try m anagers expand o r c o n t r a c t th e number
o f firm s in an in d u s tr y so t h a t th e p r ic e f o r each firm
e q u a ls av erag e c o s t as w e ll as m a rg in a l c o s t. T his in s u r e s
t h a t th e s c a le o f p ro d u c tio n i s th e m ost e f f i c i e n t in th e
long ru n as w e ll as th e s h o r t run
C r itiq u e o f th e Model
1. The s t a t e c e n tr a l p la n n in g b o ard m ust a c q u ire
in fo rm a tio n on m ark et s u rp lu s e s and s h o rta g e s in o rd e r to
a d j u s t p r ic e s so t h a t m ark et e q u ilib riu m i s a c h ie v e d w ith
ea ch e n t e r p r is e o p e ra tin g a t th e o p tim a l s c a le o f o p e ra
t i o n s . The c e n t r a l p la n n in g b o a rd i s r e a l l y a c e n t r a l
p o lic in g b o a rd f o r i t m ust a ls o somehow e n s u re t h a t each
e n t e r p r i s e i s p ro d u cin g on th e lo w e s t p o s s ib le m a rg in a l
c o s t c u rv e . The g a th e rin g o f t h i s in fo rm a tio n i s v ery
c o s tly i f in d e e d i t i s p o s s ib le . A c a p i t a l i s t s o c ie ty can
t h e o r e t i c a l l y a c h ie v e p u re ly c o m p e titiv e re s o u rc e a l lo c a -
72
tio n and u t i l i z a t i o n w ith o u t t h i s a d d itio n a l c o s t to s o c i
e ty .
2. In th e Lange schem a, e n t e r p r i s e s do n o t m axi
m ize p r o f i t s as an o b je c tiv e b u t m erely m e c h a n ic a lly fo llo w
t h e i r g iv en r u le s o f o p e r a tio n . T here i s no sy stem o f
rew ards o r punishm ent f o r com pliance to th e r u le s s h o r t o f
a S ib e ria n h o lid a y and th e r e a re no s tim u li f o r in n o v a tio n s
to f lo u r i s h .
3. Abba L e rn er has a d v o c ate d t h a t a f r e e m arket
f o r a l l com m odities and f a c t o r s o f p ro d u c tio n would e lim i
n a te th e afo rem en tio n ed c o s t in c u r r e d by th e c e n t r a l p la n
n in g b o ard in th e Lange schem a.^ Then th e problem o f
s c a rc e re s o u rc e s can be fo rm u la te d more c l e a r l y in term s o f
f a c t o r in p u ts r a th e r th a n in te rm s o f th e o u tp u ts o f p ro
d u c e rs and L an g e's r u le s become q u e s tio n a b le .^
W e have seen t h a t i f th e e n t e r p r i s e s a re o rd e re d to
pro d u ce w here m a rg in a l c o s t e q u a ls p r i c e , th e o p tim a l s c a le
o f o p e ra tio n s i s in s u re d b u t th e second r u le t h a t th e en
t e r p r i s e choose th e lo w est p o s s ib le m a rg in a l c o s t cu rv e i s
n e c e s s a ry to in s u r e t h a t th e optimum co m b in atio n o f f a c to r s
i s chosen from th e v a rio u s ways th e p ro d u c t can be produced.
I f th e r e i s o n ly one way o f p ro d u c in g th e p ro d u c t b ecau se
^Abba P. L e m e r, The Econom ics o f C o n tro l (New
Y ork: The M acm illan Company, 1 9 4 4 ), p . 63.
5 I b i d . , p p . 127-12 8 .
73
th e p ro p o rtio n betw een th e f a c t o r s i s te c h n ic a lly f ix e d ,
th e n th e second r u le i s n o t needed b u t t h i s i s an excep
t i o n a l c a s e .
By ap p ro ac h in g th e problem from th e v ie w p o in t o f
in p u ts L ern er s u b s t i t u t e s th e fo llo w in g s in g le r u le where
Lange re q u ire d tw o:
For th e a l t e r n a t i v e fo rm u la tio n in term s o f th e
p ro d u c tio n o f an a d d itio n a l u n i t o u tp u t (where p
sta n d s f o r th e p r ic e o f th e p ro d u c t and vmf s ta n d s
f o r th e v a lu e o f th e m a rg in a l amount o f f a c t o r needed
to produce one more u n i t o f p r o d u c t) , th e c o r r e c t
fo rm u la tio n o f th e R ule i s as fo llo w s : When p i s
g r e a te r th a n vmf ap p ly more o f th e f a c t o r ; when p i s
le s s th an vmf ap p ly le s s o f th e f a c t o r ; and when
p = vmf c o n tin u e to p roduce a t th e same r a t e b ecau se
th e optimum p o s it io n h as been r e a c h e d . 6
4. The Lange r u le t h a t an e n t e r p r i s e sh o u ld p ro
duce where o u tp u t p r ic e e q u a ls m a rg in a l c o s t o n ly a c h ie v e s
an optimum re s o u rc e a l l o c a t i o n i f th e r e i s no in flu e n c e by
b u y ers on th e p r i c e o f f a c t o r s o f p ro d u c tio n . But i f th e
change in f a c t o r demand o f an e n t e r p r is e does in flu e n c e th e
f a c t o r 's p r ic e (o r an in te rm e d ia te g o o d s' p r ic e ) th e mar
g in a l c o s t e q u a ls p r ic e r u le w i l l d i s t o r t th e a llo c a tio n o f
re s o u rc e s . In such a c a s e , fo rc in g e n t e r p r i s e m anagers to
view p r ic e s as p a ra m e tric r e s u l t s in an i n e f f i c i e n t a l l o c a
tio n o f r e s o u r c e s . L e rn e r h as a d r o i t l y p o in te d t h i s o u t.
I f th e r e i s to be an ad ju stm e n t o f o u tp u t to m eet
a change in c o n d itio n s , th e p ro d u c e r m ust p la n to
produce an amount w hich w i l l e q u a te p to vmf in th e
® Ib id ., p p . 130-131.
74
new c o n d itio n s . The change in o u tp u t w i l l have an
e f f e c t on th e p r ic e s o f th e f a c to r s and th e r e f o r e on
vmf. T h is w i l l have to be ta k e n in to ac co u n t i f th e
new optimum s i t u a t i o n i s to be re ac h ed w ith o u t a
g r e a t d e a l o f u n n e c e ssa ry fu m bling. I t w i l l t h e r e
f o re n o t s u f f i c e to t e l l th e p ro d u cer to p re te n d t h a t
he has no in f lu e n c e on th e p r ic e s o f th e f a c t o r s .
However i t was p e r f e c t l y n a tu r a l f o r t h i s re fin e m e n t
to be m issed b ecau se th e w hole em phasis was on o u tp u t
and n o t upon i n p u t. 7
On th e one hand, he m ust ig n o re h is in f lu e n c e
on p r ic e in c a lc u la tin g t o t a l c o s t to f in d t h a t m ethod
o f p ro d u c tio n w hich makes t o t a l c o s t a minimum, b u t
on th e o th e r hand he m ust ta k e i t in to a c c o u n t b ecau se
he has t o r e p e a t th e c a lc u la tio n (ig n o rin g h is i n f l u
ence on p r ic e s ) ev e ry tim e he changes h is o u tp u t o r
th e p r o p o rtio n in w hich he com bines th e f a c t o r s , and
i f he knew b e fo re he made any changes w hat th e e f f e c t s
o f th o s e changes would be on th e p r ic e s he c o u ld sav e
h im s e lf a g r e a t d e a l o f tr o u b le . In any p o s itio n w ith
g iv en p r i c e s h is c a lc u la tio n s m ight show t h a t a d i f
f e r e n t m ethod o f p ro d u c tio n was ch e ap e r ( i f th e new
p r ic e s w ere ta k e n as g iv en in th e new c a l c u l a t i o n ) .
The m anager w ould th e n have to change back to th e o ld
m ethod o f p ro d u c tio n o r p erh ap s to some in te rm e d ia te
m ethod. A know ledge o f how th e p r ic e s w ould change
as a r e s u l t o f th e change in h is demand f o r d i f f e r e n t
f a c t o r s w ould have sav ed a l l th e s e t r i a l s and p e r -
m itte d th e a p p r o p r ia te m ethod to be chosen d i r e c t l y .
Some p ro d u c e rs a re i n f l u e n t i a l b u y e rs o f some i n
p u ts f o r exam ple in raw m a te r ia ls p ro c e s s in g i n d u s t r i e s o r
in d u s t r i e s t h a t employ s p e c ia liz e d la b o r s k i l l s . In such
an e n v iro n m e n t, th e Lange r u le s w i l l prom ote econom ic i n
e f f ic ie n c y and th e L e rn e r s in g le r u le fo rm u la tio n m ust be
em ployed.
5. In in d u s t r i e s w hich e x p e rie n c e la r g e econom ies
o f s c a l e , a p a ra m e te r o u tp u t p r ic e r e s t r a i n t by th e c e n t r a l
7i b i d . , p . 129. 8 i b i d . , p p . 130-131.
75
p la n n in g b o ard co u ld r e s u l t in sm a ll s c a le p ro d u c tio n and
a h ig h p ro d u c t p r ic e to consum ers when a la r g e s c a le o f
p ro d u c tio n and a low er p r ic e to consum ers w ould r e s u l t i f
th e firm was allow ed to a n t i c i p a t e i t s in f lu e n c e on o u tp u t
p r i c e s . Here a g a in , th e L e rn e r r u l e i s s u p e r io r to th e
Lange schema o f r u le s w ith r e s p e c t t o re s o u rc e a llo c a tio n
and th e u t i l i t y o f consum ption.
Summary
The s im u la tio n o f a p u re ly c o m p e titiv e environm ent
in a s o c i a l i s t economy n o t o n ly n e c e s s i t a t e s a p r o l i f e r a
tio n o f r u le s b u t i t can cau se th e i n e f f i c i e n t a llo c a tio n
o f r e s o u r c e s . The L e rn e r s in g l e r u le o f e n t e r p r i s e behav
i o r e lim in a te s th e d an g er o f re s o u rc e m is a llo c a tio n , y e t
th e r e s t i l l i s th e c o s t o f th e c e n t r a l p la n n in g b o a r d 's
h a v in g to s e t p r ic e s to c l e a r m a rk e ts and p o lic e th e e n te r
p r i s e com pliance w ith th e s in g l e L e rn e r r u le s in c e a n a tu
r a l c r i t e r i o n of p erfo rm an ce i s n o n - e x is te n t.
I I P . THE THEORY OF THE
SOCIALIST COOPERATIVE
I n tr o d u c tio n
The m a jo rity o f s o c i a l i s t s t a t e s have r e je c te d
m ark et s o c ia lis m i n fa v o r o f c e n t r a l i z e d d e c is io n m aking.
However, th e slowdown in grow th r a t e s o f m ost S o v ie t-b lo c
c o u n tr ie s and th e e x p o n e n tia lly in c r e a s in g c o s ts o f cen -
76
t r a l i z e d d e c is io n m aking have l i f t e d m arket s o c ia lis m from
an academ ic c o n s tr u c t to a t o p i c a l p o s s i b i l i t y . One so
c i a l i s t c o u n try , Y u g o sla v ia , ha,s em ployed a m o d ifie d form
o f m ark et s o c ia lis m f o r some tim e and has i n s t i t u t e d an
e n te r p r is e s t r u c t u r e w here each w orker i s a s h a re h o ld e r. 9
Very l i t t l e t h e o r e t i c a l work h as been done on th e th e o ry o f
such an e n t e r p r i s e w ith th e e x c e p tio n o f th e two m odels
t h a t w i l l be p r e s e n te d in t h i s s e c tio n .
By d e f i n i t i o n , each firm i s a c o o p e ra tiv e where th e
w orkers h ir e m anagem ent, le a s e c a p i t a l and la n d from th e
s t a t e as d e s c rib e d in th e p re v io u s c h a p te r, p u rch a se and
s e l l com m odities from o th e r firm s and in d iv i d u a ls , s h a re
p r o f i t s and lo s s e s by an ag ree d fo rm u la w hich f o r s im p lic
i t y i s assumed to be e q u a lit y . The c o o p e ra tiv e can h i r e
and f i r e la b o r and i s d e m o c ra tic a lly c o n tr o lle d . S in ce th e
w o rkers s h a re p r o f i t s and l o s s e s , i t would ap p e ar t h a t th e
c e n tr a l p la n n in g b o a rd need n o t s e t any e n t e r p r is e r u le s
s in c e th e y a re p r o f i t o r ie n te d . Such an e n te r p r is e s t r u c
tu r e a ls o e lim in a te s th e la c k o f in c e n tiv e c r i t i c i s m o f th e
Lange schema.
The Ward Model
S t a t i c E q u ilib riu m
B enjam in Ward has ad o p ted L a n g e 's m ethod o f cen
^For a d e t a i l e d ac c o u n t o f th e Y u g o slav ia co o p era
t i v e s , se e th e b ib lio g ra p h y r e f e r e n c e s ._______________________
77
t r a l i z e d p r ic e s e t t i n g o f in p u ts and o u tp u ts and d ev elo p ed
a model o f th e c o o p e ra tiv e e n t e r p r is e t h a t y ie ld s p arad o x
i c a l r e s u l t s .
