1.1.19 Labour and value added

The relationship between labour and value added can be explained quickly, although the central affirmation is only expressed by David Ricardo and Karl Marx. Adam Smith is somehow contradictory on this issue, see below. The idea is that the "capitalist", pays the worker only a wage at subsistence level, but get the whole value of what the worker produced. To put it simply, the worker works ten hours, for instance, but gets only paid for two hours. What is produced in the eight hours is the value added.

The consequence of this is that the value of the product is only determined by the incorporated work. The demand doesn't play any role. If two goods have the same quantity of work incorportated, they have the same value. This has very concrete consequences. In planned economies, like the one in the now passed away East-Germany or Cuba, prices are not a signal of scarcity or the result of supply and demand, but a signal of how much work is incorporated in a product. In this logic, things can have a value even if nobody wants them even for free.

This concept of value is incompatible with the concept of natural price/market price. The natural price of a good is necessary to pay the natural price for the resources needed to produce the product. The natural price to pay for the resources is the price to pay if their marginal revenue is the same in any kind of use. In other words, if the marginal revenue in one sector is higher than in another, for instance for labour, then labour will flow away from the less productive sectors to the more productive sectors until the marginal revenue is the same. When the natural price is the same as the market price, we have a total equilibrium in the sense of Léon Walras. If preferences or customs change, if there is a change in the production structure and organisation etc. the market price can be higher or lower than the natural price and we will see an adaptation of the natural price. In the market price it is therefore included in changes on the demand side.

This concepts describes quite well the process of price building in market economies. The price is the result of changes in the supply and demand side. A price considered as a presentation of the work incorporated considers only one variable, the work, which is considered as a homogeneous factor.

That's why to completely different tendencies, Marxism at one side and the different types of market economies, consider Adam Smith as their grandfather. Through David Ricardo, who radicalised the idea that only work creates an added value, we get to Karl Marx and through the natural price/market price and similar concepts, for instance the 'invisible hand of the market', we get to the free market economy.

This is not mere theory. Socialists countries pay little attention to the demand side and to the problem of the optimal allocation of resources and in the three thick volumes of Karl Marx, we don't find any single word about how to produce something and what should be produced. When it comes to deal with real world problems, this is not very helpful. In the constitution of Cuba, we can read that the government organises and controls the economy, but it is not explained how it should do that.

artículo 16o.- El Estado organiza, dirige y controla la actividad económica nacional conforme a un plan que garantice el desarrollo programado del país, a fin de fortalecer el sistema socialista, satisfacer cada vez mejor las necesidades materiales y culturales de la sociedad y los ciudadanos, promover el desenvolvimiento de la persona humana y de su dignidad, el avance y la seguridad del país.

CONSTITUCIÓN DE LA REPUBLICA DE CUBA

article 160: The goverment organises, leads and controls the national economy in order to guarantee the programmed development of the country aiming to strengthen the socialist system, to satisfy better and better the material and cultural necessities of the society and of the citizens, to promote the development of the human person and his dignity, the progress and the security of the country.

Constitution of the Republic of Cuba

That actually means that everything should be organised like education, jurisprudence, defense, research and development and so on, see governmental activities. That means that everybody is a public employee, getting his money independently from his performance, doesn't have to bear the consequences of wrong decisions and doesn't care about anything because doing so doesn't offer any advantage. An economy of the type described by the Cuban constitution is kind of a superlative of all the problems we have with governmental activities in market economies.

The next affirmation is not interesting from an economic point of view, it is obvious that it is wrong, but from a psychological point of view. The affirmation was not true either in the times of Adam Smith. If Adam Smith life had passed by in front of his spiritual eye in different scenarios, he would have quickly become aware that his assumptions were wrong.

[Perhaps this is what distinguishes great economists: The ability to imagine a lot of different scenarios and to proove if they agree with the theory.]

The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour therefore, is the real measure of the exchangeable value of all commodities.

