Saturday, 28 February 2015

Bits and Pieces (IV): "Human Capital" Edition.

Prof. Robert Paul Wolff offers his views on "human capital". For him, following Marx, this alleged equivalence between labour and capital is a foundational fiction of capitalism:
"Economic theory, of course, cooperates in the fantasy that workers run small businesses producing the commodity labor power.  And The Law in its majesty enforces wage bargains as though they were contracts between capitalists who meet as equal participants in the free market.  But The Law is not an ass, and when a worker with more book learning than is good for him comes before the bar and requests that he be permitted to deduct on his income tax return the cost of 'doing business' -- which is to say, his food, clothing, shelter, and other expenses incurred in the course of producing his commodity for the market -- the Law sniggers behind its hand and denies his request."

Personally, I find that comment particularly useful as it inspires a simple example, close to most workers' heart, showing why capital and labour are not only different, but also acknowledged as different before the law, regardless of mainstream economists' absurd claims:

Firms' positive cash flows are differentiated: they have revenues, but they do not pay corporate income taxes on them; they pay income taxes on the excess of revenues over expenses (their income). In other words, their income is equal to their profit.

Wage earners' positive cash flows are not differentiated: they pay personal income taxes on their gross income. For taxation purposes, and roughly speaking, there's no difference between a wage earner's "revenue" and "income", as there is among a firm's revenue and income.

However, all expenses the worker incurs are used to reproduce the worker's labour power: they are a cost. It's as if workers' income taxes were in general calculated on "revenues".

Take for instance children's education. Parents are paying for the education of their replacements in the labour force. This is similar to what capitalists do with depreciation: a machine gradually wears off and a deduction is made from revenue so as to cover this cost and make possible its replacement. Capitalists pay no corporate income taxes over depreciation charges, why should workers pay income taxes over costs of children's education?

This is an acknowledgement, consecrated by the law I dare say universally, that labour incomes are not equal to capital incomes. How can now anyone claim there is a "human capital"?


Prof. David Ruccio also gives his views on this subject. He concludes a very interesting post thus:
"As I see it, all these new forms of capital, like human capital, are ways of expanding Smith's wealth of nations; they all seen as contributing to the production of more 'stuff'-more use-values, the 'immense accumulation of commodities.' But the expanding universe of capital also serves to hide the extent to which all that stuff, which is in reality socially produced, is then privately appropriated-leading to a growing gap between a tiny minority at the top and everyone else. In other words, it's a pattern of private capitalist appropriation that creates a more and more unequal distribution of income and wealth.
"The capital controversy will remain with us, then, as long as we refuse to solve the problem of capital."

Unfortunately (and ironically, too!), Prof. Branko Milanovic provides the discordant note. After arguing quite correctly (February 19) that:
"It is not the amount of income that makes you a worker, but the need for continuous application of your labor. This is the fundamental difference between labor and all forms of capital. This is the cleavage, so obvious to anyone, that has been at the source of the classical distinction between labor and capital."
Milanovic, commenting on Vilfredo Pareto, writes now (February 28):
"Before him [i.e. Pareto], economics was about functional income distribution which, of course, makes sense if you assume that all workers are at subsistence, all capitalists rich, and all landlords even richer."
So, what gives?

Prof. Milanovic writes on this in the comment thread attached to a MNE post.


Update 2:
The Sandwichman (aka Tom Walker) strikes again! And he's taking no prisoners.

Hume & Kapp, et al. (you've got to love this title!)

Monday, 23 February 2015

Matt Bruenig on "Human Capital".

Matt Bruenig joins the "human capital" controversy.

Bruening comments on Branko Milanovic's pieces, and on some other related stuff. For him "Milanovic's basic point about the confusion engendered by 'human capital' is exactly correct". He has made this point before, and, for what it is worth, I agreed with him then.