In u t i l i z i n g n o n -la b o r .in p u ts , th e c o l l e c t i v e w i l l
behave s i m ila r ly to i t s c a p i t a l i s t c o u n te rp a rt b u t i t w i l l
n o t do so w ith r e s p e c t to la b o r in p u ts s in c e th e o b je c tiv e
of th e c o o p e ra tiv e s i s t o maximize th e d iv id e n d r a t e o f th e
members w h ile th e c a p i t a l i s t c o u n te r p a r t w i l l a tte m p t to
m axim ize a b s o lu te p r o f i t s . When th e v a lu e o f th e m a rg in a l
p ro d u c t o f la b o r becomes le s s th a n th e av erag e d iv id e n d p e r
c o o p e ra tiv e w o rk er, th e c o l le c tiv e w i l l n o t h i r e th e mar
g in a l w o rk e r. Ward assum es t h a t th e c o o p e ra tiv e can o b ta in
as many w o rk ers as th e y r e q u ir e f o r th e s t a t e f ix e d w age.
The s o l i d l in e s o f F igure*5-A i l l u s t r a t e s th e e q u ilib riu m
p o s itio n o f th e c o o p e ra tiv e assum ing th e p ro d u c tio n fu n c
tio n has th e n e c e s s a ry and s u f f i c i e n t p r o p e r tie s f o r a
s ta b le e q u ilib r iu m . F ig u re 5-A y ie ld s th e le v e l o f em ploy
ment o f th e v a r ia b le in p u t, la b o r , when a l l o th e r in p u ts
a re c o n s ta n t and o u tp u t i s a fu n c tio n o f la b o r in p u ts .
The c a p i t a l i s t e n t e r p r is e w ith s im ila r rev en u e and
p ro d u c tio n f u n c tio n s w i l l h i r e th e same amount o f w o rkers
and hence p ro d u ce th e same o u tp u t o n ly i f th e wage r a t e in
c a p ita lis m i s e q u a l to th e s o c i a l i s t s t a t e f ix e d p r ic e o f
Inward, op>. c i t . , pp. 566-589.
78
D = av erag e d iv id e n d
V = v a lu e o f th e m a rg in a l p ro d u c t
L = employment
w ,
W x
L L
F ig u re 5-A. E q u ilib riu m o f th e c o l l e c t i v e w ith
p a ra m e tric p r ic e s and th e e f f e c t o f an in c re a s e in fix e d
c o s t s .
79
la b o r p lu s th e av erag e d iv id e n d p e r w o rk er o f th e co o p era
t i v e . I f th e wage r a t e to th e c a p i t a l i s t e n t e r p r is e i s
below th e wage p lu s th e d iv id e n d o f th e c o o p e ra tiv e , th e
c a p i t a l i s t e n t e r p r is e w i l l h i r e more la b o r and hence p ro
duce more o u tp u t. Only in th e c a se o f ze ro p r o f i t s w i l l
th e b e h a v io r o f th e two e n t e r p r i s e s be i d e n t i c a l and even
th e n t h e i r r e a c tio n s t o a change in p a ra m e te rs are n o t th e
sam e.
E ff e c ts o f a Change in P a ra m e te rs
An in c re a s e in f ix e d c o s t w i l l red u ce th e av erag e
d iv id e n d r a t e p e r w orker as p e r D2 in F ig u re 5-A. The co
o p e ra tiv e w i l l resp o n d by in c r e a s in g employment to L2 and
hence o u tp u t a ls o s in c e th e v a lu e o f th e m a rg in a l p ro d u c t
o f w orkers i s g r e a t e r th a n th e av erag e d iv id e n d r a t e
L^S. An in c re a s e in f ix e d c o s ts to th e c a p i t a l i s t p u re
c o m p e tito r w ould r e s u l t in a d e c re a s e in o u tp u t and em ploy
m ent. T his p a ra d o x ic a l r e s u l t o c c u rs b ecau se th e in c re a s e
in fix e d c o s t to th e c o o p e ra tiv e has had th e e f f e c t o f de
c re a s in g th e p r ic e (d iv id e n d ) o f th e v a r ia b le f a c to r ( la
b o r) . H ence, v a r ia b le c o s ts a re now h ig h e r in th e c a p i t a l
i s t e n t e r p r i s e .
I f th e p r ic e o f th e o u tp u t in c r e a s e s , employment
and hence o u tp u t w i l l f a l l b e c a u se th e in c re a s e in th e d iv
id e n d r a te w i l l be g r e a t e r th a n th e in c r e a s e in th e v a lu e
o f th e m a rg in a l p ro d u c t s in c e f ix e d c o s ts have a lre a d y been
80
11
a m o rtiz e d . F ig u re 5-B i l l u s t r a t e s th e r e a c tio n o f th e
c o o p e ra tiv e to an in c r e a s e in o u tp u t p r ic e and th e r e a d e r
h as p ro b a b ly a lre a d y th o u g h t o f th e p o s s i b i l i t y o f a n eg a
t i v e l y s lo p in g p ro d u c t su p p ly s c h e d u le . The c a p i t a l i s t
c o u n te r p a r t w i l l o f c o u rse resp o n d in th e o p p o s ite d i r e c
t i o n . A d e c re a se in f ix e d c o s ts o r o u tp u t p r ic e w i l l r e
s u l t in an o p p o s ite r e a c tio n to th o se j u s t d e s c r ib e d .
The im p lic a tio n s o f t h i s model do n o t enhance th e
e f f i c i e n t a l l o c a t i o n o f re s o u rc e s in such an en v iro n m en t.
These r e s u l t s o c c u r when p r ic e s a re p a ra m e tric and wages
r a th e r th a n a b s o lu te p r o f i t s i s th e o b je c tiv e f u n c tio n . W e
can co n clu d e t h a t th e Lange schema would be d is a s te r o u s
w ith r e s p e c t to th e a l l o c a t i o n o f re s o u rc e s i f e n t e r p r i s e s
w ere c o o p e ra tiv e s . A d d itio n a lly , th e c o o p e ra tiv e c o u ld
e f f e c t o u tp u t p r ic e s by r e s t r i c t i n g p r e s e n t o u tp u t in an
t i c i p a t i o n o f th e s t a t e 's r e a c tio n o f in c r e a s in g p r ie d to
c l e a r m a rk e ts . The c o o p e ra tiv e would th e n r e c e iv e monopoly
p r o f i t s .
11 _ py.! - dy + K )
D = — = ------------------------ fix e d c o s t (K) f o r th e
L l L
m a rg in a l w orker i s zero when th e r e i s o n ly one o u tp u t and
la b o r i s th e o n ly in p u t. F o r a s o lu tio n to th e g e n e ra l
c a s e , se e Evsey Domar, "The S o v ie t C o lle c tiv e F arm ,"
Am erican Economic R eview , J u ly , 1966, A ppendix, S ec. 3 ( b ),
p p . 749-756. I t i s p o s s ib le t h a t th e in c r e a s e i n o u tp u t
w i l l n o t e f f e c t em ployment a t a l l when la b o r c o s ts a re
r e l a t i v e l y u n im p o rta n t as w ith a Cobb-D ouglas p ro d u c tio n
fu n c tio n . Domar h as p ro v en t h i s a t th e v ery end o f h i s
A ppendix.
81
L
L
F ig u re 5-B. E f f e c t o f an In c re a s e in O u tp u t P ric e
in th e Ward M odel.
82
The o n ly way th e s t a t e co u ld m a in ta in p u re ly compe
t i t i v e re s o u rc e a l lo c a tio n w ith p a ra m e tric p r ic e s w ould be
to a l t e r th e s t a t e f ix e d wage to th e o r i g i n a l f ix e d wage
p lu s d iv id e n d le v e l o f th e o r i g i n a l e q u ilib riu m p o s it io n
w henever p a ra m e te rs to th e firm change. T his o f c o u rse i s
p r a g m a tic a lly im p o s s ib le b e s id e s b e in g a d m in is tr a tiv e ly
c o s t l y .
The r e s u l t s o f t h i s model may a ls o be o b je c tio n a b le
t o a s o c i a l i s t s o c ie ty w ith r e s p e c t to th e d i s t r i b u t i o n o f
incom e. Some c o o p e ra tiv e s may be in e q u ilib riu m w ith a
h ig h d iv id e n d w h ile o th e rs have a low d iv id e n d w hich i s due
to th e h e ig h t and s lo p e o f th e v alu e o f th e m a rg in a l p ro d
u c t o f la b o r cu rv e w hich i s te c h n o lo g ic a lly d e te rm in e d . No
m echanism e x i s t s f o r re d u cin g th e d i s p a r a t i e s .
The Domar Model
The C o o p e ra tiv e 's E q u ilib riu m
Evsey Domar h as a l t e r e d th e Ward model w ith a p o s i
t i v e su p p ly sc h e d u le o f la b o r w hich im proves th e r e a lis m
o f th e m o d e l's fo u n d a tio n s and i t s perfo rm an ce to some
e x t e n t . ^
F ig u re 5-C i l l u s t r a t e s th e e q u ilib riu m p o s i t i o n o f
th e c o l l e c t i v e w ith a supply o f la b o r c u rv e . The c o l l e c
t i v e now m ust m axim ize th e d iv id e n d r a t e w ith r e s p e c t to
1 2 I b i d . y p p . 735-757.
MLG
MLC. /
L , L
F ig u re 5-C. E f f e c t o f an In c re a s e in O utput P r ic e in th e Domar Model.
84
la b o r c o s t r a th e r th a n th e v a lu e o f th e m a rg in a l p ro d u c t
o f la b o r . I f th e c o o p e r a tiv e 's su p p ly o f la b o r curve has a
p o s i t i v e s lo p e , th e c o l l e c t i v e c o u ld behave as a m onopson-
i s t and employ la b o r up to th e p o in t w here th e m a rg in a l
la b o r c o s t and th e v a lu e o f th e m a rg in a l p ro d u c t a re e q u a l.
The broken l i n e in F ig u re 5-C r e p r e s e n ts th e m a rg in a l la b o r
c o s t and i s th e e q u ilib riu m em ployment le v e l o f th e
firm .
T his would be i d e n t i c a l t o th e e q u ilib riu m p o s itio n
o f i t s c a p i t a l i s t c o u n te r p a r t and some o f th e p a ra d o x ic a l
im p lic a tio n s o f W ard's model d is a p p e a r. An in c r e a s e in
o u tp u t p r ic e would r a i s e b o th th e v a lu e o f th e m a rg in a l
p ro d u c t cu rv e and th e d iv id e n d r a t e curve as p e r F ig u re 5-C
and th e new M LC curve w ould a ls o s h i f t to th e r i g h t . Em
ploym ent would in c re a s e to L2 ahd hence o u tp u t a ls o . An
in c re a s e in fix e d c o s ts i s i l l u s t r a t e d in F ig u re 5-D. The
r e s u l t i s a low er av era g e d iv id e n d r a t e cu rv e and a r e s u l t
in g le ftw a rd s h i f t in th e m a rg in a l la b o r c o s t c u rv e . The
new e q u ilib riu m p o s itio n o f th e c o l l e c t i v e i s a t a low er
le v e l o f employment and o u tp u t.
The im m o b ility o f la b o r from p o o r to r ic h co o p era
t i v e s t h a t would o c c u r i n th e Ward m odel now does n o t o c c u r
s in c e th e p r ic e o f la b o r w i l l f lu c t u a t e and i s n o t o f a
r i g i d p a ra m e tric n a tu r e .
F ig u re 5-D. E f f e c t o f an I n c re a s e in F ix ed C osts
in th e Domar Model.
86
C r itic is m o f th e Domar Model
1. Domar c o n s id e rs th e m a rg in a l la b o r c o s t to be
g r e a te r th a n th e su p p ly p r ic e o f la b o r o n ly beyond th e
p o in t o f i n t e r s e c t i o n o f th e su p p ly la b o r curve and th e
av erag e d iv id e n d r a t e c u rv e . Domar does n o t s t a t e th e
r a tio n a le o f h i s c o n c e p t o f m a rg in a l la b o r c o s t to th e co
o p e ra tiv e b u t th e o n ly j u s t i f i a b l e r a ti o n a l e i s to c o n s id e r
th e s h a re h o ld e rs as a u n io n who can h ir e o r f i r e n o n -u n io n
w o rk e rs. W ithout t h i s a ssu m p tio n , th e m a rg in a l la b o r c o s t
curve would n o t s h i f t to th e l e f t and to th e r i g h t when
fix e d c o s ts and p ro d u c t p r ic e change. When o u tp u t p r ic e
in c r e a s e s , some o f th e new la b o re rs become s h a re h o ld e rs who
r e c e iv e a d iv id e n d w h ile o th e rs a re h ir e d w orkers who r e
c e iv e a wage h ig h e r th a n th e wage o f th e s h a re h o ld e rs who
re c e iv e a d iv id e n d . The o n ly p o s s ib le c r i t e r i o n o f who i s
h ir e d as a s h a re h o ld e r and who i s h ir e d as a wage em ployee
m ust be t h e i r r e s p e c tiv e la b o r o f f e r p r i c e .
