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Paper Presented at the International Confederation of Association for Pluralism in Economics June 1-3,2007 Salt Lake City, Utah. The firm theory A comparative analysis between the labor theory of value and the Post Keynesian theory. Dr. Gustavo Vargas Sánchez

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slide1

Paper Presented at the International Confederation of Association for Pluralism in Economics

June 1-3,2007

Salt Lake City, Utah

The firm theory A comparative analysis between the labor theory of value andthe Post Keynesian theory

Dr. Gustavo Vargas Sánchez

Full time Professor at the economics theory department at Economics School at Universidad Nacional Autónoma de México, Mexico City.

objective
Objective

In this presentation I intend to show that the labor theory of value and post keynesian theory reach a similar conclusion about the firm:

The firm is a dynamic and complex economic phenomenon that evolves and grows permanently.

relevant questions
Relevant questions
  • Is it possible to obtain a microeconomics explanation of the firm’s supply from the labor theory of value (LTV)?
  • Can we construct a microeconomics firm theory from the LTV?
  • What are the differences between the LTV and post keyensian theory about the firm theory?
layout
Layout
  • Build a theory of the firm from the LTV.
  • Compare and contrast each theory’s analysis of:
    • Production theory
    • Cost theory
    • Pricing
    • Firm Dynamics
  • Conclusions
labor theory of value contributes to the firm s microeconomic theory
Labor theory of value contributes to the firm’s microeconomic theory
  • The source of surplus value (profit) is produced because the labor force creates more value than is required for its replacement,
  • The social character of value allows the private firm to be recognized as the owner of this surplus value.
labor theory of value
Labor theory of value
  • The social process of value creation can be measured in two forms:
    • Time: labor time concept
    • Money: costs, income and profits
labor time
Labor time
  • necessary labor time NLT
  • incorporated labor time ILT
  • socially necessary labor time SNLT
snlt s ocially necessary labor time

SNLT

Firms

Price, Costs

+

+

+

+

+

+

+

SNLT: VALUE

Market Price

Average Profit

Industry Average Cost

Commodity i

SNLTSocially necessary labor time
the firm value price wages surplus and costs

New value

Wages

New Value Surplus

Cost of row materials

The firm: value, price, wages, surplus and costs

SNLT

Price, Costs

Suppose: K c=0

+

+

+

+

+

+

+

SNLT: Value

Total Value =

Variable capital +

Surplus value

+

Constant capital

Price

4hs

8hs, Q

Commodity i

the most important form of competition
The most important form of competition

Reduction of labor time employed in the production of the merchandise

“The incorporated value – IAL- would now be below its social-SNLT value, this is, would cost less labor time…”

snlt and the ilt at lead firm

SNLT

ILT

Price, Costs

+

+

+

+

+

+

+

SNLT

Market Price

Average Profit

Industry Average Cost

I L T

Extraordinary Profit

Firm Lead

Average Cost

Commodity i

SNLT and the ILT at lead firm
the value has two moments and a social dimension
The Value has two moments and a social dimension

Abstract labor incorporated

The firm

The market

Production

Circulation

Socially accepted abstract labor

Process of transformation:

Value into prices

two kinds of labor
Two kinds of labor

Labor can be classified in two types:

  • Productive labor is the labor that creates value in the form of a good.
  • Nonproductive labor is the one that does not produce value but that is necessary for the circulation of the capital and has to search the maximization of profit rate.
the firm has three nodes

Profits

Value

Market

Firm

The firm has three nodes:
  • Production
  • Market
  • Profit

The firm’s dynamics and general mission is determined by the general law of the capitalist system: the production of private profits.

“The production of surplus value,  … is the absolute law of production...”

microeconomics representation of value prices average profits and cost in commodity i

Commodity ‘i’ Value

Prices

Pa

Pb

Pc

Pe

Pn

a

b

c

d

n

Qdn

Qde

Qdc

Qdb

Qda

Microeconomics representation of value, prices, average profits and cost in commodity “ i ”

Prices

Pa

Pb

Pc

Pe

ATC

Extraordinary Profits

Profits

Normal Profits

Average

Total

Cost

Qdc

the firm definition based on the labor theory of value
The firm  definition based on the labor theory of value  

The firm is an economic space that manages the creation process of value.

