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Posted by: Frenchy on February 01, 19100 at 10:44:03:


Price-Allocation and Crises

The neo-classical revolution in economics dealt a death blow to attempots to depict the value of output as a sum derived by adding up the values of the inputs. On the contrary, only a pre-existing value of output to the consumer could make a given expenditure of productive inputs economically viable. Only insofar as consumers' subjective valuations of a product cover the objective costs incurred by producers can the producers continue to make the product, or to stay in business. There was no "given" assemblage of firms or capital to which labor could be added to get output. Estimating consumer demand and bearing the risks inseparable from these estimates were among the vital non-labor functions to be performed- and rewarded, if such functions were to continue.
Marx implicitly admitted much of this with his concept of "socially necessary labor". No matter how much had been expended (in labor or money) on the production of a given commodity, its value was limited to the amount "socially necessary" to supply the quantity actually demanded at the lowest cost possible under existing technology. In short, value was limited by the consumer, regardless of product costs.
But however much Marx admitted these realities in an implicit or ad hoc sort of way, his explicit formal analysis of value and surplus value was an analysis of surviving capitalist firms- firms that had correctly estimated consumer demand. But to analyze only survivors is to risk misconceiving the very process from which they emerged. By starting his analysis in the middle, with surviving firms in place, waiting to hire workers, Marx ignored the key implication of failing firms (a majority of all firms in the long run)- that risk is inherent in anticipating consumer demand, and that profit derives from successfully assuming that risk, rather than from merely hiring people to perform the mechanical aspects of producing goods. Failing firms also hire workers- but their failure shows that that is no guarantee of receiving surplus value.
Despite his insights into the role of ignorance- and hence, risk- in the functioning of any division-of-labor economy, Marx repeatedly ignored the importance of knowledge and risk in explaining the phenomena of a capitalist economy. For example, financial speculation was seen in the crudest terms as mere unsavory gambling, with no analysis if its vital role as a social process for conveying the risks inherent in economic activities to those best able or most willing to bear risks. Thus, farmers may grow food for a price guaranteed long before harvest, while commodity speculators carry the risks- each group doing what it knows best.
Although Marx went further than the classical economists before him in showing the crucial role if knowledge and ignorance in the economy, he failed to include knowledge costs or risks in the cost of production that determined value and surplus value. Moreover, Marx seemed to assume that a future communist society could somehow readily overcome these risks inherent in production for an unknown consumer demand. Central planning might enable many producers to become aware of what other producers were doing, but a dynamic economy would present the same difficulties to central planners as to capitalists in guessing how consumers would apportion their growing income or otherwise change their demand. More important, Marx and Engels failed to consider how the very apparatus of central planning would present an ever-present temptation to the holders of political power to turn the whole economy to their purposes- including military might- rather than let it serve consumers.
What Marx knew or stated in ad hoc ways must be clearly distinguished from what he built into his systematic analysis. I might be possible to assemble a substantial collection of random quotes from his passing remards, showing that Marx knew about skills, risks, etc., but such an exercise would have no significance for Marxian analysis as a system. Marx's arbitrary assuumptions, such as the special productivity of labor, were built into the very framework and definitions of Marxian economics, in effect making the isolated thing that he knew ad hoc "
off limits" to his analysis. As Marx himself observed in a different context: "The label of a system differs from that of other articles, among other things, by the fact that it cheats not only the buyer, but often the seller". The Marxian system negated the implications of much of Marx's own knowledge of risks and human capital.

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