But then, Bruenig writes:
"Ultimately, ideology determines whether the classical distinction between income from working and income from owning truly matters. But the distinction carries a lot of weight in many common ideological frames."
While Bruenig is an astute observer, that is a common and unnecessary mistake.

Classical authors of radically different ideological perspectives, like Marx, Ricardo and Smith, had no difficulty accepting that capital and labour were objectively distinct. Their opposed ideologies did not stop them from seeing what is evident. They evaluated it in different ways, to be sure; but they did not deny reality.

They were not alone, either. Before them, other pre-classical authors divided society and the economy along similar lines. Across the pond, people like John C. Calhoun also conceived society as built upon labour (see also or here).

Indeed, the attempt to blur the distinction between labour and capital became a central concern in economics only with the works of John Bates Clark, Knut Wicksell and Philip Wicksteed (suggestively, Veblen called them "neoclassicals").

Mind you, it's not like these three authors were secretive about their underlying political motivations; quite to the contrary, they were very open and upfront about that:
"The welfare of the laboring classes depends on whether they get much or little; but their attitude toward other classes—and, therefore, the stability of the social state—depends chiefly on the question, whether the amount that they get, be it large or small, is what they produce. If they create a small amount of wealth and get the whole of it, they may not seek to revolutionize society; but if it were to appear that they produce an ample amount and get only a part of it, many of them would become revolutionists, and all would have the right to do so. The indictment that hangs over society is that of 'exploiting labor.' 'Workmen' it is said, 'are regularly robbed of what they produce. This is done within the forms of law, and by the natural working of competition.' If this charge were proved, every right-minded man should become a socialist; and his zeal in transforming the industrial system would then measure and express his sense of justice. If we are to test the charge, however, we must enter the realm of production. We must resolve the product of social industry into its component elements, in order to see whether the natural effect of competition is or is not to give to each producer the amount of wealth that he specifically brings into existence." (John Bates Clark; for a comment on Wicksell, here).
There are two ironies here.

For starters, the intellectual progeny of Clark, Wicksell and Wicksteed now want to claim the non-ideological high ground.

And smart people, who otherwise know better, leave them the battle ground uncontested.

Abbott's Security.

Last December, a fruitcake got himself some weapons, went to downtown Sydney, and kidnapped the customers and staff of the Lindt Café. The ensuing police siege lasted for hours and ended in the tragic death of two hostages, plus the gunman.

Today, an increasingly unpopular PM (“conservative, centre-right, libertarian”) announced a series of measures, supposedly to prevent this kind of things from ever happening again and to enhance Australian security. Apparently, the Australian government found a way of preventing people from going bananas and committing crimes. Kind of "Minority Report", I guess.

Among other things, the Government intends to achieve that by tightening citizenship and revoking citizenship to Australians with dual citizenship.

Reactions to English-born Tony Abbott’s announcement came in swiftly. Some of the commentators were Labor’s Bill Shorten, Greens’ Christine Milne, and Julian Burnside QC.

Ironically, the best reaction came from the Liberal Democrat (libertarian) senator David Leyonhjelm:
"I'm just a bit worried that our national security and Tony Abbott's job security are, kind of, linked a little bit too closely."

Friday, 20 February 2015

Capital Errors: from Bad to Worst (of All).

Tim Worstall (a senior fellow of the Adam Smith Institute) takes issue in the “human capital” controversy (link).

Worstall thinks “that Milanovic is missing something” and proceeds to his own “rejigged” counter-example to show where that something is:
“We have two people with unskilled labor. They can earn $10,000 a year each. One of them also has a capital endowment which pays him $50,000 a year. His maximum income is thus $60,000 a year. The possession of that financial capital clearly leads to an inequality.
“Now our other unskilled laborer decides to go get himself some of that human capital…”
… And, as a result, he, too, gets paid $60k a year.

Let’s illustrate that. The second unskilled worker (say, both were initially janitors) “goes get himself” a job qualification, maybe a vocational course at TAFE (aged care nurse, for instance). After that, he gets a higher paying job (paying $60k).