Book I, Chapter V

It is to assume that the idea that only work creates values is not from Adam Smith and that it was a popular concept in his times. That's why he had so much trouble to get rid of it. Sometimes Francis Hutchenson is mentioned as the author of the concept.

Even in the time of Adam Smith, one could observe that for instance, land becomes more and more valuable the more population grows and therefore the demand for food increased. Depending on the moment the land was sold, very different amount of work could be bought by selling this land, with no need to invest any work in this land.

[The same problem arises with the terms exchange value and use value. This distinction doesn't make any sense. Karl Marx realised that it is not very useful to invest work in something that is good for nothing and has no useful value. The problem is that the exchange value, something separated from the use value, doesn't exist. People pay only for the use value and don't care about the exchange value, the incorporate labour. To put is simply, what we need to make cooperation possible are throigh prices which are signals of scarcity, the result of supply and demand. The concept of exchange value / use value has no practical function and is therefore useless.

The term use value is not really useful and can't substitute the term demand, which includes preferences. The term use value has only two options. It exists or it doesn't exist. That's not helpful if it comes to allocate resources and produce the things that are the most scarce.]

In very primitive societies where everyone can do any work, in other words where work is homogenous, the idea that the value of a thing consists of the work incorporated makes some sense. One person makes a cake in two hours and gives it to another one who cleans the windows for two hours. Not a really relevant concept.

From a psychological point of view, it is interesting. It is another example for something we find very often in economic thinking. A term can narrow the perspective. The idea that the value of a thing is proportional to the amount of work incorporated leads him tp the conclusion that no value is generated if it is not incorporated finally in a product. In other words, if the work consists only in a service, see productive work and unproductive work. The work of a doctor for instance and any other services would be in this case worth nothing as already stated by Jean Baptiste Say, because the work of a doctor is not incoropareted in anything.

The service sector (cinema, music, tourism, restaurants, teaching, consulting, medical services etc.) amount to almost half of the GDP and is by far more important than the industry. With a little bit of fantasy, Adam Smith could had found a lot of example which contradicts his affirmation.

One might wonder why Marxism insists so much on the idea that only work produces an added value and that this strange idea was taught for fifty Years in any university of a socialist society, albeit by looking out of the window it was easy to see that this theory is wrong.

The idea is crucial for the Marxist ideology because this ideology needs a force that pushes history forward towards a final end. It is equally necessary that the labour is accumulated in capital and not in brains. If capital is accumulated in brains, then the capitalist can't accumulate it. In this case, it has two legs and can go away. This is actually the case. Capital or money is worth nothing if there is a lack of qualified people and innovations.

Cuba is a nice example for the fact that ideologies need no content, see it's all about economics.

GUIADOS

por el ideario de José Martí y las ideas político-sociales de Marx, Engels y Lenin;

CONSTITUCIÓN DE LA REPUBLICA DE CUBA

Guided

by the ideas of José Martí and the political-social ideas of Marx, Engels and Lenin

Constitution of the Republique of Cuba

The problem is that in any of the three thick books of Karl Marx and in the many essays of Engels, there is not a single sentence, not even a single one, which describes in a concrete way how to organise the economy. There is no answer to the three very fundamental questions what is to produced, how it is to produce and for whom it should be produced. These three fundamental questions which we find at the beginning of any textbook about economics were irrelevant for Karl Marx.

After the experience of the author with ex academic teacher of Marxism-Leninism of the University of Humboldt in East Berlin, he is almost sure that neither Fidel Castro nor Raúl Castro have any clue what Karl Marx wrote.

Authoritarian or totalitarian states are characterised by certain techniques which allows getting control over the society. The content is completely irrelevant.

The errors of Marxism are easy to see, but they are irrelevant. East-Germany didn't disappear from earth because after 50 years, communist economists came to the conclusion that the theory is wrong from the beginning to the end. It disappeared because it collapsed ecnomically.

