MARX & MMT, PART 2 – A Connection Between the Markup, Exploitation, Currency Value and MELT

The first post in this series distinguished between three types of macro measures: ‘monetary’, ‘real use-value’ and ‘real labor-time’ magnitudes. Under simplifying assumptions, the post spelled out basic connections between these different kinds of variables. The same assumptions are retained in this post to highlight a connection between the aggregate markup (Kalecki), the rate of surplus value (Marx), value of the currency (MMT) and the monetary expression of labor time (MELT).

The assumptions are:

1. a pure private closed economy;
2. no fixed capital;
3. all labor is simple and paid the same wage;
4. the level of productivity is taken as given;
5. the general price level does not change.

It should be mentioned that the macro-level connections identified under these assumptions — though basically valid — will be subject to modification later in the series when various assumptions are dropped. Not only this, but different interpretations of Marx would require different modifications to be made. Interpretative differences largely come down to: (i) the way constant and variable capital are defined; and (ii) whether value determination is considered simultaneous or temporal. It is too early to get into these issues. Suffice to say for now that, in this series, constant capital and variable capital will be defined as the amounts actually paid for inputs and labor power, with value determined temporally. At the moment, all that matters is the definition of variable capital. The reason for this, apart from the simplifying assumptions, is that attention is being confined just to the new value added in the production period. Any interpretation that understands variable capital to be the amount paid for labor power will generate the same results. (For those familiar with the Marxist literature, this is true of the New Interpretation and all single-system interpretations, whether simultaneist or temporal.)

Despite the simplifying assumptions, the results presented at this early stage are still of interest. A lot of short-run macroeconomic models employ a similar set of assumptions. For example, the Keynesian income-expenditure model in its simplest form assumes a private closed economy with productive capacity, productivity and the price level all taken as given. Just as the present focus is on new value added, other short-run models often center on a measure of society’s net product or income.

Okay, enough of the qualifications and caveats …

Consider the start of a new production period. Suppose it is known, based on data from the previous period, that the MELT (or monetary expression of labor time) is $20/hour. This means that each hour of simple labor in the previous period happened to create $20 of value. Under the assumptions of a constant price level and productivity, the MELT will be the same in the upcoming period. This is because the MELT, under present assumptions, is equal to the price level multiplied by the level of productivity. That is, m = Pρ. Since P and ρ are constant by assumption, so is the MELT.

To initiate production, capitalists outlay $c of constant capital for means of production and $v of variable capital to employ workers for the period.

The monetary outlay for constant capital is necessary to acquire the raw materials used up in production. More generally, if we hadn’t assumed away fixed capital, the capitalists would also have to cover wear and tear on plant and equipment. During the labor process, workers transfer preexisting value from the elements of constant capital to the final product. According to single-system interpretations, the monetary amount $c is calculated using the prices of the elements of constant capital. Input quantities are multiplied by these prices to arrive at the monetary outlay for constant capital.

The amount of money outlaid as variable capital will be equivalent to the total money wages W and other costs of employing workers advanced by capitalists. Here, it is assumed that the other costs of employment are factored into the wage bill. The advance is an autonomous expenditure, financed either out of past savings or a bank loan.

It is useful at this point to work out the value of the currency as defined in MMT. The value of the currency will be denoted by z. It can be calculated as the level of employment L, expressed in terms of simple labor, divided by the wage bill. Equivalently, it can be calculated as the reciprocal of the minimum hourly wage w. With all labor assumed simple, the minimum wage is the same as the average wage:

Defined in this way, the value of the currency is the amount of labor time that must be performed to obtain a unit of the currency. Conversely, and equivalently, it is the amount of labor power that capitalists can command with a unit of the currency.

For instance, if the wage rate is $10/hour, the value of the currency will be 0.1 hours/dollar. With an outlay for variable capital amounting to $100 billion, capitalists will be able to pay for (0.1 hours/dollar) x ($100 billion) = 10 billion hours of labor power.

The next question is, how much value will be created as a result of this 10 billion hours of labor power? Well, the MELT is $20/hour, so total new value will be mL = $200 billion. Under our present simplifying assumptions, this is nominal GDP. It is clear also that workers have produced surplus value of $s = mL – $v = $100 billion.

The surplus value generated in a single hour by an individual worker performing simple socially necessary labor will equal the difference between the MELT and the hourly wage: $s/hour = m – w. Equivalently, this surplus value will equal the difference between the MELT and the reciprocal of the value of the currency: $s/hour = m – 1/z.

