10.4 Empirical evidence for labour theory of value

Classical Econophysics

This monograph examines the domain of classical political economy using the method-ologies developed in recent years both by the new discipline of econo-physics and bycomputing science. This approach is used to re-examine the classical subdivisions of political economy: production, exchange, distribution and finance.The book begins by examining the most basic feature of economic life – production –and asks what it is about physical laws that allows production to take place. How is itthat human labour is able to modify the world? It looks at the role that information hasplayed in the process of mass production and the extent to which human labour stillremains a key resource. The Ricardian labour theory of value is re-examined in the lightof econophysics, presenting agent based models in which the Ricardian theory of valueappears as an emergent property. The authors present models giving rise to the classdistribution of income, and the long term evolution of profit rates in market economies.Money is analysed using tools drawn both from computer science and the recent Chartalistschool of financial theory.Covering a combination of techniques drawn from three areas, classical political econ-omy, theoretical computer science and econophysics, to produce models that deepen ourunderstanding of economic reality, this new title will be of interest to higher level doctoraland research students, as well as scientists working in the field of econophysics.

W. Paul Cockshott

has a PhD in Computer Science from Edinburgh University and iscurrently Reader in Computer Science at University of Glasgow.

Allin F. Cottrell

isProfessor of Economics at Wake Forest University, North Carolina and has a PhD fromthe University of Edinburgh.

Gregory J. Michaelson

is Professor of Computer Science atHeriot–Watt University, and is a Fellow of the British Computer Society.

Ian P. Wright

is a PhD student in Economics at the Open University.

Victor M. Yakovenko

is Professorof Physics at the University of Maryland. He has a PhD in Theoretical Physics from theLondon Institute for Theoretical Physics Moscow.

Routledge advances in experimentaland computable economics

Edited by K. Vela Velupillai

National University of Ireland, Galway

and Francesco Luna

International Monetary Fund (IMF), Washington, USA

1. The Economics of Search

Brian P. McCall and John J. McCall

2. Classical Econophysics

Paul Cockshott, Allin F. Cottrell, Gregory J. Michaelson, Ian P. Wright and Victor M. Yakovenko

Other books in the series include:

Economics Lab

An intensive course in experimental economics

Alessandra Cassar and Dan Friedman

Value in the capitalist economy

191It will be useful first to inquire more closely into the status of the assumption of an equalized profit rate. Nobody believes that the rate of profit is

actually

uniformacross industries or sectors of the economy. The claim made on behalf of thetheory of prices of production has to be that there is a strong

tendency

for the rateof proﬁt to become equalized and that it is legitimate, for theoretical purposes, toassume that this tendency is fully realized. Here we may distinguish two conceptsof tendency:

historical

tendency, and what we might call

immanent

tendency. If the equalization of the rate of profit were a historical tendency, this would meanthat if we took measurements of a given economy at two points in time (say,separated by a decade) we would expect to find, with high probability, that therate of profit was more nearly uniform at the later observation. It’s doubtful if thisis what the theorists of prices of production have meant, but if they did mean thisit is not correct. The data show a roughly constant degree of dispersion of profitrates around the social average. Industries and firms change their places in thedistribution over time, but the distribution shows no trend towards collapsing to asingle value.That leaves the notion of an immanent tendency: this is the weaker claim thatthe forces making for equalization of the rate of profit are internal to, or inherentin, the market economy, while the ‘disturbances’ that counteract equalization andmaintain dispersion are accidental, contingent. So even if there’s no historicaltrend towards a more uniform rate of profit, it’s still theoretically legitimate toignore the random ‘noise’ and focus on the outcome that would emerge if thesystem were unperturbed – the supposed ‘mechanical equilibrium’ of the system,in the sense discussed in chapter 7.Farjoun and Machover provide a powerful critique of this line of thinking(and also see Farjoun (1984)). They reject the claim that the forces making fordispersion of profit rates can be conceived as ‘external’ disturbances. Some suchfactors may be external (e.g. changes in the weather affecting the profitability of agriculture), but in the main the dispersing forces are inherent in inter-capitalistcompetition. The force making for equalization is the tendency of capitalists toinvest preferentially in industries or sectors showing above-average profits, andthis is indeed ‘inherent’. But equally inherent is the search for profit by means of innovation in new products and processes, new markets, new sources of materials,and so on. And innovation of this sort opens up opportunities for above-averageprofits while at the same time pushing some industries into a low-profit state.Farjoun and Machover therefore argue that the concept of mechanical equilibrium(where opposed forces are in perfect balance and nothing changes) is totallyinappropriate for the analysis of profit rates in a capitalist economy. We needto use the concept of statistical equilibrium, in which the system is not at all ‘atrest’, and the outcome of the opposed forces is a relatively stable

distribution

of proﬁt rates, within which there is ceaseless motion of the ‘particles’.The greater the equilibrium dispersion of proﬁt rates, the worse are neo-Ricardian prices of production as approximations to actual prices – or even totheir ‘centers of gravity’, discounting the effects of short-run supply-demanddisequilibrium. On the other hand, on the maintained hypothesis of an equalized