Nowadays, mainstream economics will not disappear because it turns out that it is wrong. It will disappear if it becomes irrelevant for explaining reality. Nobody will then care about it anymore.

It is fatal error, to criticise ideologies by addressing the content, as Karl Popper did. We will return on the topic when talking about Karl Marx, Karl Popper, Ernst Bloch.

The idea that the value of a product is proportional to the labour incorporated in this product is present in the work of Adam Smith, but, although in a somehow contradictory way, balanced by the concept of natural price/market price, which takes into account the problem of allocation of ressources. David Ricardo and Karl Marx radicalised the idea. The value of a product depends only on the labour incorporated or, more generally speaking, from the costs.

Even if we admit that in the 18th century there was always an excess demand over supply, in other words, everything that was produced could be sold as well. The problem remains because a good capitalist wants to invest his money in the most profitable way. Therefore, the question arises how can he find the most profitable use of his captial? The only way to do that is through market prices, but market prices are always the result of the relationship between supply, which depends on the productive structure, and demand, which depends on the preferences on the consumers.

That makes a big difference. David Ricardo and Karl Marx assume that only labour generates an added value and therefore profits can only rise if more labour is employed by the capitalists, which leads, in the theory of David Ricardo, to an ever growing demand for food with the result that the price of food increases. Actually, we take into account the demand, we can imagine a completely different scenario.

If the distribution of income becomes more and more unequal, there will be a higher demand for the more luxury goods, with a higher margin of earnings. In this case, if we remain in the strange world of David Ricardo and Karl Marx, it is more profitable to produce less with fewer workers and to produce luxury goods instead of food.

In other words, Ricardian and Marxist theory defines the added value as the difference of the value needed to guarantee the subsistence level and the value he actually produced. This difference goes to the pocket of the "capitalist".

There are two problems with this thesis. The first one is that in a situation of competition, there will be no added value because prices will decrease until the added value is elimininated. If we call it value added or just earnings, it doesn't make any difference. In a situation of competition, the price will fall to the marginal costs, see equilibrium in the short run and in the long run.

The second problem is that the added value depends on the demand and not on the amount of labour employed. There is actually no relationship between employed labour and added value and therefore, there is no need for capitalists to employ more and more workers to increase or maintain their profits.

Tanto Adam Smith como Ricardo y Karl Marx vieron que su concepto del trabajo, el concepto que es homogéneo, no tiene nada que ver con la realidad. El caso más curioso en este aspecto es Adam Smith. Adam Smith da por un lado razones, implícitamente y no explícitamente por los cuales esto es así de otro lado tiene ejemplos rotundos que ilustran que el trabajo no es de ninguna manera un factor homogéneo. La famosa idea con la división del trabajo tal como la ilustra con su ejemplo con las agujas, envés de una persona que hace todos procesos necesarios para producir una hay una solo para cada proceso, lleva a una simplificación de los distintos trabajos por lo cual son realizados de manera más eficaz. Este fenómeno es sin duda una característica de economías desarrolladas, pero igual de característico es otro fenómeno, la especialización. Esta se produce cuanto un trabajo es tan complicado que solo puede ser realizado después de una formación más o menos larga y este fenómeno es mucho más importante que el primero. En el primer caso tenemos realmente una tendencia que convierte el trabajo en algo homogéneo. En el segundo caso tenemos exactamente lo contrario. Este saber especializado es capital real.

Si el "capitalista" quiere producir relojes, mecánicos en este entonces, y se decide a fundar una empresa de relojes, su problema no será el capital. de esto se necesita poco. Su problema será encontrar los especialistas y es de suponer que es más fácil para el relojero encontrar el poco capital que necesita que para el "capitalista" encontrar relojeros. Hoy el asunto es bastante obvio. Los "capitalistas" buscan desesperadamente gente cualificada con ideas rentables donde invertir, por que si no los encuentran no les queda otra cosa que hacer que especular en la bolsa, construir inmuebles y producir burbujas. Pero incluso en este entonces la idea que los "capitalistas" siempre son más poderosos que los "trabajadores" carecía de fundamento. Ni siquiera el carpintero necesita mucho capital. Si hace muebles individuales para una determinada persona puede exigir un adelanto para los materiales. El problema no es el capital, el problema es el saber.