Marx’s concept of surplus value can be related to Kalecki’s notion of the markup. One version of the markup k is expressed:

In this expression, Y is real income and U is total money profits prior to their distribution into various elements (retained earnings, interest, dividends, rent, etc.). The markup shows the extent to which nominal income exceeds money wages, expressed as a ratio.

From a Marxist perspective, Kalecki does not provide a fully satisfying explanation of what determines the markup. He does provide an explanation in terms of physical output (a real use-value explanation) and also a monetary explanation. In physical terms, he points out that when commodities are produced for capitalists, as either investment goods or capitalist consumption goods, they are unavailable for worker consumption. This leaves a physical surplus for capitalists. In monetary terms, he points out that when capitalists outlay money on the production of investment goods and capitalist consumption goods, the prices paid in aggregate for final output will exceed the wages of workers, leaving a monetary surplus that can be distributed among capitalists themselves. But Kalecki does not offer a real labor-time explanation.

A Marxist is inclined to ask, what actually determines the size of the markup? Or, what is its real basis? From a Marxist perspective, it is not enough to say that the real basis is the surplus of physical commodities. This leaves open the question of what ensures this physical surplus translates into surplus value. Similarly, from a Marxist perspective, it is not enough to say that the surplus value is ensured by capitalists’ monetary expenditures. This leaves open the question of what determines the size, in real terms, of those monetary expenditures. Marx wanted to explain the real basis of surplus value.

Although Kalecki does not address this question, his notion of the markup does provide an organizing framework capable of accommodating Marx’s answer. As a ratio of monetary variables, Kalecki’s notion of the markup can be translated directly into a ratio of Marxian monetary magnitudes and then converted into labor-time measures.

In labor-time terms, the markup is revealed to be a ratio between total living labor performed in the period and necessary labor time (the amount of labor time required to offset wages). The more workers are coerced into production beyond this point, the larger the markup.

It now becomes evident that there is an intricate connection between the markup and Marx’s concept of the rate of surplus value. The rate of surplus value – sometimes called the ‘rate of exploitation’ – is the ratio between surplus value and variable capital, or s/v. It indicates the proportions in which newly created value are distributed between workers and capitalists:

In our numerical example, the rate of surplus value s/v is equal to 1. This is because workers perform half their labor time to reproduce the equivalent of variable capital (5 billion hours) and the other half to create surplus value for capitalists (5 billion hours). The expression above shows that Kalecki’s markup must equal 2. It is simply the rate of surplus value plus 1. The meaning is that the net value product (= v + s) is twice as large as variable capital (v), or equivalently that nominal GDP (= $v + $s) is double the capitalists’ monetary outlay on variable capital ($v).

So, although Kalecki does not explain the markup in terms of surplus labor, there is an openness in his formulation that makes it compatible with Marx’s theory. It is possible to reconcile the two views as mutually consistent and, if desired, incorporate the insights of both into an explanation of the markup.

It is perhaps not surprising that there is a close connection between the markup and the rate of surplus value considering that the markup happens to be the reciprocal of the wage share ω in nominal income:

Not only does this make the markup and the nominal wage share inseparable concepts, but it also indicates that they are closely connected with the two other macro measures we have already discussed. These are the value of the currency z and the MELT m. The connection is evident once it is recognized that, under present assumptions, both z and m are proportional to the markup or, equivalently, proportional to the reciprocal of the nominal wage share. (With our assumptions, m = PY/L, as discussed in the previous post.)

MMT Marx 2 Eqn 7

Since the markup (or reciprocal of the nominal wage share) enters these expressions for z and m, all four macro concepts, as well as the rate of surplus value, are closely connected:

MMT Marx 2 Eqn 8

In the present context, if we know the wage rate, then we know z. It is simply the reciprocal of the wage rate. With the MELT given – because the price level and productivity are assumed constant – we also know the markup and rate of surplus value.

To illustrate the above relationships between k, ω, m, z and s/v, again consider one hour of socially necessary labor performed by a single worker. Suppose, as before, that the MELT is $20/hour and that the value of the currency is 0.1 hours/dollar, implying an hourly wage rate of $10/hour. In that single hour, m = $20 of value will be created, which of course is the monetary equivalent of the one hour of labor. Of that, $v = $10 will be paid to the worker, leaving the other $10 as surplus value for capitalists. Multiplying the MELT by the value of the currency gives 2, which is the markup as conceived by Kalecki. Taking the reciprocal gives the nominal wage share of 0.5. This indicates that workers receive half the new value produced in the period. Subtracting 1 from the markup gives the rate of surplus value.