2 . By b eh av in g as a m o n o p so n ist, th e members o f
th e c o l le c t i v e in c r e a s e t h e i r av erag e d iv id e n d r a te s (which
i s a ls o t h e i r wage r a te ) by h i r i n g more s h a re h o ld e rs and
wage w orkers when o u tp u t p r ic e in c r e a s e s , b u t i t i s d o u b t
f u l i f th e s h a re h o ld e rs w ould c o n se n t to p ay in g a la b o re r a
h ig h e r income th a n th e y th e m se lv e s a re r e c e iv in g f o r s im i-
l a r la b o r . The s h a re h o ld e rs w ould th e n be a d is c r im in a tin g
m onopsonist d is c r im in a tin g a g a in s t th e m se lv e s. No one under
87
th e s e c o n d itio n s / would w ant to be a s h a re h o ld e r , f o r a l l
would o f f e r t h e i r s e r v ic e s as wage la b o r e r s . The in e q u ity
o f th e s tr u c t u r e o f th e c o o p e ra tiv e i s c o n tra ry to th e
e q u a lit y id e o lo g y o f a c o l l e c t i v e and th e c o l le c t iv e would
ce ase to fu n c tio n .
3. I f th e Domar d e f i n i t i o n o f th e m a rg in a l la b o r
c o s t i s re p la c e d by a c o n tin u o u s one as in F ig u re 5 -E , h is
c o n c lu sio n s t i l l h o ld s b u t n o t because o f s im ila r re a s o n s .
T h is new M LC cu rv e w i l l s t i l l i n t e r s e c t th e v a lu e o f th e
m a rg in a l p ro d u c t cu rv e a t as in F ig u re 5-C , so th e o r ig
i n a l e q u ilib riu m p o s it io n i s n o t a l t e r e d . An in c r e a s e in
o u tp u t p r ic e w i l l s t i l l in c r e a s e employment and hence o u t
p u t a ls o b u t now o n ly b ecau se th e v alu e o f th e m a rg in a l
p ro d u c t has in c re a s e d and th e m a rg in a l la b o r c o s t curve h as
a s lo p e le s s th a n i n f i n i t y , n o t because b o th th e V and M LC
a re s h i f t i n g . T h is i s a ls o i l l u s t r a t e d in F ig u re 5-E .
However, when f ix e d c o s ts in c r e a s e , em ployment and
hence o u tp u t do n o t c o n tr a c t as i s i l l u s t r a t e d by L -^ in
F ig u re 5 -F . S in ce th e in c re a s e in f ix e d c o s ts does n o t
e f f e c t th e v a lu e o f th e m a rg in a l p ro d u c t o r th e m a rg in a l
la b o r c o s t, th e e n t i r e f ix e d c o s t w i l l be ac c o u n ted f o r by
a re d u c tio n in th e d iv id e n d r a t e p e r w orker and th e e f f e c t
on em ployment and o u tp u t w i l l be n e u t r a l c o n tra ry to th e
c a p i t a l i s t c o u n te r p a r t. To re a c h t h i s c o n c lu sio n we m ust
assume t h a t th e L^-Lg p e o p le on th e su p p ly o f la b o r cu rv e
88
F ig u re 5-E . E f f e c t o f an In c re a s e in O u tp u t P r ic e
in th e A d ju ste d Domar M odel.
89
M L.C
F ig u re 5 -F . E f f e c t o f an In c re a s e in F ix e d C osts
in th e A d ju ste d Domar M odel.
90
who w ere p re v io u s ly s h a re h o ld e rs now become wage e a rn e rs
and th e r e s t o f th e s h a re h o ld e rs pay them a h ig h e r wage
th a n th ey th em selv es w i ll re c e iv e in o rd e r to r e t a i n them.
W e m ust m a in ta in th e d is c rim in a tin g m o n o p o list assu m p tio n .
4. Y et th e a d ju s te d Domar model s t i l l m ust assume
two c la s s e s o f la b o r r e c e iv in g u n eq u al r e t u r n s , one a d i v i
dend and th e o th e r a h ig h e r wage. I f t h i s assu m p tio n i s
n o t made th e employment le v e ls o f F ig u re s 5-E and 5rF a re
c o n tr a d ic to r y to th e su p p ly o f la b o r c u rv e , fo r wage d i s
c rim in a tio n i s c o n tra ry to th e c o o p e ra tiv e id e o lo g y . I f
th e su p p ly o f la b o r cu rv e in d ic a te s th e av erag e wage t h a t
m ust be p a id to a t t r a c t a c e r t a in amount o f w o rk e rs , th e
c o o p e ra tiv e can n o t a f f o rd to h ir e w o rk ers beyond th e i n t e r
s e c tio n o f su p p ly o f la b o r cu rv e and th e av e ra g e d iv id e n d
r a t e c u rv e . C o n seq u en tly , th e e q u ilib riu m le v e l o f em ploy
ment and hence o u tp u t in F ig u re 5-F i s in d ic a te d by .
W ith t h i s more r e a l i s t i c assu m p tio n , an in c r e a s e in fix e d
c o s ts w ould d e c re a se employment to L3 in F ig u re 5-F and
hence o u tp u t j u s t as i t does in th e c a p i t a l i s t c o u n te r p a r t.
In d e e d , i f th e c o o p e ra tiv e c o u ld behave as a m o n o p so n ist,
i t sh o u ld behave as a d is c r im in a tin g m o n o p so n ist and employ
L5 w o rk ers in o r d e r to m axim ize th e d iv id e n d r a t e o f i t s
w o rk e r-s h a re h o ld e rs r a t h e r th a n p ro d u ce w here th e M LC equals
V. The M L C cu rv e i s n o n - e x is te n t in a c o o p e ra tiv e by d e f i
n i t i o n .
9 1
A R e a l i s t i c Theory
o f th e C o o p erativ e
The Model
F ig u re s 5-G , 5-H and 5-1 i l l u s t r a t e th e th r e e s i t
u a tio n s a c o o p e ra tiv e co u ld fa c e w ith a p o s i t i v e su p p ly o f
la b o r curve and th e c o o p e r a tiv e 's b e h a v io r w i l l be d i f f e r
e n t in each case when th e c o o p e ra tiv e may n o t a c t as a d i s
c rim in a tin g m o n o p o list b u t m ust pay e q u a l wages f o r e q u a l
work be i t in th e form o f wages o r d iv id e n d s . The co o p era
t i v e th e n a c ts as i f i t w ere an i n d u s t r i a l u nion t h a t w i l l
h i r e and f i r e members in o rd e r to m axim ize wage r a t e s .
F ig u re 5-G i l l u s t r a t e s a s i t u a t i o n w here th e d i v i
dend i s le s s th an th e wage r a t e n e c e s s a ry t o a t t r a c t w ork
e r s a t any le v e l o f employment and o u tp u t s in c e th e su p p ly
o f la b o r cu rv e i s t o t a l l y to th e l e f t o f th e av erag e d i v i -
1
dend r a t e cu rv e. Ig n o rin g s h o r t run c o n s id e r a tio n s , t h i s
c o o p e ra tiv e would n e v e r come i n t o e x is te n c e o r w ould now
d i s i n t e g r a t e i f i t had p re v io u s ly o p e ra te d u n d er a d i f f e r
e n t s e t o f c o n d itio n s . I t i s an alo g o u s to a p u re ly com
p e t i t i v e c a p i t a l i s t firm whose minimum av erag e c o s t i s
above i t s demand c u rv e .
M oderate S h o rtag e
o f Labor
F ig u re 5-H i l l u s t r a t e s a c o o p e ra tiv e w ith p o s it iv e
econom ic p r o f i t . The c o o p e ra tiv e w i l l o n ly employ
y
L
F ig u re 5-G. N o n -F u n ctio n in g C o o p e ra tiv e .
93
M U C
L
F ig u re 5-H. S h o rta g e o f Labor C o o p e ra tiv e .
94
w o rk e rs , f o r i f i t a d d i tio n a lly h ir e d to L2 w o rk e rs , i t
w ould have to pay them more th a n th e e x i s tin g w o rk ers w ere
r e c e iv in g even though th e v a lu e o f m a rg in a l p ro d u c t o f
to L2 w o rk ers i s g r e a t e r th a n th e ir , c o s t. H irin g them
w ould in c r e a s e th e wages (d iv id e n d r a te ) o f th e e x i s t i n g
w o rk ers b u t in d o in g s o , th e c o o p e ra tiv e would be b e h a v in g
as a d is c r im in a tin g m o n o p o list a g a in s t i t s e l f . T h is c o u rse
o f a c tio n was p re v io u s ly r u le d o u t as c o n tra ry to th e co
o p e r a tiv e ' s c o n s t i t u t i o n .
The r e s t r i c t i o n o f employment by t h i s c o o p e ra tiv e
r e s u l t s in a low er o u tp u t th a n th e c a p i t a l i s t m o n o p so n istic
firm f o r i t w ould h i r e L3 w o rk e rs. O u tp u t p r ic e w i l l th e n
be h ig h e r in th e s o c i a l i s t economy th a n th e c a p i t a l i s t
economy. T his im p lie s t h a t th e v alu e o f th e m a rg in a l p ro d
u c t cu rv e i s h ig h e r and s te e p e r in th e s o c i a l i s t economy
th a n th e c a p i t a l i s t economy.
The a d d itio n o f a p o s i t i v e l y slo p e d su p p ly o f la b o r
cu rv e e l im in a te s , in t h i s c a s e , th e p a ra d o x ic a l r e s u l t s o f
th e Ward m odel. When f ix e d c o s ts in c r e a s e , o n ly th e a v e r
age d iv id e n d cu rv e f a l l s , c a u sin g em ployment and hence o u t
p u t to f a l l . When o u tp u t p r ic e in c r e a s e s , th e V and D
c u rv e s r i s e c a u sin g em ployment and hence o u tp u t to in c r e a s e .
P u re ly C o m p etitiv e O utput
M arket and M o n o p so n istic
L abor M arket
I f th e c o o p e r a tiv e 's o u tp u t p r ic e i s p a r a m e tr ic ,
95
th e r e s t r i c t i o n in em ploym ent, hence o u tp u t and th e r e s u l t
in g h ig h e r p a ra m e tric p r ic e w i l l c r e a te an econom ic p r o f i t .
T h is i s n o t o bvious from th e g r a p h ic a l p r e s e n ta tio n s in c e
th e p r o f i t i s ab so rb ed in th e d iv id e n d r a t e . The analogy
to th e c a p i t a l i s t c o u n te rp a rt i s th e p u re c o m p e tito r on
o u tp u t m a rk e ts and th e m o n o p o lis t in th e em ploym ent o f
la b o r e a rn in g a s h o r t- r u n e q u ilib riu m p r o f i t . Howver, th e
c a p i t a l i s t firm w i l l produce more o u tp u t and e a rn a g r e a te r
econom ic p r o f i t s in c e i t w i l l produce a t L3 , w here P = M C
f o r th e c a p i t a l i s t firm . Hence o u tp u t p r ic e w i l l a ls o be
low er in c a p ita lis m .
Where th e r e i s a n a tu r a l mechanism in c a p ita lis m
f o r th e p r ic e to f a l l to a zero econom ic p r o f i t e q u ilib riu m ,
t h i s may n o t happen in th e c o o p e ra tiv e economy. I f a l l
c o o p e ra tiv e s in th e in d u s try a re in e q u ilib r iu m a t th e I»i
em ploym ent le v e l o f F ig u re 5-H, none o f them w i l l in c r e a s e
o u tp u t and hence p r ic e s w i l l n o t f a l l . I f a m echanism f o r
new c o o p e ra tiv e s to e n te r an in d u s try does n o t e x i s t ,
w i l l be th e lo n g ru n e q u ilib riu m p o s it io n o f th e co o p e ra
t i v e w ith econom ic p r o f i t . Domar does n o t i n d ic a t e t h a t
F ig u re 5-H can be an econom ic p r o f i t e q u ilib r iu m .