Obviously, what Worstall calls “human capital” is simply “higher skill qualification/higher paying job”. His argument seems to be that to use one or the other is something like to-may-toes vs. to-mah-toes:

But if those phrases were synonymous, why the stubborn insistence on using “human capital”, instead of "skills"? Why he picks "to-may-toes" but emphatically opposes "to-mah-toes"?


Unlike "to-may-toes" and "to-mah-toes", "human capital" and "skills" aren’t perfectly exchangeable.

First. The “human capitalist” still has to work to get his $60k. What happens with the “disutility” he experiences? (Recall that "disutility" was centre-stage in Prof. Rowe’s own critique of Milanovic). One could suggest another “rejigging”: the “financial capitalist” could quit his job and still get $50k a year, no sweat (no "disutility"). Worstall can see that, surely?

(Strangely, Worstall does not use the word “disutility” at all: it appears once only in his post, in a literal quote from Milanovic. Why not? Does Worstall imply that basic microeconomic concepts are irrelevant to the point of being optional or even altogether disposable?)

Second. Can the “human capitalist” transfer his aged care nurse certificate as inheritance to his kids, as the other guy can leave his bank account balance to his?

Third: As Worstall admits: “So, no, the two things, financial capital and human capital are not the same thing nor do they have exactly the same effects”. Now, that's something.


So, we go back to our question: why Worstall’s single-minded insistence on using “human capital” when it is clearly not synonymous with “higher skill qualification/higher paying job” and he admits as much?

That usage is misleading, as Milanovic rightly asserts. Worse, it's evidently nonsensical, going against elemental English. Why his insistence on using misleading terms?

This brings us to Worstall’s earlier “argument”:
“The point [of Milanovic’s critique] being that if we start referring to ‘capital’ in this sense then we’ll end up declaring that we’re all capitalists. And, well, perhaps we won’t be able then to apply Marxian class analysis or something and wouldn’t that be bad.”
Frankly that suggests a very unflattering answer to those questions, but I'm not here to tell readers what to think. Judge by yourselves: read his post.

Leaving that aside, this may be news to Worstall, from the Adam Smith Institute, but poor economics is not a good thing, and worst-of-all is the astonishing ignorance of the relevant history of economic thought:
“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties [capitalists and workers], whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.
“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen.”
Poor Adam Smith.


Personally, made to choose between Tim Worstall, and Fred Astaire and Ginger Rogers, it wouldn't break my heart to pick Astaire and Rogers for their far superior "human capital" (aka dancing, singing and reasoning skills). Let's call the whole thing off.

Branko Milanovic replies to Nick Rowe and Tim Worstall.

Monday, 16 February 2015

Capital Errors.

Prof. Branko Milanovic wants economists to junk the phrase human capital. He gives two reasons for that, the "second and more important" of which reads:
"It leads to a perception - and sometimes to the argument used by insufficiently careful economists - that all individuals, whether owners of real capital or not, are basically capitalists. Even if you have human capital and I have financial capital, we are fundamentally the same. Entirely lost is the key distinction that for you to get an income from your human capital, you have to work. For me to get an income from my financial capital, I do not".
I'll repeat, in case the reader missed that:
  1. "For you to get an income from your human capital, you have to work". This for Milanovic is true of every single worker, whether highly skilled or not, or whether he enjoys his job or hates it with a passion.
  2. "For me to get an income from my financial capital, I do not".
I like that, kinda (but, where's private property?). See here.


Prof. Nick Rowe, however, disagrees:
"Branko Milanovic (HT Mark Thoma) misses the point about the usefulness of the concept 'human capital'."
To make his case, that, well, "all individuals, whether owners of real capital or not, are basically capitalists" (paraphrasing Milanovic), Rowe begins by arguing for a similarity between "land capital", "labour capital", and, presumably, "capital capital" (to be coherent with "land capital").