Finally, relating back to the conversion factors between monetary, use-value and labor-time variables identified in the previous post:

MMT Marx 2 Eqn 9

In closing, I will note that while the precise nature of the connections presented in this and the previous post will be subject to modification as assumptions are discarded, a close connection between the markup, MELT and value of the currency will remain. It will also be seen later that the core connection between monetary, real use-value and real labor-time measures (m = Pρ) will re-emerge in a temporal setting in a form that, though modified, still resembles the one considered in these preliminary posts.

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12 thoughts on “MARX & MMT, PART 2 – A Connection Between the Markup, Exploitation, Currency Value and MELT

  1. Great post, Pete.

    Let me start with a comment on this

    “In monetary terms, he [i.e. Kalecki] points out that when capitalists outlay money on the production of investment goods and capitalist consumption goods, the prices paid in aggregate for final output will exceed the wages of workers, leaving a monetary surplus that can be distributed among capitalists themselves. But Kalecki does not offer a real labor-time explanation.”

    Here you are speaking of Kalecki’s profit equation, I take it?

    You add,

    “From a Marxist perspective, Kalecki does not provide a fully satisfying explanation of what determines the markup. (…) In monetary terms, he points out that when capitalists outlay money on the production of investment goods and capitalist consumption goods, the prices paid in aggregate for final output will exceed the wages of workers, leaving a monetary surplus that can be distributed among capitalists themselves. But Kalecki does not offer a real labor-time explanation.”

    If I am right and you are indeed speaking, among other things, of Kalecki’s profit equation — as I presume you are — I think I should add that the profit equation is not a satisfactory explanation to anyone (not only Marxists) who takes seriously the dictum of classical political economy (in Ricardo’s words: “To determine the laws which regulate this distribution, is the principal problem in Political Economy.”)

    Kalecki’s profit equation is an accounting identity. In that, it’s similar to GDP = C+I+G+NX or Assets = Liabilities+Equity. It does not explain the real-life mechanisms determining distribution, anymore than GDP = C+I+G+NX explains business cycle variations.

    One often hears the argument, based on Kalecki’s equation, that capitalists cannot squeeze workers, because that would diminish workers’ demand and would come back to bite capitalists in the backside. There may be something to that in the aggregate (although, I’d add that Steve Keen — not a Marxist by any means — has defended the thesis that private debt is often used to offset, at least for a time, that shortfall); but individual capitalists do not take orders from the Central Capitalist Politburo: if I, as a shipbuilder selling yachts to the 0.01%, manage to cut my wages bill this may affect supermarket owners. Well, too bad for them; but it’s not my problem. It increases my profits, and that’s what matters to me.

    This leads me to another, related, observation:

    k = (W+U)/W

    is the reciprocal of the wage share as a percentage of GDP. As a matter of statistically measured empirical fact, that share has been falling for a while (i.e. the markup has been increasing). This hasn’t deterred capitalists and hasn’t affected profits.

    (It goes without saying, if I’m missing the mark, let me know)

    ———-

    I’ll take some more time to go through the rest of the post. It’s really full of substance and it should take some time to digest. 🙂

  2. Thanks for your thoughts, Magpie. They are always greatly appreciated.

    Kalecki didn’t employ value theory, but I still think his work is very important. He started from identities but formed behavioral assumptions in light of them, which I consider an indispensable method in macro theorizing. In particular, he assumed that autonomous spending determines income because capitalists (or anybody else) can choose what they spend but not the income they receive. This makes the causation clearly go from autonomous spending to income.

    I have been pondering a few things. They seem relevant to your comment but are little more than thinking out loud for now. I’ve broken the thoughts into two parts – this comment and the one immediately following it.

    Marx held that *in aggregate* an hour of socially necessary labor always creates the same new value, in real labor-time terms, irrespective of variations in productivity. (This makes sense to me, BTW). This suggests that once we know the wage rate (reciprocal of the value of the currency) and employment (measured in simple socially necessary labor time), surplus value is determined unless the MELT changes (which, of course, it usually will). That is, *given* employment, the choice of the wage rate would completely determine the distribution between v and s if it wasn’t for changes in the MELT.

    Since capitalists pay a wage rate that I am assuming is determined at the beginning of the period, a rise in the MELT by the end of the period would mean a change in mL but no change in $v – since it is fixed for a given level of employment – leaving more as surplus value $s.