Im p e rfe c t O u tp u t M arket and
M o n o p so n istic L abor M arket
S in ce th e v a lu e o f th e m a rg in a l p ro d u c t i s a ls o
m a rg in a l re v e n u e , F ig u re 5-H i l l u s t r a t e s t h a t th e im p e r-
1
96
f e c t l y c o m p e titiv e c o o p e ra tiv e would n o t employ la b o r up
to th e p o in t where th e m a rg in a l la b o r c o s t e q u a le d m a rg in a l
rev en u e as th e c a p i t a l i s t im p e rfe c t c o m p e tito r w ould. The
c a p i t a l i s t im p e rfe c t c o m p e tito r w ould employ L3 w o rkers
w h ile th e c o o p e ra tiv e w i l l o n ly employ L-^. The re a so n in
t h i s c a se i s n o t to r e a l i z e a h ig h e r d iv id e n d r a t e as i t
was f o r th e p u re ly c o m p e titiv e c o o p e ra tiv e . The c o n s itu -
t i o n o f th e c o o p e ra tiv e does n o t allo w i t to a c t as a d i s -
0
c r im in a tin g m onopsonist even when a l l w o rkers w ould be
b e t t e r o f f . To h ir e L-^ to L2 w o rk ers th e c o o p e ra tiv e would
have to pay them more th a n th e e x i s t i n g members w ould r e
c e iv e even though th e d iv id e n d r a t e o f e x i s t i n g members
w ould in c r e a s e . A gain, s in c e o u tp u t i s r e s t r i c t e d , p ro d u c t
p r i c e in th e c o o p e ra tiv e economy w i l l be h ig h e r th a n th e
c a p i t a l i s t economy and a ls o th e v a lu e o f th e m a rg in a l p ro d
u c t c u rv e .
A bundant S upply o f Labor
F ig u re 5-1 i l l u s t r a t e s a c o o p e ra tiv e w ith an eco
nom ic p r o f i t s in c e th e d iv id e n d r a t e i s m axim ized a t L i
em ployment l e v e l . T his w i l l alw ays b e tr u e i f th e su p p ly
o f la b o r cu rv e i s to th e r i g h t o f th e i n t e r s e c t i o n p o in t o f
th e v a lu e o f th e m a rg in a l p ro d u c t cu rv e and th e av e ra g e
d iv id e n d r a t e cu rv e (U) i f th e c o o p e ra tiv e i s f r e e to de
te rm in e i t s employment l e v e l . Domar p o in ts o u t t h a t i f th e
c o o p e ra tiv e i s re q u ir e d t o g u a ra n te e W 2 ren u m e ra tio n to
w
L L
F ig u re 5 -1 . A bundant Labor C o o p erativ e,
v o
98
w orker s h a re h o ld e rs , i t would be b e t t e r o f f h i r i n g o u t
L3 -L2 w o rk e rs, c o l l e c t t h e i r e a rn in g s and pay them th e re g
u l a r c o o p e ra tiv e d iv id e n d. ^ 3 i f th e c o o p e ra tiv e i s f r e e to
h ir e o u t members, i t sh o u ld h i r e o u t L4 -L2 w o rk ers r a t h e r
th a n L3 -L2 s in c e i t i s a f t e r X r a t h e r th a n Z t h a t th e v a lu e
o f th e m a rg in a l p ro d u c t o f th e e x t r a w orker-m em bers i s le s s
th a n t h e i r la b o r su p p ly p r i c e .
The c a p i t a l i s t c o u n te r p a r t, when fa c e d w ith a sim i
l a r su p p ly o f la b o r , would em ploy L2 w o rk ers and hence p ro
duce a g r e a te r o u tp u t th an i t s c o o p e ra tiv e c o u n te r p a r t.
The c o o p e ra tiv e v a lu e s la b o r as - Y w h ile th e c a p i t a l i s t
firm w ould only v alu e la b o r as L4 - X a t t h i s le v e l o f em
ploym ent .
As in th e case o f th e c o o p e ra tiv e w ith a m oderate
s h o rta g e o f la b o r, F ig u re 5-1 can r e p r e s e n t b o th p e r f e c t o r
im p e rfe c t o u tp u t m ark ets s in c e th e V cu rv e i s a ls o th e m ar
g in a l rev en u e p e r la b o r in p u t. But th e c o o p e ra tiv e w ith an
ab undant supply o f la b o r w i l l r e a c t to a change in param e
t e r s in th e same manner as th e Ward m odel. When o u tp u t
p r ic e s in c r e a s e , employment and hence o u tp u t f a l l s as in
in F ig u re 5-B. When f ix e d c o s ts i n c r e a s e , em ploym ent and
o u tp u t in c re a s e as in F ig u re 5-A.
D om ar's s o lu tio n seems h ig h ly u n lik e ly . The coop-
1 3 I b i d . , p . 7 4 6 .
99
e r a t i v e would maxim ize i t s av erag e wage a t L -^ employment
le v e l f o r beyond p o in t U th e v alu e o f th e m a rg in a l p ro d u c t
i s le s s th a n th e average d iv id e n d and th e h i r i n g o f more
w orkers would d e c re a se th e e a rn in g s o f e x i s t i n g w o rk e rs.
S in ce th e c o o p e ra tiv e v a lu e s la b o r as - U w h ile
th e c a p i t a l i s t firm would o n ly v a lu e la b o r as L ]_ - W a t
t h i s le v e l o f employment and o u tp u t, th e v a lu e o f o th e r
f a c to r s ( e . g . , c a p ita l) w i l l be u n d erv alu ed and th e y w i l l
be more in te n s iv e ly em ployed by th e c o l l e c ti v e th a n i t s
c a p i t a l i s t c o u n te r p a r t. Because th e c o l l e c t i v e w i l l u t i l
iz e th e o th e r in p u t f a c t o r s in d i f f e r e n t p ro p o rtio n s th a n
th e c a p i t a l i s t firm , th e e q u ilib riu m o u tp u t d e te rm in a tio n
p o s it io n i s in d e te rm in a te w ith o u t f u r t h e r in fo rm a tio n on
th e m a rg in a l p r o d u c t i v i t i e s o f th e s e f a c to r s and t h e i r sup
p ly s c h e d u le s .. Only i f i t s m a rg in a l c o s t and v a lu e p ro d u c t
w ere i d e n t i c a l to l a b o r 's would th e o u tp u t d e c is io n be sim
i l a r to th e c a p i t a l i s t f i r m 's and even th e n an econom ic
p r o f i t would e x i s t in th e c o o p e ra tiv e when p r o f i t was zero
in p u re c o m p e titio n . The c o o p e ra tiv e w i l l cau se a m is a llo -
c a tio n o f re s o u rc e s s in c e la b o r i s n o t em ployed to th e
p o in t w here i t s m a rg in a l p ro d u c t i s e q u a l to i t s m a rg in a l
c o s t and th e g r e a te r demand f o r o th e r f a c t o r s w i l l r e s u l t
in an eco n o m ic ally u n w arran ted b ia s in t h e i r u t i l i z a t i o n .
In summary, in a c o l l e c t i v e economy w ith p a ra m e tric
o u tp u t p r ic e s and a p o s i t i v e l y slo p e d o r p a ra m e tric su p p ly
100.
o f la b o r c u rv e , s o c i e t y 's re s o u rc e s may n o t be combined
o p tim a lly b ecau se la b o r may be o v e rv a lu e d and a l l o th e r
f a c t o r s u n d erv alu ed by th e c o o p e ra tiv e . ^
/
Im p lic a tio n s o f th e Model
In a c o o p e ra tiv e economy w ith p a ra m e tric o r non-
p a ra m e tric in p u t and o u tp u t p r i c e s , th e econom y's re s o u rc e s
w i l l n o t be o p tim a lly com bined ( a llo c a te d ) as in th e c a p i
t a l i s t c o u n te r p a r t, b ecau se la b o r may be o v e rv a lu e d and a l l
o th e r f a c t o r s u n d erv a lu e d by th e c o o p e ra tiv e when econom ic
p r o f i t e x i s t s . When th e p e r f e c t o r im p e rfe c tly c o m p e titiv e
c o o p e ra tiv e i s n o t r e a l i z i n g an econom ic p r o f i t , th e coop
e r a t i v e i s as e f f i c i e n t as i t s c a p i t a l i s t c o u n te r p a r t.
IV. CONCLUSIONS
1. The s im u la tio n o f p u re c o m p e titio n i s c o s tly ,
does n o t a d e q u a te ly p ro v id e ' a p erfo rm an ce in c e n tiv e and th e
assu m p tio n o f p a ra m e tric p r ic e s can cause re s o u rc e s to be
i n e f f i c i e n t l y a l lo c a te d .
2. The c o n c lu sio n s o f th e Ward model t h a t th e p e r
f e c t l y c o m p e titiv e c o o p e ra tiv e w i l l o n ly employ th e same
amount o f la b o r and produce th e same o u tp u t i f econom ic
p r o f i t i s n o n - e x is te n t a ls o a p p lie s to im p e rfe c t com peti
t i o n . I f econom ic p r o f i t i s p o s i t i v e , th e c o o p e ra tiv e w i ll
cau se re s o u rc e s to be le s s e f f i c i e n t l y a llo c a te d th a n in
101
c a p ita lis m under s im ila r assu m p tio n s o f p e r f e c t o r im
p e r f e c t c o m p e titio n .
3. The Domar a d d tio n o f a p o s i t iv e l y slo p e d sup
p ly o f la b o r sc h ed u le o n ly im proves th e perfo rm an ce o f th e
c o o p e ra tiv e to a change in o u tp u t p r i c e o r f ix e d c o s ts when
th e r e i s a m oderate s h o rta g e o f la b o r (F ig u re 5 -H ).
CHAPTER VI
A GENERALIZED M O D EL A N D THE ROLE OF
THE CENTRAL PLANNING BO A RD
, I . THE ROLE OF THE SUPPLY OF LABOR CURV E
W e have seen t h a t th e c o o p e ra tiv e i s i n e f f i c i e n t
compared to i t s c a p i t a l i s t c o u n te r p a r t when th e c o s t o f l a
b o r i s n o t e q u a l to th e g r e a t e s t p o s s ib le av era g e d iv id e n d
r a t e . When th e c o s t o f la b o r e q u a ls th e maximum p o s s ib le
d iv id e n d r a t e , econom ic p r o f i t i s zero and th e perform ance
/
o f th e c o o p e ra tiv e i s com parable to i t s c a p i t a l i s t c o u n te r
p a r t e x c e p t when th e c a p i t a l i s t i s a m o n o psonist in th e
la b o r m a rk e t.
F ig u re 6 -A i l l u s t r a t e s t h i s s i t u a t i o n w ith th e
th r e e p o s s ib le su p p ly o f la b o r c u rv e s . The c o o p e ra tiv e
w i l l h ir e th e same am ount o f la b o r no m a tte r w hich supply
o f la b o r cu rv e i t f a c e s . I f th e c a p i t a l i s t fa c e s S2 o r S3
i t w i l l r e s t r i c t em ploym ent s in c e th e m a rg in a l c o s t o f
la b o r i s g r e a t e r th a n m a rg in a l revenue a t some le v e l le s s
th a n L-j^. In t h i s c a s e , th e c o o p e ra tiv e u t i l i z e s re s o u rc e s
more e f f i c i e n t l y th a n i t s c a p i t a l i s t c o u n te r p a r t b u t th e
analogy i s d is p u ta b le s in c e th e c a p i t a l i s t i s e x p e rie n c in g
102
103
3 > a W
M L C
L .
F ig u re 6 -A. The T hree P o s s ib le Supply o f Labor
C urves to th e C o o p e ra tiv e .
104
an econom ic p r o f i t and th e c o o p e ra tiv e does n o t.
I I . THE M O D EL GENERALIZED
S h o rt Run— The
C a p i t a l i s t F irm1
L e t T o ta l Revenue be
6 .1 R(L, K q )
and T o ta l C o st be
6 .2 C(L, K q )
th e n p r o f i t i s
6 .3 7 r = R(L, K0 ) - C (L, K0 )
and i s m axim ized when
6 4 L H . = - IS - = 0
3L 3L 3L
th e r e f o r e th e o p tim a l amount o f la b o r em ployed by th e c a p i
t a l i s t firm i s when
6 .5 — =
3L 3L
^•I am in d e b te d to P ro fe s s o r John N ied e rc o rn f o r
h e lp in g t o fo rm u la te t h i s g e n e ra liz e d m odel.
105
S h o rt Run—The C o o p erativ e
The o b je c tiv e i s to maxim ize th e av erag e d iv id e n d
p e r w orker th e n ;
„ R(L,K0 ) C(L,K0 )
6 . 6 D „ ~ ~ --------------
n l L L
and i s m axim ized when;
L § | - R(L,K0 ) - C(L,K0 )
6 .7 = °
9L L2 L2
c o l l e c t i n g term s y ie ld s ;
6 . 8 L — - — - R(L,Kq ) + C(L,K0 ) = 0
9L 9L ° °
th e r e f o r e th e le v e l o f employment w here i s m axim ized i s
R(L,K0 ) - C(L,K0 )
6 .9 L =
9R _ 9C
9L 9L
But as lo n g as L > 0 and
6 .1 0 R (LrK0 ) > C(LfK0)
th e n
^ m 9R 9C
6.11 — > —
9L 9L
106
Looking back a t 6 . 8 we se e t h a t th e s o c i a l i s t c o o p e ra tiv e
w i l l s to p em ploying la b o r b e fo re
6.12
3L 3L
w here th e c a p i t a l i s t firm s to p s . T h is was i l l u s t r a t e d by
F ig u re s 5-H and 5 -1 .