192

Classical econophysics

rate of proﬁt, the greater the dispersion of the capital to labour ratio (or organiccomposition), the worse are labour-values as approximations to actual prices.Since both of these distributions (proﬁt rates and organic composition) are non-degenerate, the question of whether neo-Ricardian prices or labour-values offerthe better systematic approximation to actual market prices is an empirical one.The evidence to date shows, with remarkable consistency across data-sets drawnfrom different capitalist economies and different time periods, that the labourtheory of value is at least as good a predictor of actual prices as the neo-Ricardiantheory. This claim is backed up in the following section.

10.4 Empirical evidence for labour theory of value

We have discussed above the theoretical challenges to the labour theory of value.The view of orthodox economics in the West is that the labour theory of value is‘discredited’. But it is noteworthy that the LTV has

not

been discredited by the thediscovery of empirical evidence that was inconsistent with the theory. In science,competing theories are supposed to be evaluated on the basis of their ability toexplain observed data. Economics, it seems, does not proceed in this way. Thepractical political implications of different economic theories are so great that itis very difficult for scientific objectivity to take hold. While people build politicalparties on the basis of different economic theories, they don’t fight in the sameway over alternative theories of galactic evolution.It was not until the 1980s that a serious scientific effort was made to testwhether or not the labour theory of value actually held in practice. The pioneeringwork was done by Anwar Shaikh (1984) and his collaborators (Petrovic, 1987;Ochoa, 1989) at the New School in New York. Following this, there is nowa considerable body of econometric evidence supporting the proposition thatrelative prices and relative labour values are highly correlated, or in other words,in favour of the LTV.

10.4.1 Calculating labour-values

The key to testing the labour theory of value has been the use of input–outputtables. An input–output table is a way of showing the structural interaction of different industries. Such tables are constructed periodically by government sta-tistical agencies for the leading economies. The idea behind them can be graspedbylookingattheexampleinTable10.1.Thisshowsinahighlyaggregatedfashionthe structure of an economy with four main industries, labeled A, B, C and D. Thecolumn corresponding to each industry shows how much of the output of eachother industry is used as input by the given industry. Thus industry A uses 100units of output from B and 10 from D. In an aggregated table, these quantitiesare denominated in monetary terms; we may think of them as being in billions of dollars. At the foot of the table we have rows showing the total wages and profitsearned in each industry and the total final sales of the industry. The final sales rowis the sum of the wages, profits, and indirect inputs above.

Value in the capitalist economy

193

Table 10.1

Example input–output table

Industry A B C D Final consumption

A 100 100 10 100B 100 100C 20 280D 10 20 10Wages 100 45 85 14Proﬁts 100 35 95 16Sales 310 200 300 40

We can use an input–output table to work out how many hours of labour go intoproducing the total output of each industry. We start up by simply adding up thenumber of units of labour that are directly employed in each industry. Dividingthe directly utilized labour by the dollar value of the industry’s output, we get aninitial ﬁgure for the amount of labour in each dollar of output. For industry A,measuring the labour input by the wage bill, we see that 100

/

310

=

0

.

323 unitsof labour go directly into each dollar of output. Since the table tells us the dollaramount of A’s output used by every other industry, we can use this to work outthe amount of indirect labour used in each industry when it spends a dollar on theoutput of industry A.This gives a second estimate for the labour used in each industry, which in turngives us a better estimate for the number of units of labour per dollar output of allindustries. We can repeat this process many times, and as we do so our estimateswill converge on the true value.The description given can be presented more formally as an algorithm:(1) Iteration 0: Calculate the labour-value per dollar for each industry,

V

i

, as thedirect labour time expended in industry

i

(

i

=

1

,

2

,...,

n

) divided by themonetary value of its output. Let

k

=

1 and go to step 2.(2) Iteration

k

:Calculatethelabour-valueperdollarforeachindustryasthesumof (a) the direct labour time expended in that industry and (b) the indirectlabour time embodied, all divided by the monetary value of its output. Theindirect labour for industry

i

is calculated as



n j

=

1

A

ji

×

V

−

j

, where

A

ji

is the input–output entry stating how much of input

j

is used in industry

i

,and

V

−

j

is the labour per dollar ﬁgure calculated for industry

j

at iteration

k

−

1.(3) Do the

V

j

s at iteration

k

differ appreciably from those calculated at iteration

k

−

1? If so, let

k

=

k

+

1 and go to step 2, otherwise stop and report theresults.Howmanyiterationsareneeded?Weﬁndthatforinput–outputtablesofthesizecommonlyproducedbynationalstatisticalagencies,withabout50to100industrycategories, convergence is produced within 10 to 20 iterations. Computations of