    This may partly explain Kalecki’s frequent practice of assuming a constant wage share in nominal income and Marx’s similarly frequent practice of assuming a constant rate of surplus value. If Kalecki is assuming a given price level, and Marx is assuming a given MELT, as often implicitly seems to have been the case, then there is no strong reason to think that the nominal wage share or the economy-wide rate of surplus value will be susceptible to much change once the wage rate is set.

    The same seems to hold true once we allow employment to vary. Whatever the extra employment is, if it is true that *in aggregate* an hour of socially necessary labor always creates the same real value, then (for a constant MELT) the increase in v + s will be proportional to the percentage increase in v, leaving s/v unchanged. (The rate of profit will be a different matter, because it also depends on the value of total capital.)

    This also probably points to the ‘conflict theory of inflation’. Inflation appears, in this context, to be the way s/v can change, given the wage rate workers manage to negotiate. And of course workers are trying to factor in likely inflation as well in arriving at their wage demands.

  3. Here is another reason I think Kalecki is important. Once employment is allowed to vary, demand comes in right from the start with how much capitalists will decide to outlay in the form of $c and $v. (From an MMT perspective, demand comes in even earlier if we consider the state’s role.) Kalecki’s insight seems very useful in considering this situation. Capitalists can get more s in aggregate *if* they spend more. But will they?

    The choice of wage rate will be one influence on capitalists’ decisions over the amounts devoted to $c and $v, but only one. I think demand is critical. Especially autonomous demand that is not capacity enhancing (government consumption expenditure, credit-financed private consumption expenditure, exports). To me, the state’s role is the key one. Strong, ongoing autonomous expenditure can only be made financially sustainable through the state underpinning demand (and domestic private-sector finances). The strong ongoing autonomous demand results in high rates of capacity utilization and induces private investment from capitalists to keep up with demand.

    The credit-financed private consumption route was the one taken in the period leading up to crisis but is unsustainable. The capacities of the state, if currency issuer, are a completely different matter.

    What I tend to think at the moment (without any degree of certainty) is that a particular distribution between v and s might well impact negatively on employment and value creation *if* the state fails to take a proactive role in driving demand through its autonomous expenditures. But if the state does play that role, employment and value creation can be maintained alongside a fairly wide range of possible distributive outcomes. (Note that this may well come at the cost to capitalists of a lower rate of profit, a possibility both Kalecki and the TSSI emphasize, though for different reasons and on different theoretical bases.)

    The trouble, of course, is that the state and capitalists are on the same side. So, the state has no intention of adopting such an approach. It would only do so in response to massive grassroots pressure from the general population.

    Because of the capacity of a currency-issuing state, so inclined, to drive demand for not-for-profit activity, there is no necessity to retain a role for capitalists or capitalism. This is why in the past I have suggested that there is an opening here – due to the capacities of a democratically accountable currency-issuing government – for activism that pushes the system beyond capitalism and into socialism or communism.

    Incidentally, the line of thought above makes me think that the task is not “just” to synthesize MMT’s understanding of state money and Marx, but also to accommodate long-period (supermultiplier) demand theories of output, growth and accumulation. It is the state, IMO, that especially brings the latter into play. At the moment – and for a while yet in the series – there is no explicit acknowledgment of the state. But once it is included, which it must be right from the start if the MMT understanding of state money is to be integrated into the analysis, then I think determination of the rate of growth is truly open and demand-determined in a way that can occur alongside very different rates of profit.

    If and when a state insists upon a high-demand (high-pressure) economy, capitalists will have little choice in the matter. Their options will be invest and receive some profit – even if at a low rate of return – or don’t invest and receive no profit. When, instead, the state opts for unemployment and tons of slack in the economy, capitalists can benefit from slow growth by grabbing a larger piece of a smaller pie. It is possible because of the weakened position of organized labor.

  4. Hi, Pete, thanks for the thoughtful replies.

    I agree with you: I too think Kalecki is important. Don’t worry about that 🙂

    What I think is that people want to read too much in Kalecki’s equation. One of those things people read in Kalecki’s equation is that argument (i.e. “capitalists cannot squeeze workers, because that would diminish workers’ demand and would come back to bite capitalists in the backside”).

    Personally, I find that argument particularly weak. But let me propose this: let’s leave this discussion for another moment. I’ll prepare my argument and as time permits, I’ll post something in my blog. This way, I don’t create any distractions to hinder your own exposition.

    Sounds good?