The s o lu tio n im p lie s t h a t th e o p tim a l employment
le v e l o f c a p i t a l w i l l be h ig h e r in th e c o o p e ra tiv e firm
b e c au se th e p r o d u c tiv ity o f c a p i t a l w i l l be h ig h e r s in c e
th e amount o f la b o r in p u ts i s s m a lle r th a n f o r th e c a p i t a l -
O
i s t firm .
In long ru n e q u ilib r iu m , th e le v e l o f em ployment o f
la b o r in th e c o o p e ra tiv e w i l l be g r e a t e r th a n in th e s h o r t
run and v ic e v e rs a f o r c a p i t a l s in c e b o th in p u ts w ould th e n
be c o n s id e re d sim u lta n e o u s ly v a r ia b le .
I f , '
6 .1 3 R(L,Kq ) <^C(L,K0 )
w hich i s th e s i t u a t i o n i l l u s t r a t e d by F ig u re 5-G , th e co
o p e r a tiv e would n o t come i n t o e x is te n c e o r f o ld .
I f th e optimum em ploym ent o f la b o r g iv e n by equa
t i o n 6 . 8 o cc u rs when:
6 .1 4 R(L,K0 ) = C(L,K0 )
2As lon g as th e fa c to r s are n ot p e r fe c t s u b s t it u t e s .
107
th e n a ls o a t t h i s e q u ilib riu m p o s it io n
6.15 M = i £
d L dL
and th e b e h a v io r o f th e c o o p e ra tiv e i s s im ila r to th e c a p i
t a l i s t firm f o r ir = 0. T h is s i t u a t i o n i s i l l u s t r a t e d by
F ig u re 6 -A as lo n g as la b o r c o s ts a re p a ra m e tric to th e
c a p i t a l i s t firm . T his g e n e ra liz e d model em braces b o th p e r
f e c t and im p e rfe c t o u tp u t m a rk e ts.
I I I . DETERMINING COOPERATIVE EFFICIENCY
L e t us r e c a l l , from C h a p ter V, th e e f f e c t s o f a
change in p a ra m e te rs on th e c o o p e ra to v e .
A M oderate Labor S h o rtag e
In F ig u re 6 -A, S2 i s th e su p p ly o f la b o r curve o f
th e m oderate la b o r s h o rta g e c o o p e ra tiv e (F ig u re 5 -H ). When
f ix e d c o s t in c r e a s e s o n ly th e av e ra g e d iv id e n d r a t e curve
f a l l s c a u sin g a d e c re a s e in em ploym ent. When o u tp u t p r ic e
f a l l s , b o th th e V and D cu rv es f a l l and employment a g a in
f a l l s . I f one o r th e o th e r o r b o th w ere to o c c u r by a s u f
f i c i e n t m ag n itu d e, th e e q u ilib riu m o f F ig u re 6 -B would r e
s u l t . The r e a c tio n s o f th e Domar m odel to a change in
p a ra m e te rs w hich p r e v io u s ly c o n tr a d ic te d th o s e o f th e Ward
model a re th e d e s ir e d r e s u l t s from th e s ta n d p o in t o f th e
c o o p e ra tiv e em ploying r e s o u rc e s e f f i c i e n t l y .
10 8
L
F ig u re 6 -B . L abor S h o rta g e C o o p e ra tiv e ,
105
E q u ilib riu m em ploym ent L -^ o r w ould p ro b ab ly n o t
be as e f f i c i e n t as t h i s c o o p e r a tiv e 's c a p i t a l i s t c o u n te r
p a r t b ecau se th e c a p i t a l i s t may employ more th a n L2 la b o r
depending on th e slo p e o f h is m a rg in a l la b o r c o s t c u rv e .
S in ce th e c o o p e ra tiv e c a n n o t behave as a d is c rim in a tin g
m o n o p o list, i t w i l l r e s t r i c t employment and hence o v e rv a lu e
o th e r i n p u t s .
T h is c o o p e ra tiv e h as to o many f ix e d and n o t enough
v a r ia b le in p u ts and i s an alo g o u s to lo n g -ru n m o n o p o lis tic
e q u ilib riu m in c a p ita lis m . The economy sh o u ld have few er
firm s in t h i s in d u s tr y .
A bundant L abor
3
In F rg u re 6 -A, S i s th e su p p ly o f la b o r curve o f
th e la b o r abundant c o o p e ra tiv e (F ig u re 5 -1 ). When fix e d
c o s ts in c r e a s e , th e av era g e d iv id e n d curve f a l l s and em
ploym ent in c r e a s e s . When o u tp u t p r ic e f a l l s , b o th th e V
and D c u rv e s f a l l and s in c e th e D cu rv e f a l l s r e l a t i v e l y
more th a n th e V c u rv e , em ployment in c r e a s e s . A gain, i f one
o r th e o th e r o r b o th w ere to o ccu r by a s u f f i c i e n t m agni
tu d e , th e e q u ilib riu m o f F ig u re 6 -C w ould r e s u l t . The once
p a ra d o x ic a l r e s u l t s o f th e Ward model a re now th e d e s ire d
r e s u l t s .
T h is c o o p e ra tiv e w i l l be more e f f i c i e n t th a n i t s
c a p i t a l i s t c o u n te r p a r t, s in c e th e l a t t e r w i l l employ le s s
th a n L2 w orkers owing to th e f a c t t h a t i t , w i l l have a m ar-
110
W,
L . L
L
F ig u re 6 -C . Labor Abundant C o o p e ra tiv e .
I l l
g in a l la b o r c o s t cu rv e to th e l e f t o f th e su p p ly o f la b o r
c u rv e .
A g la n c e a t e q u a tio n 6 .9 r e v e a ls t h a t i f th e o u tp u t
demand cu rv e s h i f t e d le f tw a r d , employment would in c r e a s e .
The s h i f t in th e demand cu rv e w ould cause b o th t o t a l and
O
m a rg in a l rev en u e t o f a l l . S in ce m a rg in a l rev en u e w i l l
n ev e r f a l l le s s th a n t o t a l re v e n u e , th e denom inator o f
, _ R (L ,K 0 ) - G (L ,K 0 )
O • JlO Xi ■“ "^ I
3R _ 9C
9L 9L
w i l l alw ays d e c re a s e more th a n th e n u m erato r. S in ce th e
d e c re a se in p r ic e re d u c e s th e av erag e d iv id e n d a t th e o ld
le v e l o f em ploym ent, i t i s no lo n g e r b e n e f ic ia l to r e s t r i c t
th e n e x t m a rg in a l in p u t o f la b o r s in c e th e v a lu e o f th e
m a rg in a l p ro d u c t w i l l now be g r e a t e r th an th e av erag e d i v i
dend r a t e a t L-^ em ploym ent a f t e r th e p r ic e d e c re a s e . T his
can be seen in F ig u re 6 -C w here a t 1^ employment l e v e l , th e
v a lu e o f th e m a rg in a l p ro d u c t, even though i t has f a l l e n ,
i s s t i l l g r e a t e r th a n th e av erag e d iv id e n d r a t e a t L^.
6 .1 7 > £ a t L,
3 L L L
3 As lo n g a s th e s h i f t i s n o t from a concave to a
convex cu rv e as can happen w ith a change in t a s t e s f o r th e n
m a rg in a l rev en u e can in c r e a s e o r f a l l r e l a t i v e l y le s s th an
t o t a l re v e n u e .
112
The Second O rder C o n d itio n s
W e can now co n clu d e t h a t w ith a m o n o p so n istic la b o r
m a rk e t, th e c a p i t a l i s t firm w i l l be more e f f i c i e n t th a n th e
c o o p e ra tiv e when th e su p p ly o f la b o r curve i s ta n g e n t to
th e av erag e d iv id e n d r a t e and th e av e rag e d iv id e n d curve i s
r i s i n g . The c o o p e ra tiv e firm , w ith a m o n o p o lis tic la b o r
m a rk e t, w i l l be more e f f i c i e n t th a n th e c a p i t a l i s t firm
when th e su p p ly o f la b o r cu rv e i n t e r s e c t s th e av erag e d i v i
dend curve a t i t s maximum p o in t. When th e p r ic e o f la b o r
i s p a ra m e tric to b o th (S i in F ig u re 6 -A) and ta n g e n t to th e
av erag e d iv id e n d c u rv e , t h e i r perfo rm an ce w i l l be s im ila r .
What h as been i l l u s t r a t e d i s t h a t th e second o rd e r
c o n d itio n s f o r a c o o p e ra tiv e to be as o r more e f f i c i e n t
com pared to i t s c a p i t a l i s t c o u n te r p a r t i s t h a t n o t o n ly
m ust m a rg in a l c o s t n o t be f a l l i n g b u t th e av e rag e d iv id e n d
r a t e m ust be a t i t s maximum p o in t. I f th e av e ra g e d iv id e n d
r a t e i s r i s i n g o r f a l l i n g , th e c o o p e ra tiv e w i l l be le s s
e f f i c i e n t . The f i r s t d e r iv a tiv e o f th e D cu rv e m ust be
z e r o .
IV. THE PATHS TO COOPERATIVE EFFICIENCY
T hree to o ls e x i s t in a c o o p e ra tiv e economy t h a t
co u ld be u t i l i z e d to in d u ce c o o p e ra tiv e s to o p e ra te a t th e
zero econom ic p r o f i t le v e l o f em ploym ent.
113
A lte r in g th e Number o f Firm s
In th e la b o r s h o rta g e c o o p e ra tiv e o f F ig u re 6-B ,
to o many fix e d and n o t enough la b o r in p u ts a re u sed . I f
th e number o f firm s in t h i s in d u s try d e c re a se d , th e demand
curve f o r i t s o u tp u t w ould s h i f t rig h tw a rd , c a u sin g b o th
th e V and D c u rv e s to s h i f t upward as in F ig u re 6rD. Em-'
ploym ent and hence o u tp u t would in c re a s e to and th e de
c re a s e in th e number o f c o o p e ra tiv e s in th e in d u s try co u ld
cause th e su p p ly o f la b o r curve to s h i f t to th e r i g h t . I f
th e d e c re a s e in th e number o f firm s w ere s u f f i c i e n t to
s h i f t th e S cu rv e to S2 in F ig u re 6-D, t h i s c o o p e ra tiv e
w ould become as e f f i c i e n t as i t s c a p i t a l i s t c o u n te r p a r t.
In th e abundant la b o r c o o p e ra tiv e o f F ig u re 6 ^C, an
in c r e a s e in th e number o f c o o p e ra tiv e s in th e in d u s tr y wou]d
cau se th e demand cu rv e to s h i f t le f tw a r d , hence th e V curve
would s h i f t downward and to th e l e f t and th e D curve downr-
w ard and to th e r i g h t c a u sin g employment to in c r e a s e and
hence o u tp u t a l s o . I f th e in c r e a s e in th e number o f coop^
e r a t i v e s w ere s u f f i c i e n t to s h i f t th e D curve so t h a t th e
S cu rv e i n te r s e c t e d i t a t i t s maximum, t h i s c o o p e ra tiv e
would no lo n g e r r e s t r i c t o u tp u t and p r i c e .
The in c r e a s e in th e number o f c o o p e ra tiv e s co u ld
a ls o cau se th e su p p ly o f la b o r curve to s h i f t le ftw a rd as
i n F ig u re 6 ->E. In such a c a s e , th e D curve need o n ly s h i f t
to D2 o f F ig u re 6 -E , f o r th e c o o p e ra tiv e to become as e f f i -
114'
W ,
L
F ig u re 6 -D. E f f e c t o f a D ecrease in th e Number o f
C o o p e ra tiv e s on th e L abor S h o rta g e C o o p e ra tiv e .
115
L
F ig u re 6 -E . E f f e c t o f an In c re a s e in th e Number
o f C o o p e ra tiv e s on th e Labor A bundant C o o p e ra tiv e .
1 1 6
c i e n t as i t s c a p i t a l i s t c o u n te r p a r t.
A lte rin g P r ic e s
F ix in g fix e d c o s t s . A lump sum ta x o r r e n t would
in c r e a s e th e employment o f th e la b o r ab u n d an t c o o p e ra tiv e
as e f f e c t i v e l y as in c r e a s in g th e number o f firm s . However,
th e la b o r s h o rta g e c o o p e ra tiv e r e q u ir e s a su b sid y to in-^
c re a s e em ployment b e fo re i t w i l l n o t r e s t r i c t th e em ploy
ment o f la b o r . In a d d itio n , a lump sum ta x o r su b sid y
d e s tro y s th e r a t i o n a l i t y o f th e p r ic e s o f th e f a c to r s o f
p ro d u c tio n as th e y w ere e s ta b lis h e d in C h ap ter IV.
F ix in g l a b o r ' s p r i c e . Making th e p r ic e o f la b o r
p a ra m e tric i s e q u iv a le n t to s e t t i n g a minimum wage. Such
a c tio n may be d is a s te r o u s in a c o o p e ra tiv e economy f o r th e
fo llo w in g re a s o n s .
