[OPE] Misunderstanding value (reply)

What would you like me to explain, Paul?

As I elaborate in my paper, a central organising concept in national
accounts is the concept of value-added, which is itself based on:

(1) a theory of "factors of production" (Marx's "holy trinity", though land
rents and land sales are excluded as unrelated to the value of production),
and
(2) on the idea, that the value of the net product is equal to (a) the sum
of factor incomes generated by its production, or (b) the sum of investment
in production, consumption expenditure and the net balance of foreign trade
in goods and services.
(3) an accounting conception of the costs and benefits of economic activity.

The concept of value added (in German: "Mehrwert", the more-value or
surplus-value) was already known and used for hundreds of years, but people
like Simon Kuznets and Richard Stone among others refined and
operationalized the concept statistically, for the purpose of a
comprehensive social account that could be internationally standardized for
comparative purposes. It was the most successful conceptual innovation of
economics in the 20th century, since now everybody uses it, but also the
biggest mystification since almost nobody knows what it means. Marx
theoretically anticipated the concept 80 years earlier
http://www.marxists.org/archive/marx/works/1864/economic/ch02b.htm#487 but
he did not in fact operationalise an explicit "system" of grossing and
netting macro-economic aggregates.

If a marginalist view of the valuation of gross product was taken, then in
the first instance factor price aggregates should be scientifically computed
according to marginal cost. But in reality they are not so computed; at most
it is just assumed or implied that the observed prices will reflect marginal
costs. That's the first problem.

The second problem is that the categorization and conceptualisation of the
national accounts largely does not conform to marginal utility theory, but
is, instead, structured by an analogy of the ordinary double-entry
bookkeeping of a business, which more or less assumes a cost-of-production
theory of value (value-added itself can be thought of as turnover less
inputs used up in production).

Consequently, there are constant controversies about whether the categories
are in fact theoretically correct, and more precisely, whether the way
transactions are valued is correct - since observed transactions are not
simply added up and subtracted, but imputations are also made to achieve a
valuation deemed conceptually consistent. In modern capitalism, the
theoretical issues get more intractable, especially because increasingly the
"user" of a physical or financial asset is not the "owner" of the asset, and
because it's more difficult to identify the real cost structure of
production output and link it to income.

The classification system and the survey frame were originally built on the
basis of the idea of an independent, resident business unit owned by one
employer recording his own account for the production of an output on one
location, but this becomes problematic nowadays.

A wellknown example is that of the manufacturing sector, which statistically
shrinks even simply because a change in the division of labour has
re-allocated service functions to other industrial classifications. But it
goes much further than that, because e.g. income generated by a producing
unit may in fact appear somewhere else, in a way so that the link between a
specific economic activity and the income it generates or the assets it uses
is no longer clear.

If a categorisation system is no longer adequate, the effect is that you
have to make more and more additional (ad hoc) assumptions to sustain it.
>From an accounting point of view, the problem is that these assumptions may
not even be made explicit, which throws the meaning of the aggregation in
doubt. Accounting information cannot provide policy orientation if nobody
really knows what it means.

Peter-Utz Reich, whose book I do not have handy here, traces out in
entertaining detail, how the conceptual structure of national accounts tries
to straddle different notions of economic value which are really
incompatible. Depreciation as we were discussing before, for example, can be
viewed as a compensation for the loss of capital value by producers, but it
can also be viewed as the value of a capital service, as part of the price
of capital, or simply as a component of gross income. We can observe that
depreciation is charged in certain amounts but how it should be valued for
accounting purposes is another story.

For the purpose of compiling the national accounts, it is obviously not
necessary to have a deep and meaningful theory about their structure - all
you require is a complete grid of concepts sufficiently defined that they
are all mutually exclusive, and can exhaustively allocate all transactions
surveyed. From there, the technical debate is just about how, from a
statistical point of view, you can create the most accurate measures for the
concepts. It is just that the coherence of the system depends on reconciling
the micro-level and the macro-level in ways which must ignore certain
transaction values, and impute certain transaction values.

The accounting view of the world has some peculiar results to which I have
referred before. For its Global Report on Manufacturing & Services, Morgan
Stanley surveys executives in 26 countries which together account for 81% of
world GDP, but you can calculate that this excludes about 167 countries
which together represent 47% (about half) of the world population, who
produce the other 19% (a fifth) of world GDP. You can picture this in maps
http://archives.econ.utah.edu/archives/ope-l/2007m06/msg00190.htm
http://archives.econ.utah.edu/archives/ope-l/2008m12/msg00086.htm

Jurriaan

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Received on Sat May 9 04:13:32 2009