Good Introduction to the Capital Debates

Others, including Tom Hickey, Robert Vienneau and Lord Keynes, have already mentioned this, but Matias Vernengo has provided an educational post on the content and significance of the capital debates. For those who are unfamiliar with the debates or remain uncertain of what was involved, Vernengo’s post is well worth reading. It is both informative and accessible.

I won’t summarize the post here, because it is better to follow the link to Vernengo’s actual post. I will simply highlight some of the key aspects that make the topic a significant one.

As Vernengo discusses, the implications of the capital debates for the analysis of market economies are far-reaching. Distribution is not determined by relative scarcity, nor can it be said to reflect productive contribution. There is no automatic tendency to full employment. There is no monotonic inverse relation between private investment and the rate of interest (implying, among other things, that the ‘liquidity trap’ is not a valid explanation of our current predicament). There is no monotonic inverse relation between the real wage and employment. Aggregate production functions are not a valid modeling construct (undermining both new keynesian and new classical macroeconomics.)

Vernengo also points out the empirical relevance of the results. Consistent with the theoretical conclusions drawn from the capital debates, there is a lack of evidence for any significant relationship between investment and the rate of interest, or between real wages and employment, and income effects have been found to be more important than substitution effects.


18 thoughts on “Good Introduction to the Capital Debates

  1. It took time AND social evolution for chemistry to be born out of alchemy or astronomy to be born out of astronomy.

    MSM economics is clearly a proto-science, as alchemy or astrology, as its reaction to the capital debates (or the critic of general equilibrium or etc, etc) shows.

    Although still an “alchemist” Samuelson knew more about “economic truth” than his acknowledging of Cambridge winning the debate may lead one to think. He was aware of the fundamental character of the wage relation:

    β€œSince slavery was abolished, human earning power is forbidden by law to be capitalized. A man is not even free to sell himself: he must rent himself at a wage” (Samuelson, P. A. 1976. Economics, p. 52, 10th ed. New York: McGraw-Hill.).

    If the observed historical pattern will repeat, one should expect that the science to be born from economics will emerge correlatively with the vanishing of wage labor.

  2. I think we need more, much more detailed analysis on the capital debates and their implications for neo-classical economics. I ‘ve had a really hard time finding quality material on the subject. Maybe do another post on the subject and/or provide some links (to papers, posts etc)?

  3. I’m going through Naked Keynesianism’s article already (which is very good, by the way).

    If possible, I’d like to have a good look at Tom’s, Viennau’s and Lord Keynes’ links. So, if you can post Tom’s link, I’d greatly appreciate it.

    By the way, if you are ever into writing something non-technical about TSSI vs simultaneous and physicalists, I’d be also very interested :-), as my curiosity have been aroused after your comments. I have even been devoting some time to this subject.

    Also, I’ve found a set of lecture notes on Marxian economics (the simple variety, undergraduate level), which could be useful to my resources project. Is there a way I could show them to you, so as to have your opinion? I could just link to them, or re-write them, if there is something important to add.

  4. Thanks, Tom, mah man!

    By the way, folks, I’ve finished writing a kind of call for educative resources, which I would like to submit to you guys for your opinion:

    (It lost the formatting)

    Some schools of economic thought have made quite effective use of the Internet to spread their message. MMT comes to mind.

    Marxism, in this sense, has not performed well at all. I am using the term “Marxism” in the widest possible way: basically anyone accepting Marx’s influence falls into this category for the purposes of this page. This definition would encompass Anarchists, Guild Socialists and Neo-Ricardian Socialists who acknowledge Marx’s economic contributions, even if in some respects they disagree.

    In this sense of the word “Marxism” yes, there are lots of Marxist websites covering polemic issues, but very few sites trying to educate the broad public.

    I am sure there are many good reasons for this absence. I also suspect some reasons are not particularly good.

    Regardless, I’d like to contribute to ameliorate this situation, given my limited abilities.

