the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

Michael Sakbani, Ph.D., is a former professor of Economics and Finance at the Geneva campus of Webster and Thunderbird. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook, then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and Special Programs. Now, Michael has published over 140 professional papers.

Wednesday, January 01, 2020

Reflections on Karl Marx and the Neo-Classicists








Reflections on Karl Marx and the Neo- Classicists


                  By

        Dr. Michael Sakbani





 

the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

Dr. Michael Sakbani is a professor of economics and Finance at the Geneva campus of Webster-Europe. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook,then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and UNCTAD`s Special Programs. Published over 120 professional papers.

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wedensday, January,1, 2020.

 

Reflections on Karl Marx and the Neo- Classicists


                  By


        Dr. Michael Sakbani

 

Karl Marx was a great economic and sociological historian. I am reminded in this context , however, of Joseph Schumpeter exegesis “he who is not impressed by Marx, the sociologist and historian, has a dull mind, but he who takes Marx seriously as an economist does not know economics”.

Marx`theory of value

Marx the economist, has glaring failings which grew and became obvious over time. His theory of value based on labor only, and its derivative the labor surplus value theory, are empirically false. To be sure, at the initial phase of  production, it is true that without labor there is no production. But as capital and labor inputs grow along the scale of production, empiricall evidence shows  a great deal of substitution between labor and capital; the substitution elasticity is never fixed throughout. That means that the ratio of capital to labor in production is empirically not fixed; a state of affairs which brings about substitution.

The contradiction of capitalism

 As a good student of classical economics, Marx thought that wages will decline at the margin to subsistence level. It follows that the accumulation of capital grows while the lumpen proletariat income declines. This , on his theory, would led to a juxtaposition in capitalism of under- consumption and over- production. Is this inherent contradiction of capitalism true?

Econometrics studies covering 1907 -1987 data in the USA as well as in other countries during the past century, have shown that the shares of labor and capital in the GDP were fairly constant. Robert Solow, Edward Denison and Moses Abramowitz empirical research show that . Further, they find that the share of technology in growth is two thirds while labor and capital  combined, produce only one third. The observed constancy means that labor, for a variety of reasons discussed below, had successfully captured 72 % of the GDP while capital captured 28 % over most of the twentieth century This means that the theory of accumulation and the crisis of overproduction of capitalism is empirically non supported.

Many reasons can be marshalled to explain this empirical constancy in income shares. No doubt, labor unions and economic rules and regulations of competition are very important factors. However two other factors are critical: the increased franchise of individuals and institutional savers into liberal capitalism and the rise of Keynesian macroeconomics. Keynes introduced a policy model for stabilization policies: fiscal and monetary, which saved capitalism from its tendency to achieve equilibrium at less than full employment. His influence went even global in the creation of the International Economic and Financial Organizations, which despite all their shortcomings and the legitimate criticisms of their biases, have nonetheless saved the world from going into global synchronized recessions. Governments ‘actions, fiscal and monetary, in saving the major economies in the 2008 crisis owe a huge debt to the insights of John Maynard Keynes and not to rational expectations macroeconomics taught in the academe.

 Since 1987, however, the data show an inflection point in the income shares. Specifically, capital has increased its share by anywhere from 5 % to 10% . What could be the possible explanation? 

Thomas Piketty has shown that in Western economies there has been according to the data, a differential between the rate of profit and the rate of growth of income in favor of profit. This of course increases capital share in income. Furthermore, as globalization took hold on business, which owns the technology, it moved its technology globally to capture the gains from labor saving technology in cheap labor locations. Globalization enabled business, whose decision making objective is to increase the value of the stock-holders equity, to localize production in countries with laxed labor protection, laxed environmental standards, laxed standards of health protection and low wage standards. So, globalization and labor saving technologies are also behind this inflection .One can see that in the hallowing out of old manufacturing in the US `rust-belt plants closed and moved to Mexico and othr cheap labor locatikons.

Moreover, the advances in technology such as Artificial intelligence have been owned by capital, thus, their share of production is going to capital and will continued to do so.