David Ricardo as well as Karl Marx invent a lot of arguments in order to prove that even in the case that labour is not a homogenous factor, that doesn't have any impact on their theory. The problem is that the qualification of labour follows demand and a change in prices. If nowadays in industrialised countries the agricultural sector is irrelevant and people moved out from this sector and qualified for jobs in the industry or services, they did it because the wages were and are higher in these sectors.

No matter how much effort they put in presenting the problem of the different kind of labour as irrelevant, it is the demand which allocates the resources.

In speaking, however, of labour, as being the foundation of all value, and the relative quantity of labour as almost exclusively determining the relative value of commodities, I must not be supposed to be inattentive to the different qualities of labour, and the difficulty of comparing an hour's or a day's labour, in one employment, with the same duration of labour in another. The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes, and depends much on the comparative skill of the labourer, and intensity of the labour performed. The scale, when once formed, is liable to little variation. If a day's labour of a working jeweller be more valuable than a day's labour of a common labourer, it has long ago been adjusted, and placed in its proper position in the scale of value.

David Ricardo, On the Principles of Political Economy and Taxation, Chapter I, Section II

No, definitely not. The "estimation in which different qualities of labour are held" doesn't depend on the comparative skills and intensity of the labour performed. Not at all. The estimation depends on the demand for this qualification. Qualification, from a merely economic point of view, is worth nothing if there is no demand for this qualification.

If an engineer earns twice times more than a baker, it is due to the fact that the demand for engineers in relationship to the supply is higher for engineers than for bakers and the wage for an engineer must be higher, in order to induce people to study engineering.

If the baker and the engineer would get a wage corresponding to the subsistence level at the end of their respective studies, neither of them would study this profession because in the end, they wouldn't be better of than an unqualified worker.

However, it is even worse. The sentence "it has long ago been adjusted and placed in its proper position in the scale of value" reveals a total incomprehension of market economies and is the beginning of the Marxist tragedia. The truth is that these relationships changes very quickly and there are fewer and fewer people who do the same job their entire life. Actually, jobs like that only exists in the public administration where people can't be fired and are employed even if there is actually nothing to do.

The unification of Europe for instance leads to the abolition of a lot of frontiers, but it was not possible to fire the customs agents. That's why we have a lot of customs agents voyaging in the trains in Germany where they actually have nothing to do.

At the other side, we have qualifications more or less irrelevant 30 years ago, like the biology, which is now the most promising science from an economic point of view.

All these errors would be of course completely irrelevant and only interesting for psychologists, philosophers or historians, if they were not typical for a certain kind of economic thinking we find in any textbook and any lectures.

The problem can be described at an abstract level. Economic models tend to generalise certain constellation and assume a stable relationship between certain parameters. If this is not the case, mathematical modeling is impossible, see mathematical modeling. The basic idea of Marxism and neoclassic theory is the same; The condition for investment is capital. The only difference consists in the fact that in Marxist theory capital is the added value squeezed out from the workers, while in the simplified version of neoclassic theory we find in nowadays textbooks, capital is the result of an abstract market process. (Actually, in neoclassic theory, it is never really defined where it comes from.) In both systems, the difference between capital and money is unclear, but as in both system, it is supposed that capital is used in the most profitable way and it is obvious that it must be something very liquid. Actually, they mean money.