    My idea here is to provide links to (1) educative resources, (2) freely accessible (in the sense of not requiring a payment and not being constrained in legal terms) and of (3) an introductory nature (that is, directed to people who might not have had much exposition to Marxism or more formal education, but are willing to give it a try). This means that (4) clarity and (5) brevity are extremely important considerations. It goes without saying that (6) quality is fundamental.

    Resources must be (7) written/spoken in English. There are many reasons for this, but chiefly among them, because English is the international language. As I am fully fluent in Spanish and Portuguese, by exception resources in those languages could be considered for my translation into English, provided they are brief (5 pages double line, maximum).

    I know, it’s a long list. But there are resources fulfilling these 7 requirements. A look at the links already provided may suggest readers the kind of stuff I am talking about.

    Another possibility could be lecture notes for undergraduate classes, but high school material from Eastern Europe/Latin America/Asia, translated into English, could probably be good. Free political pamphlets, as they used to be produced in early 20th century Europe, could be good as well, if they meet the other requirements.

    So, if readers know of good links, drop me a line at aussie_magpie at, with the link, the subject covered by the resource, a little review note (just a few lines will do) and make sure you state if you want to be acknowledged in the page. I’ll review the link and endeavor to reply as soon as possible.

    To repeat: these resources are for Marxism in a broad sense. I am neither qualified nor in the business of excluding resources on the basis of controversies beyond my level. This means that the contributions of not only Marxists, but also Anarchists, Guild Socialists and Neo-Ricardian Socialists are welcome.

    Needless to say, material from every stream can express their peculiar views, provided they express criticism of others in a civil manner. We don’t need to fight each other: others are doing it very well without our help. I believe we have more things in common than what separate us.


  5. Magpie: Looks good to me. Sounds like a lot of work, too. πŸ™‚

    I will certainly make an effort to contribute materials. Feel free to re-post or make use of anything contained on this blog or that is added in the future. (Not that there is much of relevance at the moment relating to the project.)

  6. PeterC,


    The first resource I am going to add is the series from kapitalism101. Man, that’s a brilliant effort.

    I forgot to add Liberation Theology, too.

  7. This is from the wiki page:

    “Money: Marx held that metallic money, such as gold, is a commodity, and its value is the labour time necessary to produce it (mine it, smelt it, etc.). Gold and silver are conventionally used as money because they embody a large amount of labour in a small, durable, form, which is convenient. Paper money is a representation of gold or silver, almost without value of its own but held in circulation by state decree.”

    If wiki is accurate here, then it seems that Marx was at a significant disadvantage if he was operating solely in a world during his time that used metallic “money” that was thought to contain this kind of embedded labor, and hence Marx was led to believe that “money” obtained it’s “value” thru this labor it appears. (similar to the US’s Ron Paul)

    This should call into question any conclusions he reached because of this belief or at least some sort of investigation into how Marx’s beliefs about the nature of “money” may have led him to inaccurate conclusions. (This is how I look at what Peter is often doing at his blog here. ie filtering Marx through an MMT lens so to speak: ie interesting)

    Peter & Magpie: imo Both of you are “smarter” than Marx was in this regard if you are led to believe the portions of MMT that apply here. (just thought you’d like to know πŸ˜‰ )

    Perhaps this is all that Marx ever experienced ie the prevailing view back then in “Metallic Money” so this is how he proceeded, can’t blame him.


  8. Marx held that metallic money, such as gold, is a commodity, and its value is the labour time necessary to produce it (mine it, smelt it, etc.).

    Marx was not so far off, really, in recognzing that gold and silver have little actual value other than for decoration, and as money token they symbolize a certain wage value (hrs of worker output).

    Similarly, the real value of a fiat currency is assessed economically in terms its exchange value in terms of hrs of worker output per unit. This is the point of the JG.

    So when the real wage falls in inflationary periods, the value of the currency is actually rising wrt to the dominant factor, capital. Consumers are paying higher prices for product, while the major cost, real wages, is not keeping up, increasing profit margin.

    Thus the key determinative factor in both metallic and credit-based money is the real wage.