In monetary terms we can say,it is the space where the production is managed with the final goal to obtain profits. It is the place where the production of value and accumulation processes take material form, of course at private level.

first coincidence production techniques
Marx supposes a relation of inputs to outputs with fixed coefficients

This means that constant and variable capital are complementary

Post Keynesians suppose that production factors cannot be substituted (CC, VC), therefore they are COMPLIMENTARY.

Also, it is possible to obtain increasing returns

First coincidence: production techniques
long term input output relationship

CC+VC

CC3+VC3

CC2+VC2

CC1+VC1

100 200 300 400 500

Q/time

Long term input-output relationship
second coincidence two kinds of labor
MARXISTS

Productive labor

Non-productive labor

POSTKEYNESIANS

Direct labor

Indirect labor

Second coincidence: TWO KINDS OF LABOR
third coincidence costs theory
MARXISTS

Average cost of variable capital is constant.

Average cost of non-productive labor decrease

Average costs of machinery decrease

Average cost of raw materials are constant

Average total costs decrease

POSTKEYENSIANS

Average variable costs (Direct labor and raw materials) are constant

Average costs ofindirect labor decrease

Average fixed costs decrease

Average total costs decrease

Third Coincidence: COSTS THEORY
average total costs in ltv

SNLT

Cost of

Constant Cap. and unproductive labor

Price

Price=Value

ATC

Wages

Surplus Value

Cost of Row Materials

Qmín QaveQmax Q/t

Average total costs in LTV
fourth coincidence pricing
MARXISTS

Competition: prices are determined by the social formation of the average rate of profit.

Prices are determined by costs and average rate of profit.

POSTKEYNESIANS

Prices are fixed from average costs and mark-up.

Mark-up represents monopolistic power (given a competitive environment).

Fourth Coincidence: PRICING

Firms fix prices according to competition.

slide26

Pricing

Price

Costs

ATC

Price

Mark - up (NC)

NC (Qav)

Q

Qav

60% 95% RP

level and variation of prices in time
Level and variation of prices in time

P +P = cj ( CMTP) + Mgj+ (CMTP)+  Mg(e, , , g, b)

Prices are determined by: average total cost and mark-up which is determined by the competitive environment.

Variations in average total cost and monopolistic power determine inflation.

This argument is similar between the TLV and PK.

fifth coincidence long term
LTV

Technological and organizational changes transform the production techniques and this causes a reduction in:

IALT

Average costs

Prices

PK

Innovative firms:

Reduce average costs

Reduce prices

Improve quality

Apply marketing strategies

This results in:

greater expansion than the industry average

“absolute concentration” of capital and market share

financially stronger

Fifth Coincidence:Long term
the firm in the long term

P, C

Pt1

Pt2

Pt3

ATC Lt

P.Tec1 P.Tec2 P.Tec3 Time

The firm in the long term
sixth coincidence evolutionary character of the firm
LTV

Proactive tendency: innovation in all areas of the firm

Reactive law:

“catch up”

These lead to the development of the productive forces and the economy as a whole

PK

Competition leads to a reduction in average costs and a long term average cost curve with a negative slope

Sixth coincidence: EVOLUTIONARY CHARACTER OF THE FIRM
slide31

THEORY

Labor Theory of Value

Post Keynesian

Neoclassic

Origin of Value

Labor, abstract labor, socially accepted labor

------

Scarcity

and

The market

Analysis in terms of

Labor value

Time and prices

Prices only

Prices only

Production theory

Complementary factors with constant and increasing returns

Complementary factors with constant and increasing returns

Substitute factors and decreasing returns

Cost theory

Constant and decreasing average costs

Constant and decreasing average costs

Increasing average and marginal costs

Pricing

Firms set their price according within the competitive environment

Firms set prices due to monopolistic power given the competitiveenvironment

Supply and demand

Firm performance

Dynamic

Dynamic

Static

Origin of the dynamic

Search for profits

Search for profits

Does not exist as maximum profits are obtained

Form

Competition through innovation

Competition through innovation

Externalities

slide32

Thanks you

vargassanchez01@live.com.mx

http://www.economia.unam.mx/profesor/webprof.htm