In both systems, the 'capitalist' is not an entrepreneur. Actually, the capitalist is the same thing as capital. He doesn't take any decisions, he never errs. Concerning labour, there is at least a discussion about possible differences between one type of work and another even if these differences are assumed to be irrelevant. Concerning capital and capitalist, there is not even a discussion. They are completely homogeneous. Karl Marx is very explicit concerning this point. His horrible book is called 'The Capital', not 'The Capitalists'.

It is often said that the homo oeconomicus is a basic assumption of the neocclassic theory. Actually, it is not because in the trivial version of neoclassic thinking, somenthing very different from what we find in Principles of Economics of Alfred Marshall, there is no decision making at all. Capital moves alone in the most profitable use. There is no homo oeconomicus or entrepreneur needed. Actually, the theories of Léon Walras and Karl Marx are very similar. In theory, the total equilibrium of Léon Walras addresses the problem of allocation, but not in practice. Léon Walras presents the problem as an already resolved one with some equations. Karl Marx doesn't adress it at all. That doesn't make a big difference. In both systems, we don't need entrepreneurs.

This is the same kind of thinking we have with the famous ceteris paribus clause. The ceteris paribus clause assumes that all the parameters not included in the model don't change. That's not a useful assumption when the basic strength of a market economy is to adapt itself to changes. If we exclude the problem to be resolved from our model, the model is not useful.

However, the problem is still more serious. A model takes into account certain parameters considered relevant by abstracting from the irrelevant ones. It assumes furthermore, that there is a causal relationship, or at least a stable relationship, between the remaining parameters. But if this is not true, and if all the parameters depend actually from parameters not included in the model and if these parameter changes, then the model is useless.

There are prominent examples illustrating this issue. The IS-LM model for instance, presented as a presentation of Keynesian theory, although it has actually any relationship with Keynes, abstracts from employment. The so called "classical sector", where an increase in aggregate demand will end up only in a raise of prices is, in this model, due to a lack of money and raising interest rates (crowding out effect). It is assumed in this model that the interest rates will put a limit to fiscal policy. Actually, it is the productive potential, not really the same thing as unemployment because unemployment alone doesn't mean necessarily that the unemployed workforce can be used productively, that puts a limit. The interest rates is not a big issue and can be lowered by printing money. However, the productive potential, unemployment, is definitely a limit.

The model establishes a relationship that actually doesn't exist and the relevant parameter is not included in the model. Few people see that. We find the IS-LM model in any textbook about macroeconomics. This is fatal, because it is a misinterpretation of the Keynesian theory and is simply nonsense.

The whole topic has been already discussed in mathematical modeling. In short terms, Mathematical modeling is only possible, if all the relevant variables are part of the models and/or the relationship between the parameters is stable. In other words, the equations of the model must be more than merely descriptive, they must describe causal relationships.

This for instance, we find that in any textbook, is a descriptive equation.

Y = C + I

with Y = social product, C = aggregate consumption and I aggregate investement. This is of course always true, in Germany and in Namibia. The equation suggests that we can take away an arbitrary amount of C and add to I.
That's of course not true because we can't reduce the consumption and increase investment arbitrarily, although we find this equation and similar ones in any textbook about macroeconomics. If we increase C, to take another example, there is no guarantee that Y will increase. That is needed to get to a new equilibrium, but there is no evidence that this new equilibrium can be reached. In the case of full employment for instance it will not be reached.

To undertand that point, lets take an example from physics. (kinetic energy = potential energy)

1/2 m v² = m g h

In this case, there are casual relationships. If we change one parameter, v or m or h we will automatically have a change in both sides of the equation. If we increase h the energy, the potential energy on the right and the kinetic energy on the left, will increase. This equation is not a mere description. It describes a casual relationship. Equations in economics are always mere descriptions.

Mathematical modeling is only a special type of modeling in general. The same mistakes can be done of course by any kind of model.