  5. Pete,

    I find concrete, real-life examples, sometimes help to understand abstract concepts.

    Let’s test my understanding of this:

    “In labor-time terms, the markup is revealed to be a ratio between total living labor performed in the period and necessary labor time (the amount of labor time required to offset wages). The more workers are coerced into production beyond this point, the larger the markup.”

    Necessary labour time would be that part of my shift I work to produce enough to cover my wages (i.e. v). Surplus time is that part of my shift I work to produce stuff above what’s necessary to cover my wages (i.e. s). That’s where my employer’s profit comes from.

    That’s similar to what serfs in medieval Europe used to do: during a part of the week, a serf would cultivate the land assigned to her to cover her needs (that’s equivalent to necessary labour time); she would work for her landlord the rest of the week, and the landlord would keep the crop of this part of his land (and this to surplus time).

    How would this coercion “into production beyond this point” work in a concrete situation?

    There are many ways. Perhaps the boss makes me work faster and produce more stuff in the same time (economists call this an increase in labour productivity). Three guys used to do the job before; now, only two do the same thing.

    I might end up working extra, for free: I take work home, or I stay past 5:00PM, without pay. I go to work this Saturday, even though I was hired to work from Monday to Friday, only. (Incidentally, this is equivalent to a wage cut).

    In fact, Aussie bosses have made of this an art-form:
    Labour hire, plight of insecure workers to be put under the spotlight
    November 18, 2015
    by Anthony Forsyth
    Professor of Workplace Law, RMIT University
    https://theconversation.com/labour-hire-plight-of-insecure-workers-to-be-put-under-the-spotlight-50463

    This explains why bosses seem to dislike seeing their staff relaxed, laughing, and talking: time is money (literally).

  6. Sounds great, Magpie (re: the capitalists can’t squeeze workers argument). Good plan. I’ll look forward to reading your future post.

    And nice illustration (in your most recent comment) of methods used to increase the rate of exploitation at the micro level.

    I agree with you: I too think Kalecki is important. Don’t worry about that 🙂

    Well, I wouldn’t say I was worried, exactly, but he is my second favorite dead economist (and, when I’m tired and Marx is too hard to read, sometimes my favorite), so I may have given that impression … 🙂

  7. Pete,

    I would like to ask you a question that may sound strange to you, but that — given the context — could be quite topical and, I hope, pertinent. So, please bear with me on this.

    You wrote:

    A Marxist is inclined to ask, what actually determines the size of the markup? Or, what is its real basis?

    That’s obviously important to you (it is also important to me), but why should anyone else — other than a Marxist, that is — care about that?

  8. Pete,

    Another question (a quick one, and sorry for the many questions). You wrote:

    Although Kalecki does not address this question[i.e. “Marx wanted to explain the real basis of surplus value”], his notion of the markup does provide an organizing framework capable of accommodating Marx’s answer.

    Does it mean that Kalecki’s notion of markup is not incompatible with Marx’s Law of Value (or Labour Theory of Value, as some style)?

  9. Thanks for the link to your post, Magpie. I will ruminate on it. 🙂

    … why should anyone else — other than a Marxist, that is — care about that?

    Well, if you are interested in the markup, as Kalecki was, and *if* there is a real labor-time basis to it (i.e. if Marx’s theory is correct), then I think it would be of interest in its explanatory value, if nothing else.

    Does it mean that Kalecki’s notion of markup is not incompatible with Marx’s Law of Value …

    Exactly: Markup = 1 + s/v. For those who want to understand the markup in value terms, they can do so.

    Also, his broader definition for the markup is, in the case of no fixed capital, equivalent to (c + v + s)/(c + v) = Total Price / Cost Price. Kalecki was using costs of raw materials M instead of c along with W and U for wages and gross profits.

    In this old post, you picked up on this point in the comments:

    Wages, Materials, and the Markup

    It may be that Marx has had more influence on modern macro than is usually acknowledged, especially through his analysis of social capital as a whole and the circuits of capital.

  10. Thanks, Pete.

    Well, if you are interested in the markup, as Kalecki was, and *if* there is a real labor-time basis to it (i.e. if Marx’s theory is correct), then I think it would be of interest in its explanatory value, if nothing else.

    No doubt, I understand that the explanatory value is important, from a theoretical point of view. But — to me, at least — its importance goes well beyond theoretical considerations.

    In fact, I suspect that if there is something both Marxists and anti-Marxists share, it is precisely that understanding. The thing is that both sides evaluate it in diametrically opposed ways.

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