  9. Trixie, you seem to have caught on fast with the capital debates. You can explain them to the rest of us now. πŸ™‚

  10. Tom,

    “Thus the key determinative factor in both metallic and credit-based money is the real wage”

    Seems like it would be the same with state currency too?


  11. Matt: Yes, I’m in agreement with you and Tom. Marx had a commodity theory of money, but for him the value of a commodity is in terms of socially necessary labor time, which therefore made the value of money the amount of socially necessary labor time required to produce gold. So Marx recognizes money as social – since its value is determined by labor time – even though he was theorizing in terms of the gold standard.

    To me, the neo-chartalist approach seems compatible to this aspect of Marx’s analysis in that the value of the currency is regarded as what is required to obtain it, which can be considered in terms of labor time (e.g. specified in a job-guarantee wage).

    Personally, I think this approach makes sense when attempting to understand value in terms of the logic of capital. That is, it is a theory of how things are valued under capitalism to the extent that the logic of capital is allowed to hold sway. It is not necessarily suggesting that this is a good way to value things or money (i.e. it is not a normative theory of what should be considered to have value or of how value should be measured). My own view is that in a post-capitalist society value and the value of money could be – and hopefully will be – determined differently.

  12. PeterC

    I’ve finished reading and re-reading Vernengo’s article. That is a very good article.

    I found this comment very intriguing:

    “In other words, the forces of competition that lead capitalists to those sectors with higher remuneration and establish a uniform rate of profit do not operate in the Walrasian world.[5] Hence, the Walrasian models are incapable of ascertaining tendencies in real economies, a defect that is not mitigated with the introduction of imperfections (Stiglitz, 1993, p. 109), which Stiglitz calls the post-Walrasian and post-Marxist paradigm.”

    Do you know more about this, Pete?

  13. Magpie: In light of the capital debates, the neoclassicals had to abandon either aggregate capital or the principle of substitution. In general equilibrium theory, they opted to retain aggregation by treating each different type of capital good as a separate ‘factor’ of production; i.e. heterogeneous capital goods that are not substitutable for each other. Each capital good was treated as having its own rate of return, and since there was no substitution between them, there was no manner in which the different rates of return would tend to be equalized in the long run through investment seeking the highest return.

    ‘Imperfectionist’ arguments are those that focus on price rigidities, incomplete information, etc., to explain non-convergence to a long-run situation entailing full utilization of ‘factors’ and/or an equal rate of return in different sectors.

    I’m not sure who Stiglitz means by ‘Post Marxists’. In particular, I am not sure if he is referring to what that term usually refers to in Marxist literature. Maybe he is referring instead to the Analytical Marxists (methodological individualists)? I’m not sure.

    From the neo-Ricardian standpoint, the capital debates undermined Marx’s theory of value at the same time as neoclassicism. The choice of technique in the capital debates was conducted at a given level of output. The analysis showed that, in general, the same technique might be chosen at two different rates of profit, with a different technique chosen at intermediate rates of profit. But this implies that the value of output – in Ricardian terms of embodied labor – is the same at two different profit rates (since the same technique of production – and same embodied labor, both direct and indirect – is used at the two different rates of profit). However, the different profit rate will affect relative prices, including of means of production, and therefore cause a different set of divergences between prices and values in neo-Ricardian analysis. Unless each sector has the same organic composition of capital (linear wage-profit frontier), Marx’s three aggregate identities will not hold under this ‘labor theory of value’ (neo-Ricardian) interpretation of his theory.

    The temporal single-system interpretation (TSSI) replicates Marx’s results because value is determined, in that approach, not by embodied labor but by the amount of labor time needed to produce a commodity. The procurement of means of production will require an outlay of money, which always has a labor-time equivalent, for Marx. The required outlay of money (required labor time) depends on prices, not values, of the means of production. In neo-Ricardianism, in contrast, aggregate value magnitudes differ from aggregate price magnitudes because the value (rather than price) of the means of production is conceived as entering the value of the commodity. But under capitalist conditions, the amount of socially necessary labor time is determined by the prices of means of production, not their values, because of the tendency for profit rates to equalize under competitive conditions (free mobility of money capital). Accordingly, in the TSSI, the value of a commodity is taken to incorporate the prices of means of production, not their values.