The case of Adam Smith is somehow different. The concept of natural price/market price is a good description of how market economies adapt to changes on the supply side or the demand side. What he doesn't see is that the idea that the value of a thing depends only on the labour incorporated in this item is inompatible with a market economy. The value of an item is determined by both the supply side and the demand side. Some people don't get something because it can't be produced at the price they want to buy it and others want to sell something, but nobody want to have it for this price. Only if suppliers are willing to sell an item and able to produce it that the customers want and can buy it, then we can have market transactions. The labour involved is irrelevant.

The case of David Ricardo and Karl Marx is different. They refute explicitly that the demand plays any role in determing the value of an item.

Diminish the cost of production of hats, and their price will ultimately fall to their new natural price, although the demand should be doubled, trebled, or quadrupled. Diminish the cost of subsistence of men, by diminishing the natural price of the food and clothing, by which life is sustained, and wages will ultimately fall, notwithstanding that the demand for labourers may very greatly increase.

David Ricardo, On the Principles of Political Economy and Taxation, Chapter XXX

We see once again a well known phenomenon. The affirmation is not really interesting from an economic point of view, it's obviously wrong, but it is interesting from a psychological point of view. People tend to generalise a certain situation and to draw general conclusion on the basis of a special situation.

It may be astonishing that Keynes made this somehow obscure assertion, not really what we are accustomed to hear from him, but perhaps "intuitively" he got an important point. A good economist must be able to have a lot of different scenarios at one time in mind. In other words, he must be able to consider all the items that eventually have an impact on the topic he is discussing. modeling is just the opposite of that.

The object of our analysis is, not to provide a machine, or methode of blind manipulation, which will furnish infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we the have to go back on ourselves an allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in de wood) will lead uns into error.

John Maynard Keynes, The general Theory on Employement, Interest and money, page 148 (chapter 21, III)

David Ricardo uses the same term as Adam Smith, natural price, "...fall to their new natural price...", but the meaning is completely different. In the concept of Adam Smith, the natural price is the price paid for the resources when the marginal revenue is the same in all uses. (Otherwise they would be reallocated until the marginal revenue is the same in all uses.) In this case, the natural price can be higher than the subsistence level, actually it has nothing to do with the subsistence level and of course the marginal revenue depends also on the demand.

The definition of David Ricardo is completely different. The natural price, in this case of labour, is the wage and is always at subsistence level. There is no explanation for this assumption in Principles of Economic Theory and Taxation, but it is easy to guess what he means. If the demand for labour, people who want to work, exceeds the supply for labour, people offering jobs, the competition will lead to a situation where the wages will fall to subsistence level. For a more detailed description of the Ricardian theory, see David Ricardo. (The excess of demand for labour and supply for labour is called reserve army of labour in the Marxist theory.)

If we suppose that wages are the only costs, his theory is always true, although actually completely wrong. If wages are always at subsistence level, an increase in demand can increase the prices for a short time, but at the end, when the adaptation needed is realised, it will fall back to his original price because every amount of hats can be produced at the same costs.

(We will see in the chapter about Karl Marx that under this assumption there is a solution for almost every kind of problem on earth. Poor people just have to become capitalists and all problems are resolved. To be capitalist requires no qualification and the qualification of labour is irrelevant. Poor people can go to a bank, borrow money and become a capitalist. All problems resolved.)

The same thing, in this weird logic, happens when the prices of the daily consumer products, "....Diminish the cost of subsistence of men, by diminishing the natural price of the food and clothing...", decrease. Workers will remain at subsistence level, because their wages will decrease as well.

The problem is that even under the weird assumptions of David Ricardo, the theory that only the costs determine the price of a product is not true. It may be true that the price falls again to the actual costs, because the wages, the most important costs, always remains at the subsistence level, but it is the demand that decides whether a company produces hats or scarfs. In other words. If a company produces hats that nobody buys, their value is zero.

