[OPE-L:4163] Re: New & New New Quiz

andrew klima (Andrew_Kliman@msn.com)
Fri, 7 Feb 1997 10:14:58 -0800 (PST)

[ show plain text ]

A further comment, mostly in response to Rieu's ope-l 4147 and Allin's ope-l
4152.

In the phrase "the TSS interpretation of Marx's value theory," TSS stands for
"temporal single-system." "Temporal" (or sequential, or historical, or
successivist) indicates that values and prices in Marx's theory are determined
in historical time, so that input and output prices (values) need not be
equal. "Single-system" (also known as "non-dualist") indicate that prices and
values in Marx's theory are interdependent, not independent. The value
advanced for inputs depends on the prices of the inputs, while the general
level of output prices depends on the general "value" rate of profit,
surplus-value divided by capital advanced, which is determined fully as a
result of production, before outputs are sold.

Rieu writes: "Then, Mr. Wolf(our capitalist who is 'simultaneist') will
ignore these
analysts' unanimous forcast?"

My quiz said nothing about the investor being a simultaneist. Indeed, my
point was that investors are NOT simultaneists, i.e., they do NOT make
investment decisions on the basis of the simultaneist profit rate, i.e., the
"replacement cost" profit rate. Hence, when I wrote in ope-l 4136 that

"in effect, they compute both today's costs and next year's revenues using
today's prices. That is exactly what the "replacement cost" profit rate
does..."

the "they" refers to the simultaneist "profit rate" computations that
Alejandro provided, not to the computations or thinking of investors.

In response to this comment of mine, Rieu writes:

"In this passage, Andrew is talking about the way capitalists' expectation are
formed, not about simultaneists' way of thinking. Here Andrew assume that
simultaneist capitalist expects statically. Namely, adaptive expectation (P* =
P(t-1), where P* denotes expected price of period t) is posited. If the point
of quiz is to show that rational expectation is better than adaptive
expectation(or the latter is wrong), I can agree with Andrew on the passage
above. But if it is to show that simultaneist way of thinking is wrong, the
passage quoted above seems to be beside the point."

No, again, I WAS talking about the simultaneists' way of thinking, NOT the
formation of capitalists' expectations. I don't think capitalists are
simultaneists at all. The *passage* wasn't meant to show anything, just to
define the meaning of "replacement cost profit rate." But if simultaneists
think that the difference between input and output prices is irrelevant to the
rate of return, and actual investors consider it relevant, then the
simultaneist way of thinking is indeed wrong about how investment decisions
are made.

In my quiz, I was dealing with the *usual* claim made by simultaneists, that
*today's* replacement cost profit rate guides investment decisions. That is,
(output valued at today's prices minus the costs they incurred revalued
according to today's prices) divided by (the costs they incurred revalued
according to today's prices). Let's call this ratio RCPRESENT. I hold that,
instead, investors look at the expected historical rate of profit, (output
valued at the expected prices of one year from now minus the costs they would
incur today) divided by (the costs they would incur today). Rieu has since
proposed a different simultaneist profit rate (let's call it RCFUTURE) as the
basis for investment decisions --- (output valued at the expected prices of
one year from now minus the costs they would incur today revalued according to
the expected prices of one year from now) divided by (the costs they would
incur today today revalued according to the expected prices of one year from
now) --- although he is now reconsidering the appropriateness of this
criterion.

Therefore, when Rieu continues that

"No rational capitalist will think that the prices of commodities remain
unchanged. Furthermore, if he is going to start new business or enter new
industry, he will surely consider the change in price conditions."

he and I are in complete agreement. Both the expected historical rate and
RCFUTURE "consider the change in price conditions." They differ in that
RCFUTURE is based on the notion that *only* the future prices matter, while
the expected historical rate is based on the notion that the future prices are
what determines revenue, but present prices determine cost, and the rate of
return is the percentage by which revenue exceeds cost.

Rieu also writes that "the original quiz is too simple and some important
assumptions are
missing."

As I have noted since he wrote this, in ope-l 4153, although in retrospect it
may seem to Rieu that "important assumptions are missing," he managed to get
the exact right answer without them, as did Alejandro Ramos, Patrick
(according to a reasonable interpretation), and, most recently, Allin. So the
original quiz is not too simple --- it provides just enough information and
only the information that one needs to get the right answer. Input/output
relations were not specified, so RCFUTURE could not be calculated (one
RCPRESENT was 10%, the other was 8%). Nonetheless, everyone manages to know
where they would invest, everyone agrees, and everyone uses the expected
historical rate. This means that RCFUTURE is *irrelevant*. What better proof
could one ask for?!

This brings me to Allin's posts. Interestingly, he gets the right answers,
the same answers as everyone else, the expected historical rate answers. But
then he wishes to maintain something that contradicts the conceptual
foundation that allowed him to get the right answers. In ope-l 4152, he
maintains that investment decisions are not based (at least not solely) on the
expected historical profit rate:

"My thinking is that A will be preferred, if the capitalist is thinking of
investment in each of the possible ventures as a 'going concern', since A
offers a prospective gain in the form of a 'release of fixed capital' while B
does not. The capitalist investing in A can use the "saving" - owing to his
ability to replace the means of production more cheaply -- either for
consumption, or to extend the scale of his operations."

What "going concern" means here is not what it usually means. What it means
here is that capital is IMMOBILE. The "capitalist is thinking of investment
in each of the possible ventures as" something s/he is "locked into,"
something s/he cannot or will not exit, once the initial decision is made.
Clearly, under these conditions, Allin is right. If you must invest forever
after in the widget industry, due to objective and/or subjective barriers to
exit, your goal can no longer be to expand VALUE, wealth in the ABSTRACT,
independent of the MATERIAL FORM that bears it. You will have to settle for
(or desire) the self-expansion of widgets, either so you can eat more of them
or so you can admire your ever-increasing stockpile of widgets. The initial
choice between investing in the widget industry or the schmoo industry will be
guided only by relative preferences for widgets and schmoos and the expected
rates of their expansion.

What this has to do with capitalism, I don't know. If investment B gives a
higher historical rate of return but a lower "replacement cost" rate, it is
preferable to A, even though re-investment in B next time would mean lower
consumption or less expansion of one's investment, precisely because B gives
you more VALUE, which you can use HOWEVER and WHEREVER you want next time,
subject only to some constraints on capital mobility. (The widespread
existence of stock markets makes these constraints negligible for large
investors.)

In any case, what we're talking here about *here* is which profit rate does
capital MOBILITY tend to equalize. So Allin's suggestion abolishes the very
phenomenon it is meant to explain.

Andrew Kliman