    My own view is that the TSSI is the correct interpretation of Marx, but the matter remains controversial. I agree with the TSSI for a number of reasons. First, the TSSI replicates Marx’s results, neo-Ricardianism does not. This reduces the plausibility of the neo-Ricardian interpretation. Second, textual evidence in Marx’s writing seems at least as consistent with the TSSI as competing interpretations. For example, consider the following passages, quoted by Kliman and McGlone*:

    As the price of production of a commodity can diverge from its value, so [can] the cost price of a commodity, in which the price of production of other commodities is involved … . It is necessary to bear in mind this modified significance of the cost price … if the cost price of a commodity is equated with the value of the means of production used up in producing it, it is always possible to go wrong. (Capital, Vol. III, ch.9, New York, Vintage Books, 1981.)

    The ‘cost price’ for Marx was c + v (i.e. the sum of outlays on constant and variable capital), whereas value is c + v + s and the price of production is c + v + average profit. So here he is pointing out that the cost price of the commodity will not be the same as the value of the components of c and v whenever their prices diverge from values.

    Now, what enters the value of the commodity for Marx, the cost price or the value of the components of c and v?

    the cost-price of constant capital – or of the commodities which enter into the value of the newly produced commodity … may likewise be either above or below its value. Thus … the difference between cost-price and value, in so far as it enters into the price of the new commodity independently of its own production process, is incorporated into the value of the new commodity as an antecedent element. (Theories of Surplus Value, Part. III, p.167, Moscow, Progress Publishers, 1971.)

    So, according to Marx, the difference between cost price and value of the means of production enters into the value of the new commodity.

    A third reason I find the TSSI the more convincing interpretation is that Marx was attempting to analyze capitalism. Under Smith’s “rude state of society” it might make sense to theorize that value would be on the basis of embodied labor (a ‘labor theory of value’), but it does not make sense under the capitalist mode of production. Capitalism entails profit for capitalists. When decisions are made strictly according to the logic of capital, the amount of labor time required to produce a commodity will depend not on embodied labor but on the amount of labor time consistent with a tendential equalization of rates of return across sectors with different organic compositions of capital.

    The above discussion of Marx relates primarily to the ‘single-system’ aspect (prices are determinative of values), but the ‘temporal’ aspect is also important. In the TSSI, profit is determined in aggregate prior to its divvying up amongst capitalists through exchange. To me this fits nicely with Post Keynesian, especially Kaleckian, conceptions of a macro determination of profit, even though Marx was analyzing in value terms and Kalecki, who eschewed value theory, was analyzing in price terms. In aggregate, surplus value and profit, according to Marx, are meant to correspond, and do correspond in the TSSI. Further, if all surplus value happened to be realized, then, in aggregate, produced surplus value (Marx) would correspond to realized profit (Kalecki equation).

    * Kliman, Andrew J. & Ted McGlone (1999), ‘A Temporal Single-System Interpretation of Marx’s Value Theory’, Review of Political Economy, Vol. 11, No. 1, pp.33-59.

  14. re. Magpie

    That quote is pretty much my view. If you go to a data warehouse of a producer and get a profit curve for a product you can see that profit rises before it falls (unless the product was a flop). Every large producer has this information to hand. If you can find a manufacturer that’s still making the same product that they were 50 years ago then their profit will have fallen substantially. Most producers don’t do this. They improve their products or introduce new products. You can divide this into two areas; fashion and real R&D. Fashion keeps everything new by marketing and you can easily put this under the category of false consciousness. Real R&D provides increasing social benefits and this is a benign cause of the increasing surplus that can be observed over the 20th century. Another cause of increasing surplus is the increasing abuse of natural resources. A benign increase in surplus is really an increase in information. I’ve mainly used the word producer because supply chains have extended somewhat.

    I’ve held back from posting on this because you and peterc have read more Marx than I have. I was waiting till I could post with some proper quotes and citations. Anyway.. I may still do that at some point.

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