The interesting point of the Ricardian theory is not that it is wrong, which is obviously the case. The interesting point is its psychological implications, the fact that a certain theory assumes that the concept that the price is determinated by the costs was a widespread concept, impedes him in seeing the reality. Someone who earned his money as a broker, as David Ricardo, should know that the value of a share at the stock market, or any kind of listed effects, depend exclusively on the demand for this effects, because they can be produced without any costs. Speculation on the stock markets is driven by the expected demand.

[We admit that the right theory, prices raises if the demand raises, cannot be observed in reality either. It is more an intuitively very plausible concept, although we observe that, nowadays, very seldom, because the productive structure of industrialised countries is so powerful, that it can adapt itself to almost any increase in demand. However, if we are sensitive for this question, we find examples, which confirms this concept. Housing for instance is an example. If demand increases the housing sector cannot adapt itself to the increased demand and rents raise. What we see more often is that prices fall, for instance for any kind of electronic devices in the long run, and people can afford to buy them.]

Terms or concepts can narrow the perspective so much that reality gets completly obscured, although it is to suppose that the fact that ideologies can survive for a long time can't be explained this way. At least in totalitarian or authoritarian countries, it is rewarding to support the concepts of the ideology. A member of the secret police in East Germany had no clue about Marxism and nobody had read Karl Marx. They knew just the specific ,Marxist 'jargon'. But it was awarding to defend this ideology.

We have a similar situation with todays academic teaching on economics. It is awarding to stick to the "neoclassic mainstream", although something like that actually doesn't exist. Alfred Marshall, the cautious intellectual, has nothing in common with a foul like
Vilfredo Pareto, although both were put in the same drawer called neoclassic theory. It is difficult to say how the different concepts of very different authors has been clued together to something called today neoclassic mainstream. What can be said is that nobody of the academic staff has ever read 'Principles of Economics'. 'Intuitively' it is plausible that the canonisation of certain arbitrarily canonised concepts is driven by the desire to get a coherent and scientific looking system, free from contradictions. A system with "economic laws" as stable as the laws in physics and a solid fundament. This is necessary to gain public recognition and public financing.

Ideologies are a strange kind of phenomenon. The definition we find everywhere is that ideologies try to prove that the interests of a certain group agree with the general interest of society. The affirmation that an unequal distribution of income promotes public wealth, because it promotes saving and saving is the condition for investment is of this kind. However, if this is true, the way of proceeding of Karl Popper is completely useless. Popper critises ideologies or totalitarian regimes by discussing the content of the respective ideologies, Marx, Hegel, Platon. This way of procedure leads nowhere. If people are aware of the ideological character of their ideas, they are not going to change their mind. Trying to convince them is as useless as explaining to a bank robber that he should not do that. He knows that he shouldn't do that. If we want to understand the way how totalitarian systems works, we have to understand the mechanisms allowing them to stay in power, not the content. Theories about totalitarism is the one of Hannah Arendt and is not about content because the content is irrelevant. A totalitarian or authoritarian system can be based on almost everything, especially religions, an ideology not even mentioned by Karl Popper. We will discuss this topic again in the chapter about Karl Popper.

Ideologies are a strange kind of phenomenon with a lot of different aspects, but the term only makes sense if it reaches the masses and if it has some instrumental character and serves at least a small group of people. Otherwise it is just foolishness.

Most of ideologies hypostatise something as stable. They presume for instance that certain nations, ethnic groups, social minorities have certain characteristics which will never change, although a little bit of reflection about history shows that there is only one thing in history that is really stable: The belief that some things are stable.

The theories of David Ricardo and Karl Marx are so abstruse that the best thing to do is forget and bury them. The only interesting thing, concerning Karl Marx, is the fact that he had been taught for fifty years at all levels of the education system in ex East-Germany. We don't say that it was possible in the fifties to predict that a planned economy can't work, actually it works, at least in economic terms, in China. However, the experiment could have been stopped after let's say fifteen years. The interesting question is how this system could remain in power for fifty years and the psychological deformations it produced. It is to assume that these psychological deformations are similar to the ones we can observe in today's economists.