Marx`failure on monetary and financial economics

 Marx did not understand money and finance. He defined money to have only one function: a medium of exchange. The other functions, money as an asset and a unit of deferred payments do not exist as far as Marx is concerned. Since money is defined as such, it does not also have a function of a unit of measure over time.  Hence a dollar one year from now is the same in value as a dollar today. That implies that the time- value of money is zero. That means the uncertainty of the future bears no risk. Since risk is measured by the standard deviation of expected money value over time, and that is zero, we live in a world of no risk. So it is impossible to link the present (money) with finance (future). In other words, you cannot postulate scenarios of expected value for projects, investments and cost of things over time. Furthermore, risk premia in finance, which are defined as respective expected return  minus the treasury bond five- year yield in the US or some other equivalent, is below zero. So, for the financial theory neither CAPAM nor the Arbitrage Pricing Theory can hold.  The implication of that is that there is no way for determining the market price for things that are not in the market, like  public utilities or government weapons procurations. It follows that the shadow price of mini- max optimality is not knowable. All of this means that there is no general equilibrium in Marx which brings together the real and the monetary-financial sides of the economy and reveals its future path. 

Fellow travellers

This is a world  of finance in which two other theories are in the same neighbourhood. The Quantity theory of Friedman`s with its one hundred percent reserve requirement  -provided one  omits the theft part of Marx-. and Islamic Banking where profit`s share is substituted for interest rate. Friedman would stop multiple credit creation and Islamic banking would make all commercial banks subject to commercial risk. Consequently, Islamic commercial banks do not transform liabilities into assets but instead into equities shares.

 The working class is not progressive

Marx based his political action program on the solidarity of the working class and its political homogeneity as a progressive force. This is doubtful at best. Employed workers, protected by their unions, do not give a hoot about unemployed potential workers and the interests of the two are opposite. On the other hand, in all Western societies, blue collar workers in their sociological majority, are not progressive. As Schumpeter lamented in his Capitalism, Socialism and Democracy, the progressives are found in the educated and liberal petit Bourgeoisie. 

 The last, but not least problem, is the role of the markets. Marx` labor -embodied theory of value makes the market exclusion principle of price non functional. Hence, the market has no role in allocation of resources. It was one of the essential reforms of  Deng Xiao Pin in1979, to liberate China from Central- Planning valuation, thereby, bringing the market into resource allocation 

Where is the classeless society.

 Marxists assumed that in their societies there would be no inequalities of income. This turned out to be untrue. Under communism, there were huge differences in power and therefore in accrued utility income, between the Commissars and the rest of the society. This stand is, in some respects, analogous to the Neoclassicists belief that income shares are based on the value of the marginal product of labor and capital. The concept of marginal product value is theoretically defined only on a smooth curve, on what is mathematically called continuum. In reality, we deal with a step function which can only yield statistical magnitudes when significant quantum of labor is added or decreases to and from production.

 Data since the late 1980`s show that Simon Kuznets`curve of income- distribution, which according to his data, rises into inequality at the start, then goes towards more equality, is no longer empirically valid. Joseph Stiglitz and many others, have demonstrated a great income-distribution gap opening up in the last  few decades. Stiglitz documents that the average multiple between CEO`s compensation and workers was 20 to 1 in 1965 but went up to 364 to 1 in 2015. The  amazing phenomenon is that top executives compensations have increased regardless of whether the firm in question made annual profits or not. If executive compensations were added to Thomas Piketty`s profits, the return on capital plus managers compensations would open up even a grater  income differential in favor of capital. 
It is rather disappointing to acknowledge that economics has until recently passed largely in silence on income distribution.
 The silence should not continue; the recent data of income inequality,are intolerable socially and economically. Part of the  huge income inequality has to be corrected through taxation on wealth and income. Another part should be tackled by reinserting labor at the collective bargaining table and at all trade agreements and enforcing agreed international standards in wages, environmental protection and health standards; the practical disappearance of labor Unions in the last decades has played a part in income inequalities in all modern economies.

 

(Geneva , January, 2020)