Brad DeLong

Atlantic Monthly Death Spiral Watch (Ross Douthat Edition)

Why oh why can't we have a better press corps?

Ross Douthat writes:

Obama In Berlin: I'd really like to know which genius on the Obama campaign thought it would be a good idea to have their candidate conduct a major campaign rally in Europe.... Overall, the overseas tour has been good to Obama.... But photo ops are one thing, Beatlemania-style rallies are quite another - and having your candidate appear in front of tens of thousands of adoring European fans when... "too many voters who are put off rather than attracted by his race and exotic background" strikes me as the height of political folly.

The Berlin rally probably won't hurt Obama - voters aren't really paying attention... it'll be forgotten by the time the fall campaign begins in earnest. But it could do some minor damage, and it certainly won't help him.... Is it too late to call the whole thing off?

Let us parse this. Ross Douthat says:

• Obama and his staff are showing their incompetence by
• Having a Beatlemania-style rally in Berlin, of course
• There's nothing wrong with giving a speech in Berlin, and
• A speech in Berlin will please Europeans, but
• It shows a lack of political competence, because
• It will turn off Americans, who
• Are already put off rather than attracted by his race, thus
• Even though Obama's speech in Berlin will impress Europeans, and
• Make it a little bit easier for him to do diplomacy should he become president next year,
• It is the height of political folly because it will hurt his chances of getting elected, but
• It won't hurt his chances: voters aren't paying attention, and
• It won't: it will be forgotten by October, but
• He should call the thing off anyway...

Three obvious points that really should not need to be said:

• The object is not to win in November, but to win in November in a position of sufficient strength to thereafter help make a better country and a better world. George H.W. Bush's victory in 1988 was a Pyrrhic one, as Ricard Ben Cramer detailed in What It Takes. If Obama's speech in Berlin gains him credibility and thus power with our allies in Europe, it is worth doing even if it does him no good or only a little bit of harm with respect to his chances in November.
• Ross Douthat's background belief that America's swing voters would rather have a president whom foreigners fear rather than one whom foreigners like is... wrong, to say the least. America's swing voters actually like Europeans--especially the west Germans who stood in front of us on the Cold War battleline, and the British who kept the anti-Hitler party running for three years until we showed up with the refreshments in our own sweet time, and the French without whom we would not even have a country.
• The meta-ness of a political commentator who says that a candidate is less qualified to be president because the candidate does something that the commentator thinks might lead some swing voter to be less likely to vote for said candidate--well, that's a level of metaness reached only by people who don't dare make any real arguments.

Keynesian Economics: Mail Call...

Reading Keynes:

Dear Professor,

I'm a student at Florida State University, and I've recently taken up a second major in economics after reading a few books by Keynes. You're an often-quoted person in the "blog-o-sphere," and I note your review of Keynes's Tract on Monetary Reform on the Berkeley website.

I've been having trouble getting straight answers from people on campus - generally, an Austrian-aligned bunch - about whether or not Keynes was correct about deficit spending during depressions. By that, I mean whether deficits will provide at least a temporary boost in output and employment. I've heard that the effects can vary based upon whether the spending is long-term or short-term. (I may be thinking of the wrong economist, but I believe Edward Prescott demonstrated this difference.) I was wondering: What is your opinion on this?

Thank you very much,

XXXX

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Well, it depends. For example, in Argentina in 2001, Stanley Fischer argued that increasing Argentina's budget deficit would increase expectations of inflation and capital flight, would cause a collapse in private investment, and so you would lose more than you gained--that a more "stimulative" fiscal policy would actually cause not an addition to but a collapse in demand and employment.

At the same time, Joe Stiglitz argued that reducing Argentina's budget deficit would do little to increase investment in the short run, would throw people out of work thus reducing their incomes, that reduced incomes would cause reduced spending and higher unemployment, that higher unemployment would deepen the political crisis, and that a deeper political crisis would accelerate capital flight, reduce investment, and lead to a collapse in demand and employment.

The terrible thing is that, as best I can tell, I think that they were both right: that increased deficit spending in the 2001 Argentine depression would have made things worse, and that reduced deficit spending in the 2001 Argentine depression would have made things worse.

When can deficit spending in a recession help?

1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.

You thus see that my view is closely related to (but not identical to) the short-run long-run distinction you draw. The longer-run are deficits, the more likely they are to cause a crisis of private-sector investor confidence. The shorter-run are deficits, the more likely they are to be part of a stable, sustainable structure of economic policy.

Lire le Capital: Mail Call

From: "XXXX" XXXX@berkeley.edu
To: delong@econ.Berkeley.EDU
Subject: Communism
Date: Mon, 4 Apr 2005 14:22:30 -0700
Thread-Index: AcU5XGg0e/rUmG6pRfqAi7kFYayhrA==

I was wondering if I could borrow some of your insights on Economics.... I have taken Transitional Economics and have a healthy background (for an undergrad) of the “Economics of Shortage” and decision making under socialist constraints.

However, reading Das Kapital and other things, I am seeing a different interpretation of how an item is valued, and the value of labor verses what I have been taught in traditional classes and I need more understanding. What is the “value” of a product, or of labor? Marx argues that exploitation in capitalism is structural, because the basis of making a “good deal” is paying someone four dollars for something worth five. To be a capitalist means you have to exploit the true value of their labor for what you’re willing to pay them for it.

I was hoping to get your insights into how products and labor are valued, and what you think of exploitation in capitalism. Any help you can provide would be greatly appreciated, even if it is a referral to other books or anything. Thank you in advance.

XXXX

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Let's run through Marx's labor-theory-of-value argument in a simple finger-exercise model:

Start with 100 identical farm families on 100 identical farms, each of which produces 3000 pounds of wheat (and other crops, but let's assimilate them all into wheat) each year.