The basic ideas of David Ricardo and Karl Marx can be resumed in a few sentences. The plants or the mashines, buildings, tools alone doesn't produce any added value, because it is imposible to pay them only a wage corresponding to the subsistence level and take away the rest. The only source of added value is therefore labour. The value of the industrial equipement consists therefore in the work that was necessary to get it. Until here there is no difference between David Ricardo and Karl Marx.

The difference between Karl Marx and David Ricardo regards the further economic development. In the work of David Ricardo the "capitalists" will employ more and more workers, because only labour produces an added value. ("Capitalists" are strange people. Instead of having fun and spent their money in parties, they prefer to exploit the workers.) This makes food more and more expansive, because of the growing need to cultivate less fertil and more distant land. The market price of food is fixed by the less productive land, the other landowners get a rent. That means the landowners get richer and richer, while the profit of the capitalists is shrinking. Finally we will get to a stationary state with no more economic growth.(For a more detailed descriptions see David Ricardo.)

In the theory of Karl Marx it seems that food can be produced at any amount, that's not a big problem. The problem is that the 'organic composition' of capital will change, in other words the percentage of constant capital, machine, tools, building etc. that doesn't produce any added value will increase and the variable value, invested in labour, the source of added value, will decrease. The profit will therefore decrease and the monopolisation will increase until the system collapse.

The basic problem with both theories is that central banks can produce in one night more capital, actually money, than all the proletarians of the world in one hundred years. That's not the problem. The real problem, is the very fundamental one which is the transfer and production of know how. Google is not based on the added value squeezed out from proletarians, but on know how. To give an example.

If the know how for an innovative idea exists, it is not a big problem getting the money to realise it. However, money is worth nothing if for a lack of know how it can't be invested. We will return to this topic in the chapter about Joseph Schumpeter.

(The case of Adam Smith is more complicated concerning this issue, see balance of trade. Adam Smith and still more his friend David Hume were well aware of the impact of money, but didn't realise that there is a contradiction in his work.)

In the theories of David Ricardo and Karl Marx, there is actually nothing worth to be discussed. Even the most basic assumptions are wrong. Land is never scarce. What is actually scarce is water. (Although this is more a technological problem.) In SouthAmerica, neither of them, water nor land, is scarce, but transportation facilities.

The term "surplus value", the surplus of the value produced by the workers over what they are paid, has the same problem as "savings", the term used by Jean Baptiste Say and nowadays textbooks. It is assumed that investments are necesarily financed by non consumed income of the past. This assumption is one of the most fundamental error in economic thinking. We will discuss this topic when talking about Keynes.

Somehow special is Joseph Schumpeter as well. Joseph Schumpeter saw very clearly that money is a claim to a part of the productive POTENTIAL, not necessarily a claim to something already produced. (If someone has 1,000 dollars today and wishes to buy a bicycle next year with these 1,000 dollars, he hopes that someone will produce him his bicycle and his experiences tell him that someone will do it, but the bicycle is not produced in that moment.) However, Schumpeter assumed that money has only an impact on the allocation of resources, but that it is not possible to expand the productive POTENTIAL with money.

This is another example for a well known phenomenon. Joseph Schumpeter assumes, sticking to the classical theory, that unemployment is impossible, although during his lifetime he could observe several times mass unemployment. The dominance of theory about reality is difficult to explain. Maybe it is ideology, maybe just stupidity, maybe, that is valid for most academic economists, he lived in a parallel world, maybe a mix of all of that.

Only in 1936, with the appearence of the General Theory of Employment, Interest and Money of Keynes, we get a full picture of the economy and a stable framework to discuss economic issues. This website is therefore most of all about errors and misleading ideas. That's not very amusing, it would be of more use to discuss about solutions. However, while public debate is dominated by misleading ideas, we have to untangle the existing weird ideas.

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1.1.19 Labour and value added

Is the value of an item is determined by the costs or the demand?