1. When th e p r ic e o f la b o r i s n a t u r a l ly non-
p a ra m e tric , m aking i t p a ra m e tric does n o t in s u r e t h a t th e
la b o r s h o rta g e c o o p e ra tiv e w i l l employ th e optimum q u a n tity
o f la b o r s in c e i t w ould n o t be a b le to o b ta in t h a t number
o f w o rk ers a t th e ze ro p r o f i t wage r a t e . A lo o k a t F ig u re
6 -D w i l l i l l u s t r a t e t h i s c o n c lu s io n .
2 . I f th e c o o p e ra tiv e i s la b o r ab u n d a n t, s e t t i n g
th e p r ic e o f la b o r a t w^ in F ig u re 6 -E w ould n o t change th e
employment l e v e l , o u tp u t o r wage r a t e o f th e la b o r abundant
c o o p e ra tiv e .
117
3. I f th e p r ic e o f la b o r i s n a t u r a l p a ra m e tric ,
th e r e i s no re a so n to f i x i t s p r i c e .
4. F ix in g th e p r ic e o f la b o r w ould r e q u ir e th e
c e n tr a l p la n n in g b o a rd to know th e su p p ly cu rv e o f la b o r
f o r a l l c o o p e ra tiv e s b ec au se th e r e s t r i c t i o n o f employment
by a c o o p e ra tiv e does n o t r e s u l t in a c a p i t a l i s t re c o g n iz
a b le economic p r o f i t b u t i s a u to m a tic a lly r e tu r n e d to
w orkers in th e form o f lo w er wages in a la b o r s h o rta g e co
o p e ra tiv e and h ig h e r wages in a la b o r ab u n d an t c o o p e ra tiv e .
I f i t were p o s s ib le to g a th e r in fo rm a tio n on th e su p p ly o f
la b o r cu rv es o f a l l c o o p e r a tiv e s , i t w ould be e x trem ely
c o s tly and r e p r e s e n t a diseconom y o f th e c o o p e ra tiv e econ
omy t h a t would n o t e x i s t in a c a p i t a l i s t economy.
5 . E n te r p r is e and in d iv id u a l in c e n tiv e w ould be
reduced s in c e t h e o r e t i c a l l y one c a n n o t r e a l i z e more th a n
th e m arket wage.
6 . I f th e number o f firm s i s a l t e r e d , we p r e v i
o u sly saw t h a t th e r e i s no re a s o n to f i x th e p r ic e o f la b o r.
F ix in g o u tp u t p r i c e . W e saw t h a t lo w erin g o u tp u t
p r ic e can fo rc e th e la b o r ab u n d an t c o o p e ra tiv e to produce
a t th e zero p r o f i t employment le v e l o f F ig u re 6 -C . The
c e n tr a l p la n n in g b o a rd w ould know t h a t th e la b o r ab undant
c o o p e ra tiv e was r e s t r i c t i n g enqployment from th e r e s u l t i n g
s u rp lu s on th e la b o r m a rk e t. B ut we saw t h a t in c re a s in g
th e number o f c o o p e ra tiv e s w ould a c h ie v e th e same r e s u l t .
1 1 8
In th e la b o r s h o rta g e in d u s tr y , th e s h o rta g e w ould
be m a n ife s te d by c o o p e ra tiv e s ' demand f o r more la b o r a t th e
e q u ilib riu m wage r a t e w^ in F ig u re 6 -D. An in c re a s e in
o u tp u t p r ic e would r a i s e employment to L2 , o u tp u t and th e
wage r a t e to w2 r b u t employment w i l l s t i l l be r e s t r i c t e d no
m a tte r how h ig h th e o u tp u t p r ic e i s in c re a s e d (u n le ss th e
e l a s t i c i t y o f th e su p p ly o f la b o r curve becomes z e r o ) . I f
o u tp u t p r ic e i s d e c re a s e d , employment w i l l f a l l when th e
d e s ir e d r e s u l t i s to in c re a s e employment in th e la b o r
s h o rta g e c o o p e ra tiv e .
Im p e rfe c t o u tp u t m a rk e ts . I f a la b o r s h o rta g e co
o p e r a tiv e i s a ls o an im p e rfe c t c o m p e tito r, m aking i t s o u t
p u t p r ic e p a ra m e tric w i l l n o t r e s u l t in e lim in a tin g th e
r e s t r i c t i o n o f employment as was j u s t d is c u s s e d . However,
m aking o u tp u t p r ic e p a ra m e tric to th e la b o r ab u n d an t im ^>
p e r f e c t c o m p e tito r co u ld fo rc e i t to pro d u ce a t z e ro eco
nom ic p r o f i t w here p r ic e e q u a le d m a rg in a l c o s t. Y e t, i n
c r e a s in g th e number o f firm s w ould te n d to make o u tp u t
p r ic e n a t u r a l l y p a ra m e tric and o u tp u t p r ic e c o u ld be l e f t
to n a t u r a l l y f l u c t u a t e .
In m ark ets w here th e o u tp u t p r ic e i s n a t u r a l l y im
p e r f e c t , th e c o o p e ra tiv e economy fa c e s an i d e n t i c a l problem
as th e c a p i t a l i s t economy w ith r e s p e c t to c o n tr o l e x c e p t
th e c o o p e ra tiv e w i l l alw ays employ le s s la b o r th a n i t s
119
c a p i t a l i s t c o u n te r p a r t.^ R ather than f ix in g p r i c e s , th e
c e n tr a l p la n n in g board should atte m p t to e lim in a te the
b a r r i e r s t o e n try .
A lte rin g th e number of firm s in a c o o p e ra tiv e econ
omy w i l l achieve th e same r e s u l t s t h a t a l t e r i n g fix e d c o s ts
o r p r ic e s attem p ts to achieve w ith o u t in c u r r in g th e unde
s i r a b l e r e s u l t s o f th e l a t t e r two a l t e r n a t i v e s .
V. THE ROLE OF THE CENTRAL PLANNING BOARD
E lim in a te d F u nctions
C hapter V and t h i s c h a p te r i l l u s t r a t e t h a t most of
th e fu n c tio n s o f th e c e n tr a l p la n n in g board in a Lange
schema a re n o t n e c e ssa ry when th e in d u s try s tr u c t u r e i s
c o o p e ra tiv e .
1. P roducers need n o t be fo rc e d to c o n sid e r th e
p r ic e o f la b o r as beyond t h e i r in flu e n c e , so th e c e n tr a l
p la n n in g b o ard need n o t is s u e o r p o lic e t h i s r u l e .
2. This a ls o r e lie v e s th e s t a t e o f th e c o s tly jo b
o f s e t t i n g in p u t p r ic e s even i f th ey could somehow do i t as
w e ll as a m arket.
3. Since th e wage r a te of la b o r i s dependent upon
the e f f ic ie n c y o f th e c o o p e ra tiv e , th e c e n t r a l p la n n in g
board would no lo n g e r have to i n s t r u c t and p o lic e th e
^See C hapter V.
120
e n t e r p r is e to produce on th e low est m arginal c o s t curve.
4. I f th e c e n tr a l p la n n in g borad can e f f e c t zero
economic p r o f i t by in c re a s in g o r d e c re a sin g th e number of
c o o p e ra tiv e s , i t would no lo n g er have to s e t o u tp u t p r ic e s .
5. For s im ila r reasons as s ta te d in 4, th e c e n tr a l
p la n n in g board no lo n g e r would have to i n s t r u c t and p o lic e
e n t e r p r is e s to produce where m arginal c o s t eq u a ls p r ic e .
The C .P .B . F unctions
1. Determ ine th e p u b lic consum ption, in v estm en t
and a l l o c a t i v e r a te o f i n t e r e s t as o u tlin e d in C hapter IV.
2. P rovide a m arket fo r the non-human f a c to r s o f
p ro d u c tio n as o u tlin e d in C hapter IV.
3. As in th e ro le o f government in c l a s s i c a l l i b
e r a lis m , th e CPB should m aintain in d u s try environm ents t h a t
e lim in a te b a r r i e r s to e n try t h a t would allow im p e rfe c t
o u tp u t m a rk e ts.
4. In c re a s e o r d ecrease th e number of c o o p e ra tiv e s
in an in d u s try to in s u re zero economic p r o f i t a l lo c a tio n
and u t i l i z a t i o n o f th e economy's reso u rce s so t h a t la b o r
w i l l n o t be undervalued and o th e r f a c to r s o f p ro d u c tio n
o v erv alu ed . The s ig n a l to th e CPB to do so i s ex cess supply
of o r demand f o r la b o r a t th e e x is tin g in d u s try wage r a t e .
I t i s co n ceiv ab le t h a t th e l a s t fu n c tio n o f th e CPB
could come about from n a t u r a l m arket fo rc e s w ith o u t spe
c i f i c CPB i n i t i a t i v e . Would.an e n tre p re n e u r (manager)
121
s t a r t a c o o p e ra tiv e in a high d iv id en d (wage) r a t e in d u s
tr y ? Would w orkers se e in g an in d u s try w ith h ig h wage r a t e s
e s t a b l i s h a co m p e titiv e co o p erativ e? I f , in a c o l le c tiv e
economy, some people d e s ire to be C h iefs r a t h e r th an I n
d ia n s , i t would seem th a t th e answer to such q u e s tio n s
would be p o s itiv e ! Under th e se circum stances th e c e n tr a l
p la n n in g board would p a s s iv e ly e v a lu a te th e a p p lic a tio n s to
le a s e th e s o c i e t y ' s non-human f a c to rs o f p ro d u c tio n r a t h e r
th a n a c tiv e ly a llo c a te them.
VI. CONCLUSIONS
S ince th e f i r s t and second o rd e r c o n d itio n s o f th e
c o o p e ra tiv e a re un iq u ely d i f f e r e n t than th o se of th e c a p i”
t a l i s t firm , i t s response to a change in p aram ete rs i s con
t r a r y to t h a t o f th e c a p i t a l i s t firm . Y et, th e s e p arad o x ic
c a l re sp o n se s a re d e s ira b le from th e sta n d p o in t t h a t they
f a c i l i t a t e th e use o f a sim ple to o l to en su re e f f i c i e n t
u t i l i z a t i o n of s o c i e t y 's re so u rc e s by in d iv id u a l coopera~
t i v e s . Ind eed , an i n t r i n s i c mechanism to en su re coopera
t i v e e f f ic ie n c y could e x i s t in m arket sy n d ic a lism .
)
CHAPTER VII
OVERALL SU M M A R Y
Value th e o ry i s r e l a t i v e to o n e 's id eo lo g y and i s
n o t an o p e r a tio n a lly m eaningful co n c ep t. The c o s t th e o ry
o f v alu e o f th e C la s s ic a l School i s in a p p ro p r ia te fo r a l l o
c a tin g the f a c to r s of p ro d u ctio n to so lv e th e problem o f
o u tp u t asso rtm en t because i t does n o t in c o rp o ra te a th e o ry
o f demand. Y et, i t i s s u p e rio r to u t i l i t y th e o ry in th e
r e s p e c t t h a t i t im p l ic i tly im p lies a j u s t d i s t r i b u t i o n of
w ea lth acco rd in g to i t s id e o lo g y . The la b o r th e o ry of
v alu e i s a m etap h y sical concept and sin c e i t i s a ls o a c o s t
th e o ry o f v a lu e , i t i s s u b je c t to s im ila r c r i t i c i s m .
The u t i l i t y th e o ry o f ch o ice i s an o p e r a tio n a lly
s i g n i f i c a n t concept and as such i s s u p e r io r to a c o s t th e
ory o f v a lu e . Y et, u t i l i t y th e o ry has n o t u n iv e r s a lly p r e
v a ile d o v er c o s t th e o r ie s o f v alu e due to i t s f a i l u r e to
in d ic a te a m o rally o p tim al d i s t r i b u t i o n o f a s o c i e t y 's o u t
p u t. But s in c e u t i l i t y th eo ry i s an o p e r a tio n a l g e n e r a li
z a tio n o f ch o ice r a th e r th an a c o n f l i c t i n g m etap h y sical
th e o ry o f v alu e to th e la b o r th e o ry o f v a lu e , a s o c i a l i s t
economy t h a t adopts th e income d i s t r i b u t i o n a l c r i t e r i o n o f
th e la b o r th e o ry , need n o t r e j e c t th e u t i l i t y c r i t e r i o n o f
122
123
what to produce. The problem th en becomes th e e s t a b l i s h
ment of a mechanism f o r e f f i c i e n t l y a l lo c a tin g and u t i l i z
in g s o c i e t y 's re so u rc e s ac co rd in g to th e u t i l i t y th e o ry o f
choice which w ill sim u lta n e o u sly p re v e n t p r iv a te income
from non-human f a c to r s o f p ro d u c tio n ac cru in g to an in d i
v id u a l o r c la s s .