Now suppose that ten of these families starve themselves for a decade--living on little more than half-rations--to raise the cash to buy farm machinery, irrigation systems, fruit trees, et cetera from the cities. As a result of their sacrifice, saving, and investment, thereafter their farms require four times as much labor each year to operate, but also produce crops worth eight times as much because of the capital investment. They then hire thirty additional families' worth of workers, leaving the remaining ninety original farmsteads to be worked by sixty families.

If diminishing returns do not set in and if the sixty families that remain in the family-farm sector expand their crops to take over the now-idle land, each of them can now produce 4500 wheat-pound equivalents of product each year: their standard of living has gone up by 50%. The owners of the capital-intensive farms have to pay each of the 30 families they hire 4500 wheat-pound equivalents to get them to work in the capital-intensive farm sector. Each of the proprietor families is then left with 24000 - 13500 = 10500 wheat-pound equivalents in income--4500 wheat-pound equivalents of which is the "wages" of the proprietor family, and 6000 wheat-pound equivalents is profit.

Now in Marx's schema, the first situation--where average labor productivity is 3000 pounds of wheat per family, and each family receives 3000 pounds of wheat in income--is one of no exploitation: labor is paid its average product:

---

Average Labor Product:	3000
Real Wage:	3000
_____	_____
Surplus Value per Worker:	0
Total Exploitation:	0

---

And in Marx's schema, the second situation--where average labor productivity is 5100 wheat-pound equivalents, and each non-proprietor family earns or is paid 4500 wheat-pound equivalents--is a situation of exploitation in which the proprietor class extracts surplus value from the workers by using their market position to pay those that they hire less than the true value of their labor.

---

Average Labor Product:	5100
Real Wage:	4500
_____	_____
Surplus Value per Worker:	600
Total Exploitation:	60000

---

Now it should be clear that this labor-theory-of-value-based analysis makes no sense at all. The proprietor families starve themselves for a decade, and yet Marx views them as exploiters? The heavy investments of the proprietor class and their resulting demand for labor raises the real wage by 50%, and yet the working class is oppressed? Something is very wrong here.

Now at this point the standard response is that the example is rigged: that in the real world those who own property and hire labor and live richly gained their wealth not through sacrifice but through a combination of luck and theft and having chosen the right parents. Thus it is unfair to set forth an example in which the proprietors' moral claim to their higher income is so clear and strong.

And the rebuttal is that, yes, this example is rigged: that's the point. The aim is to construct useful analytical categories that will help one identify and assess injustice. The aim is not to construct analytical categories--like the labor theory of value--that claim to find injustice whether there is in fact injustice or not. The fact that the labor theory of value finds injustice whether it is there or not is a sign that it is not the brightest light on the tree of good ideas.

Marx's labor-theory-of-value-schema makes no distinctions between profits on capital that have their origins in luck, theft, and choosing the right parents on the one hand; and profits on capital that have their origins in sacrifice, industriousness, or flashes of genius on the other. They are all, to Marx, "exploitation," "unjust enrichment," "extraction of surplus value." They are all, to Marx, signs of evil. But in this particular example the proprietors are, in reality, not evil. The proprietors are, in reality, public benefactors. The effect of their savings and investment is to raise not just their own incomes (after an extended period of sacrifice) but everyone else's incomes as well.

Thus the labor theory of value category of "exploitation" does not map onto what either ordinary language or our moral intuitions call "exploitation." There are social and economic changes that are good that are, in Marx's schema, increases in the rate of exploitation. There are social and economic changes that are bad that are, in Marx's schema, increases in the rate of exploitation. It's simply not a useful tool for either moral philosophy or political action.

Moreover, the labor theory of value is of little help in predicting what average market prices will be. It's not a useful tool for economic analysis either. In my view, the labor theory of value is pretty much useless.

If you want to make a compelling criticism of economic and social relationships, you cannot do so by saying that there is Marxian "exploitation"--which exists wherever workers are paid less than the average product of labor. You have to, instead, inquire into the origins of the wealth and property rights on which the proprietor class's income is based. The labor theory of value is simply a red herring.

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UPDATE: Matthew Yglesias and many others enter the lists and couch their lances in defense of German Charlie from Trier. Matthew writes:

Matthew Yglesias: Some Marxian Musings: Brad Delong offers a critique of the labor theory of value that is, I think, helpful as an exercise in understanding economics but not a very useful contribution to Marxiania. Brad suggests that Marx would have us prefer the situation in which there's zero exploitation and real wages of 3,000 wage-units to the one where there's 60,000 units of aggregate exploitation but real wages of 4,500. This, however, is wrong. What Brad describes here is essentially the transformation from a pastoralist economy to a capitalist one. Marx emphatically does not condemn the tranformation to a capitalist economy and certainly does not suggest that we ought to move backward to a world of subsistence farming. Rather, he looks at the exploitative capitalist economy where average labor product is 5,100 and real wages are only 4,500 and suggests that, though the collective ownership of the means of production, we could move forward to a world where the real wage is pushed up to the average labor product (i.e., 5,100) and the element of profit/exploitation is reduced to zero...

I would not disagree. Marx approved of the transition from petty-bourgeois agricultural commodity production to capital-intensive agricultural commodity production even though the rate of exploitation rose. His key labor-theory-of-value-model measure--the "rate of surplus value"--increased across this change. Yet Marx saw this change as good. I think that this is my point: The labor-theory-of-value model is simply not a good or useful model. Marx's measures of "exploitation" and "rates of surplus value" don't tell you very much about what is really going on. It's a swamp you really don't want to enter.