The a llo c a tio n o f th e f a c t o r s of p ro d u ctio n in a
s o c i a l i s t economy can be b e s t achieved by e s ta b li s h in g a
m arket t h a t would equ ate t h e i r p r ic e to t h e i r m arginal
p r o d u c tiv ity . Lump sum ta x e s can t h e o r e t i c a l l y p re v e n t
su rp lu se s on c a p i t a l and land from ac cru in g to in d iv id u a ls
o r a c la s s b u t they a re n o t p r a c t i c a l . They a re d i f f i c u l t
to im plem ent, d e stro y in c e n tiv e , and th e magnitude o f th e
su rp lu s i s o fte n d i f f i c u l t to determ ine when s e v e r a l fac
to r s are combined.
As an a l t e r n a t i v e , th e s t a t e le a s e s re so u rc e s to
th e h ig h e s t b id d e r and th e p u b lic consum ption, investm ent
and a llo c a tiv e r a te s o f i n t e r e s t a re developed t h a t sim ul
ta n e o u sly ensure t h a t th e s o c ie ty p u rsu es i t s o p tim al r a te
o f economic growth c o n s is te n t w ith i t s c o l le c tiv e consump
t io n tim e p re fe re n c e . This r a t e was a ls o a p p lie d to n a tu
r a l re so u rc e s to en su re t h a t th e y a re economized over tim e.
In a c o o p e ra tiv e ly s tr u c t u r e d economy, r i s k i s c o l
l e c t i v e l y borne by th e w orker s h a re h o ld e rs and th e s t a t e
sin c e i f th e c o o p e ra tiv e in c u rs an economic l o s s , th e
124
w o rk e r-sh areh o ld ers w i l l re c e iv e le s s than t h e i r d e s ire d
wage and w i l l leave t h e i r jobs f o r t h e i r n e x t b e s t employ
ment a l t e r n a t i v e . I f bankruptcy o c c u rs , th e s t a t e b ea rs
th e lo s s . E n tre p re n e u rsh ip re c e iv e s a r e n t o f a b i l i t y wage
and w orkers sh a re p r o f i t s , hence p r o f i t i s a n o th e r form o f
wages. Since renum eration i s based on perform ance, innova
tio n should f lo u r is h t h a t y ie ld s s h o r t run economic r e n t
j u s t as i t does in th e c a p i t a l i s t firm .
The Lange schema of a d e c e n tr a liz e d s o c i a l i s t econ
omy was dem onstrated to be an i n f e r i o r method of e n su rin g
an e f f i c i e n t a llo c a tio n o f re so u rc e s in a c o o p e ra tiv e ly
s tr u c tu re d economy.
The c o o p e ra tiv e e n t e r p r i s e , s in c e th e f i r s t and
i
second o rd e r c o n d itio n s fo r th e o p tim al employment of la b o r
are d i f f e r e n t from th e c a p i t a l i s t s ' f i r s t and second o rd e r
c o n d itio n s f o r maximizing a b so lu te p r o f i t s , w i l l always
overvalue la b o r and undervalue o th e r in p u ts , when economic
p r o f i t i s p o s it iv e under c o n d itio n s o f p e r f e c t o r im p e rfe c t
in p u t or o u tp u t m arkets. When economic p r o f i t i s ze ro , the
c o o p e ra tiv e 's perform ance w i l l be s im ila r to i t s c a p i t a l i s t
tw in . Since m axim ization of th e average wage r a te i s th e
o b je c tiv e fu n c tio n o f th e c o o p e ra tiv e e n t e r p r i s e , th e sup
p ly o f la b o r curve in flu e n c e s th e e f f ic ie n c y o f reso u rce
u t i l i z a t i o n in th e c o o p e ra tiv e e n t e r p r is e to a much g r e a te r
e x te n t than i t does in th e c a p i t a l i s t e n t e r p r i s e .
125
For t h i s same reason a method o f expanding and
c o n tra c tin g th e number o f c o o p e ra tiv e s in an in d u s try i s a
more e f f i c i e n t and le s s c o s tly to o l fo r a c h iev in g o ptim al
re so u rce a l lo c a tio n and u t i l i z a t i o n than a Lange type
schema.
The c e n tr a l p la n n in g board can ensure t h a t th e co
o p e ra tiv e economy w i l l economize sc a rc e re so u rc e s as w ell
as pure co m p etitio n t h e o r e t i c a l l y does in a c a p i t a l i s t
economy. Ind eed , j u s t as in th e c a p i t a l i s t model, th e
n a tu r a l phenomena of u t i l i t y m axim ization and co m p etitio n
could r e s u l t in an e f f i c i e n t m arket sy n d ic a lism w ith o u t
c o o p e ra tiv e s having t o be s t a t e c re a te d o r d e stro y e d .
o
c
a p p e n d i x
126
APPENDIX
THE DETERMINANTS OF SAVINGS
IN CAPITALISM
I . THE HYPOTHESIS
C la s s ic a l economic th e o ry contended th e i n t e r e s t
r a te was a reward f o r p o stp o n in g consumption and assuming
t h a t as one consumes l e s s , th e m arg in al u t i l i t y o f consump
tio n in c re a s e s , i n t e r e s t r a te s and sav in g s must be p o s i
ti v e l y c o r r e la te d . The K eynesian re v o lu tio n r e le g a te d the
i n t e r e s t r a te to a secondary r o le a f t e r income in i n f l u
encing savings b u t a l l d e te r m in is tic K eynesian macroeco
nomic models s t i l l h y p o th e siz e sav in g s as a fu n c tio n o f th e
r a t e o f i n t e r e s t .
This in v e s tig a tio n contends t h a t i n t e r e s t r a te s do
n o t s i g n i f i c a n t l y a f f e c t th e l e v e l o f sav in g s in an economy
and t h a t w ith income le v e ls alo n e we can p r e d ic t th e le v e l
o f sa v in g s. Y et, i f we r e g r e s s sav in g s on i n t e r e s t r a te s
we m ight lo g ic a l ly e x p e c t them to be h ig h ly c o r r e la te d
w h ile s t i l l m a in ta in in g th e o r i g i n a l h y p o th e s is .
When income le v e ls have been h ig h , i n f l a t i o n i s
e i t h e r a th r e a t o r a r e a l i t y . The m onetary a u th o rity usu
a l l y responds by r a i s i n g i n t e r e s t r a t e s in th e hope t h a t
127
12 8
in v estm en t and consumption f a l l (sav in g s r i s e ) . Hence# the
tr u e t e s t o f w hether sav in g s i s a fu n c tio n of th e i n t e r e s t
r a t e i s to see i f th e change in sav in g s and th e change in
i n t e r e s t r a t e s , and sav in g s and th e i n t e r e s t r a t e in r e a l
term s are c o r r e la te d . A d d itio n a lly , i f th e m arginal p ro
p e n s ity to consume i s d e c re a sin g in th e s h o r t ru n , savings
would th e n in c re a s e when income i s h igh and th e i n t e r e s t
r a te should n o t co rresp o n d in g ly in c r e a s e .
I f th e i n t e r e s t r a t e i s a fu n c tio n o f sav in g s and
in v estm en t as c l a s s i c a l th e o ry ad v o c a te s, t h i s stu d y could
be c r i t i c i z e d on th e grounds t h a t th e re g r e s s io n y ie ld s a
p ath o f sa v in g s a t e q u ilib riu m i n t e r e s t r a t e s r a t h e r th an
th e sav in g s fu n c tio n . This i s th e f a m ilia r i d e n t i f i c a t i o n
problem .
However, i f in v estm en t i s h ig h ly i n t e r e s t i n e l a s t i c
as many s tu d ie s in d ic a te d and i s a fu n c tio n o f the change
in income le v e ls due to fu tu re e x p e c ta tio n s and th e e x i s
te n ce o f a c a p ita l- o u tp u t r a t i o , th en :
I f S = f (Y)
I = f(Y)
and r = f ( S ,I )
th e re fo r e r = f(Y)
I f t h i s i s t r u e , th e n when sav in g s a r e re g re s s e d on
th e i n t e r e s t r a t e , sav in g s a re r e a l l y b ein g r e g re s s e d on
129
income which f u r th e r su p p o rts o u r a p r i o r i h y p o th e sis t h a t
a b s o lu te sav in g s in c o n s ta n t d o lla r s w i l l be h ig h ly c o r re
la te d w ith a b s o lu te i n t e r e s t r a te s in c o n s ta n t d o lla r s even
when sav in g s are n o t a fu n c tio n o f th e i n t e r e s t r a t e .
I I . EVALUATION OF REGRESSION RESULTS
1. R egressions 9 t o 15 show t h a t sav in g s are corf-
r e l a t e d w ith income b u t tim e had to be added in o rd e r to
remove a u to c o r r e la tio n .
2. R eg ressio n s 1 and 5 make sa v in g s and i n t e r e s t
r a t e s in c u rr e n t d o lla r s appear to be h ig h ly c o r r e la te d .
But re g r e s s io n 16 shows t h a t w ith i n t e r e s t r a t e as th e
dependent v a r ia b le , i t i s la r g e ly e x p la in e d by c u rr e n t i n
come le v e ls which su p p o rts th e h y p o th e sis t h a t th e m onetary
a u th o r ity changes i n t e r e s t r a t e s in th e same d ir e c tio n t h a t
income le v e ls change.
3. R egressions 2 ,3 ,4 ,6 ,7 and 8 in d ic a te t h a t th e
change in sav in g s and sa v in g s in r e a l term s a re n o t s i g n i f
i c a n t l y e f f e c te d by a change in i n t e r e s t r a t e , and th e i n
t e r e s t r a t e in r e a l term s. Ind eed , th e re g re s s io n c o e f f i
c i e n t i s sometimes n e g a tiv e .
4. I f in v estm en t i s n o t a fu n c tio n o f th e i n t e r e s t
r a t e b u t i s a fu n c tio n o f income, s in c e th e re g re s s io n s i n
d ic a te t h a t sav in g s a re a ls o n o t a fu n c tio n o f income, th en
th e i d e n t i f i c a t i o n problem i s n o t p r e s e n t. The i n t e r e s t
130
r a t e i s th en a fu n c tio n of income a ls o . T his p o s itio n has
a l o t o f p re c e d e n t in c a p i t a l th e o ry .
In summary/ th e le v e l o f sav in g does n o t e m p iri
c a lly appear to be dependent on th e r a t e o f i n t e r e s t in
p o s t World War I I American c a p ita lis m .
I l l . NOTES O N M ETHODOLOGY
1. X in d ic a te s t h a t th e re g r e s s io n f a i l e d t h a t
p a r t i c u l a r t e s t .
2. Adding tim e as an e x p la n a to ry v a r ia b le d id n o t
improve th e Von Neuman r a t i o in th e 1929-68 d a ta r e g r e s
s io n s . I t does allow th e Von Neuman to p a ss in some 1946-^
6 8 d a ta re g r e s s io n s .
3. The d ep ressio n and World War I I te n d to g iv e a
c y c lic a l p a t te r n to 1929-40 d a ta . Hence, re d u cin g th e num
b e r o f o b se rv a tio n s t o 23 improves th e Von Neuman r a t i o .
4. Since saving i s a whole number and i n t e r e s t
r a te s a re a p e rc e n ta g e , a l l d e l ta and d e l t a d e f la te d i n t e r
e s t r a t e s were m u ltip lie d by 100 to c a rry th e d if f e r e n c e s
to more decim al p la c e s in o rd e r to y i e l d d if f e r e n c e s .
5. A ll d a ta used were o b ta in e d from th e 1969
Economic R eport o f th e P r e s id e n t.
6 . No d a ta given on 9-12 month governm ent s e c u r ity
i n t e r e s t r a t e f o r 1929-1943.
7. F -T e st v alu es a t .05 s ig n if ic a n c e le v e l:
131
n = 23, 2D.F - 4.32; n = 40, 2D.F - 3.25.
8. T -T est valu es a t .05 s ig n ific a n c e le v e l: n =
23, 2D.F - 1.721; n = 40, 2D.F - 2.023.
9. Von Neuman confidence i n t e r v a l a t .05 s i g n i f i
cance le v e l: n = 23, 2D.F - 1.4 to 2 .8 ; n = 40, 2D.F - 1.5
to 2 .5 .
10. Minimum v alu es o f th e c o r r e la tio n c o e f f i c i e n t
(R^ T est) a t .05 s ig n if ic a n c e le v e l: n - 23, 2D.F - .315;
n = 40, 2D.F - .415.
IV. THE VARIABLES REGRESSED
1-A. P e rso n a l savings in c u r r e n t d o lla r s to 3 month
tr e a s u r y b i l l i n t e r e s t r a t e .
1— B. P e rso n a l sav in g s in c u r r e n t d o lla r s to 9-12 month
government s e c u r i t i e s i n t e r e s t r a t e .
1-C. P e rso n a l savings in c u r re n t d o lla r s to Moody's corpo
r a t e Aaa bond r a t e .
1— D. P e rso n a l savings in c u rr e n t d o lla r s to 4-6 month
prim e commercial p a p e r r a t e .
2-A. D e lta p e rs o n a l sav in g s in c u r r e n t d o lla r s to A.
2-B. D e lta p e rs o n a l sav in g s in c u r r e n t d o lla r s to B.
2-C. D e lta p e rso n a l sav in g s in c u r r e n t d o lla r s to C.
2-D. D e lta p e rs o n a l sav in g s in c u r r e n t d o lla r s to D.
3-A. P e rso n a l savings in c o n s ta n t d o lla r s to A.
3-B. P e rso n a l savings in c o n s ta n t d o lla r s to B.
132
3-C. P e rso n a l sav in g s in c o n s ta n t d o lla r s to C.
3-D. P e rso n a l sa v in g s in c o n s ta n t d o lla r s to D.
4-A. D elta p e rs o n a l savings in c o n s ta n t d o lla r s to A.
4-B. D elta p e rs o n a l savings in c o n s ta n t d o lla r s t o B.
4-C. D e lta p e rs o n a l savings in c o n s ta n t d o lla r s to C.
4-D. D e lta p e rs o n a l savings in c o n s ta n t d o lla r s to D.
5-A. P e rso n a l p lu s b u sin e ss savings in c u r r e n t d o lla r s
to A.
5-B. P e rso n a l p lu s b u sin e ss sav in g s in c u r r e n t d o lla r s
to B.
5-C. P e rso n a l p lu s b u sin e ss savings in c u r r e n t d o lla r s
t o C.
5-D. P e rso n a l p lu s b u sin e ss sav in g s in c u r r e n t d o lla r s
to D.
6-A. D e lta p e rs o n a l p lu s b u sin e ss sav in g s in c u rr e n t
d o lla r s t o A.
6-B. D e lta p e rs o n a l p lu s b u sin e ss sav in g s in c u r re n t
d o lla r s to B.
6-C. D e lta p e rs o n a l p lu s b u sin e ss sav in g s in c u rr e n t
d o lla r s t o C.
6-D. D elta p e rs o n a l p lu s b u sin e ss sav in g s in c u r r e n t
d o lla r s to D.
7-A. P e rso n a l p lu s b u sin e ss sav in g s in c o n s ta n t d o lla r s
to A.
7-B. P e rso n a l p lu s b u sin e ss sav in g s in c o n s ta n t d o lla r s
133
to B.
7-C. P e rso n a l p lu s b u sin e ss savings in c o n s ta n t d o lla r s
to C.
7-D. P e rso n a l p lu s b u sin e ss savings in c o n s ta n t d o lla r s
to D.
8-A, D e lta p e rs o n a l p lu s b u sin e ss sav in g s in c o n s ta n t
d o lla r s to A.
8-vB. D e lta p e rs o n a l p lu s b u sin e ss sav in g s in c o n s ta n t
d o lla r s t o B.
8-C. D e lta p e rs o n a l p lu s b u sin e ss savings in c o n s ta n t
d o lla r s to C.
8HD. D e lta p e rs o n a l p lu s b u sin e ss savings in c o n s ta n t
d o lla r s to D.
9. P e rso n a l sav in g s t o p e rso n a l d isp o sa b le income in
c u r r e n t d o l l a r s .
10. P e rso n a l sa v in g s t o c o n s ta n t d isp o sa b le income in
c u r r e n t d o l l a r s .
11. D e lta p e rs o n a l sav in g s to d e lta p e rso n a l d isp o s a b le
income in c o n s ta n t d o lla r s .
12. P e rs o n a l p lu s b u sin e ss savings to p e rs o n a l d is p o s
a b le income in c u r r e n t d o lla r s .
13. P e rso n a l p lu s b u sin e ss savings to p e rs o n a l d is p o s
a b le income in c o n s ta n t d o lla r s .
14. D e lta p e rs o n a l p lu s b u sin e ss sav in g s to p e rs o n a l
d is p o s a b le income in c o n sta n t d o l l a r s .
134
15. D e lta p e rs o n a l p lu s b u sin e ss sav in g s to p e rso n a l
d isp o s a b le income in c u r r e n t d o lla r s .
16-A. Three month tr e a s u r y b i l l i n t e r e s t r a te to GNP in
c u r r e n t d o l l a r s .
16-B. Nine to tw elve month government s e c u r i t i e s i n t e r e s t
r a t e to GNP in c u r r e n t d o l l a r s .
TABLE III
REGRESSION SU M M A R Y
OATA YEARS 1 9 * 6 - 1 9 6 8 REGRESSION SUMMARY DATA YEARS 1 9 2 9 - 1 9 6 8 PAGE 1
REG COEFF CORR REG STO R2 F T VON REG COEFF CORR REG STO R2 F T VON
NO OF COEFF COEFF ERROR TEST TEST TEST NEUMAN NO OF COEFF COEFF ERROR TEST TEST TEST NEUMAN
OETER
OETER
1A . 7 7 0 . 8 7 7 5 . * 1 9 0 . 6 2 8 1A . * 1 1 . 6 * 1 5 . 1 3 9 0 . 9 6 8 X
IB . 7 * 9 . 8 6 5 5 . 0 6 0 0 . 6 2 0
1C . 7 9 7 . 8 9 3 7 . * 1 2 0 . 7 9 3 X 1C . 0 1 2 . 1 1 1 2 . * 5 2 2 . 0 0 9 X X X X
10 . 7 7 6 . 8 8 1 5 . 2 1 0 0 . 5 9 3 10 . 1 * 2 . 3 7 2 2 . 9 8 9 1 . 0 9 5 X
2A . 0 * 7 . 2 1 8 0 . 1 1 1 1 . 5 9 1 X X X 2A . 0 2 5 . 1 5 * 0 . 3 * 2 l . * l * X X X X
2B . 0 * 6 . 2 1 * 0 . 2 7 * 1 . 5 9 1 X X X
2C . 0 * 9 • 2 2 0 5 . 6 2 5 3 . 8 6 2 X X X 2C . 0 1 3 . 1 1 5 2 . 0 3 5 2 . 8 6 7 X X X X
2 0 . 0 * 7 . 2 1 6 0 . 2 2 9 1 . 5 9 0 X X X 2 0 . 0 2 3 . 1 5 3 0 . * 2 6 1 . 1 7 7 X X X X
3A . 0 7 3 . 2 7 0 0 . 0 0 5 0 . 0 0 3 X X X X 3A . 1 7 2 . * 1 * - . 0 1 5 0 . 0 0 5 X X
3 8 . 5 * * . 7 3 7 - . 0 0 5 0 . 0 0 3 X X X
3C . 0 * 2 . 2 0 5 0 . 0 0 0 0 . 0 0 3 X X X X 3C . 1 6 8 . * 1 0 - . 0 1 3 0 . 0 0 * X
3 0 . 0 8 1 . 2 8 5 0 . 0 0 5 0 . 0 0 3 X X X X 3 0 . 1 2 8 . 3 5 9 - . 0 1 2 0 . 0 0 * X
*A . 0 8 1 . 2 8 5 0 . 0 0 7 0 . 0 0 * X X X *A . 0 2 5 . 1 5 6 - . 0 0 1 0 . 0 0 3 X X X X
*B . 0 8 6 . 2 9 * 0 . 0 0 7 0 . 0 0 * X X
*C . 0 9 7 . 3 1 2 0 . 0 0 7 0 . 0 0 * X X *C . 0 2 * . 1 5 7 - . 0 0 1 0 . 0 0 3 X X X X
* 0 . 0 8 6 . 2 9 * 0 . 0 0 7 0 . 0 0 * X X * 0 . 0 2 5 . 1 5 9 - . 0 0 1 0 . 0 0 3 X X X X
5A . 9 0 3 - . 9 5 0 2 2 . 1 0 1 . 5 * 0 5A . 8 * * . 9 1 8 2 3 . 0 9 1 . 5 8 9 X
5 8 . 9 * 8 . 9 7 * 6 . * 3 9 2 . 8 1 0 X
5C . 8 7 6 . 9 3 6 2 0 . 6 0 1 . 6 * 7 5C . 2 0 2 . * 5 0 1 8 . 9 7 5 . 7 * 6 X
5 0 . 9 * 9 . 9 7 * 1 1 . 5 8 * . 8 2 2 X 5 0 . * 6 1 . 6 7 9 1 6 . 2 0 2 . 7 6 0 X
6A . 0 3 6 . 1 9 1 2 . 6 * 7 1 . 9 5 6 X X X 6A . 0 2 5 . 1 5 9 2 . * 9 1 . 7 6 9 X X X X
u >
U l
TABLE III— Continued
DATA YEARS 1 9 4 6 - 1 9 6 8 REGRESSION SUMMARY DATA YEARS 1 9 2 9 - 1 9 6 8 PAGE 2
REG COEFF CORR REG STO R2 F T VON REG COEFF CORR REG STO R2 F T VON
NO OF COEFF COEFF ERROR TEST TEST TEST NEUMAN NO OF COEFF COEFF ERROR TEST TEST TEST NEUMAN
OETER DETER
6 8 . 0 3 6 . 89 2 . 3 9 0 1 . 7 3 3 X X X
6C . 1 2 0 . 3 4 6 9 . 5 0 4 4 . 7 6 0 X X 6C . 0 5 1 . 2 2 5 6 . 2 0 0 3 . 5 5 9 X X X X
6 0 . 0 3 1 . 1 7 7 2 . 5 6 5 . 9 6 0 X X X 6 0 . 0 8 5 . 2 9 1 3 . 0 3 4 1 . 4 2 8 X
7A . 4 0 6 . 6 3 7 0 . 0 3 6 0 . 0 0 9 X X 7A . 0 6 1 . 2 4 8 - . 1 9 7 0 . 0 1 0 X X X
7B . 4 2 2 . 6 5 0 0 . 0 3 7 0 . 0 0 9 X
7C . 3 4 4 . 5 8 6 0 . 0 3 6 0 . 0 1 0 X X 7C . 7 5 3 . 8 6 7 - . 0 0 1 0 . 0 0 4 X X
7 0 . 4 1 6 . 6 4 5 0 . 0 3 6 0 . 0 9 0 X 7 0 . 0 1 1 . 1 0 5 - . 0 0 7 0 . 0 0 9 X X X X
8A . 1 5 6 . 4 0 0 0 . 0 1 0 0 . 0 0 5 X 8A . 0 2 0 . 1 4 1 - . 0 0 2 0 . 0 0 4 X X X X
8 8 . 1 6 7 . 4 0 7 0 . 0 1 1 0 . 0 0 5 X
8C . 1 4 5 . 3 8 1 0 . 0 1 0 0 . 0 0 5 X 8C . 0 2 1 . 1 4 5 - . 0 0 1 0 . 0 0 4 X X X X
8 0 . 1 6 4 . 4 0 5 0 . 0 1 0 0 . 0 0 5 X 8D . 0 2 5 . 1 5 9 - . 0 0 1 0 . 0 0 4 X X X X
9 . 9 8 7 . 9 9 3 0 . 1 9 4 0 . 0 0 5 X 9 . 9 9 0 . 9 9 5 0 . 1 8 3 0 . 0 0 3 X
10 . 9 5 9 . 9 7 9 0 . 0 2 4 0 . 0 0 1 X 10 . 9 6 9 . 9 8 4 0 . 2 0 8 0 . 0 0 6 X
11 . 1 6 9 . 4 1 2 0 . 3 2 0 0 . 3 6 X X 11 . 3 0 4 . 5 5 2 0 . 2 7 7 0 . 0 6 6 X
12 . 9 9 3 . 9 9 6 0 . 2 1 6 0 . 0 0 4 12 . 9 6 5 . 9 8 2 0 . 2 0 4 0 . 0 0 6 X
13 . 9 8 1 . 9 9 1 0 . 2 6 4 0 . 0 0 8 X 13 . 9 2 4 . 9 6 1 0 . 2 6 9 0 . 0 1 2 X
14 . 6 2 8 . 7 9 3 0 . 4 6 5 0 . 0 7 2 X 1 4 . 7 6 4 . 8 7 4 0 . 3 9 3 0 . 0 3 5 X
15 . 6 2 4 . 7 9 0 0 . 3 5 6 0 . 0 5 8 X 15 . 6 9 0 . 8 3 1 0 . 3 3 9 0 . 0 3 7 X
16A . 9 0 2 . 9 5 0 0 . 0 0 1 0 . 0 0 0 16 A . 9 0 1 . 9 4 9 0 . 0 0 1 0 . 0 0 0
1 6 8 . 8 8 2 . 9 3 9 0 . 0 0 7 0 . 0 0 1
16C . 9 3 2 . 9 6 5 0 . 0 0 5 0 . 0 0 2 X 16C . 2 5 0 . 5 0 0 0 . 0 0 2 0 . 0 0 0 X
1 6 0 • 8 9 6 . 9 4 7 0 . 0 0 7 0 . 0 0 1 1 6 0 . 5 2 0 . 7 4 1 0 . 0 0 2 0 . 0 0 1 X
OJ
O '!
137
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Creator Mcgrath, William Terrence (author)

Core Title On The Theory Of Value And Market Syndicalism

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, theory,OAI-PMH Harvest

Language English

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Advisor Tintner, Gerhard (committee chair), Niedercorn, John H. (committee member), Pounders, Cedric J. (committee member)

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