Then, Rowe acknowledges Milanovic's main reason (emphasised and repeated above, which he, too, quotes verbatim in his post) and translates it thus:
"Labour gets disutility from working (at least at the margin, though some of us actually enjoy our jobs, and get positive total utility from working even if we get negative marginal utility from working an extra hour); land doesn't." (The emphasis is mine).
So far, so good. This is how Prof. Rowe argues against his own version of Milanovic's argument:
"So what? Does the highly-trained worker, with high human capital, get more disutility from working than the less-trained worker, with low human capital? (If anything, I would say it's maybe the other way around). Investment in human capital is not what makes work unenjoyable."
Something was lost after translation. Where's the reference to the "land capital" Prof. Rowe himself laboriously introduced? What was the point of introducing it, to drop it later?

Whether the work is more or less enjoyable (or produces more or less disutility) is irrelevant; what's relevant is that the the "labour capitalist" experiences disutility (humongous or itsy-bitsy, it doesn't matter: utility is unmeasurable and incomparable between individuals) but the real capitalist (the "capital capitalist", I suppose), does not experience disutility at all (nothing, zilch, zero, nada, niente, nichts, rien):
"To see this elementary fact, assume that you have human capital that yields $50,000 annually and I have stocks that also produce $50,000 annually. But to get the return on your human capital, you have to work eight hours a day for perhaps 250 days per year. I do not."
So, that's what. That's the fundamental difference between labour and capital, expressed in terms of his own choosing.


I am sure that Prof. Rowe is ordinarily a very careful economist. Besides, as old priests say, errare humanum est. However, arguing that way he only proves Prof. Milanovic's point.

UPDATE: Maybe I should add that there are other things differentiating labour from capital, besides the "disutility" thing, or the fact that workers, well, work; while capitalists don't. Among them, the fact that capital is private property, mentioned above; the potential immortality of capital, versus the all-human mortality of labour is another, and such.

But those things are assumed not relevant in the basic neoclassical setup, which is the one Prof. Rowe discusses.

Sunday, 15 February 2015

Jonah Scott: Cool Space Photos.

Okay, no sad, bad, mad things today. Something cool for a change:

Young Jonah Scott (17), from Queensland, is an amateur astronomer. He built his own telescope and takes really amazing photos with it. You can go here, to see a sample of his work. He’s also started his own space program!

Congratulations to him and his proud parents. Go Jonah!

Friday, 13 February 2015

Sosa/Guarany: "Si se Calla el Cantor"

A hot spell during the Cold War, the 1960s-1970s saw the rise to power of right-wing dictatorships all over Latin America, generally supported by the U.S. under the pretext of countering/preventing Soviet influence. Whether that influence was real or merely imagined often was a secondary consideration.

Following the Cuban Revolution, those decades were important for Latin American (perhaps Ibero American would be more precise) folk music, as a generation of composers, musicians and singers came of age and adopted diverse streams of revolutionary thought, giving origin to the Nueva Canción musical movement.

In Argentina two particularly important names were Mercedes Sosa and Horacio Guarany (in Spanish), both of mixed Amerindian and European backgrounds.

Before playing the video, look at the picture below.

It depicts a man and a woman embracing (Guarany and Sosa) -- maybe lovers or friends -- smiling, happy in each other's company. Now, look more closely: the Philips logo on the long play's cover top left corner.

Perhaps it's just me, but I find that cover powerfully symbolic of capitalism's fundamentally inhumane, irrational, self-destructive nature.

If you believe the Argentine dictators, those two persons were extremely dangerous fifth-columnists, Soviet-backed anti-capitalist activists (don't they look "scary" to you?), and yet, when it comes to making money, the capitalists behind Philips did not mind giving them a break.

But that's not the half of it. In their obsession with saving capitalism, the Argentine dictators could not trust Philips themselves on judging what was good for them. Not even a seal of approval, like the logo, was enough for overzealous defenders of the "free" market.

Or maybe the reason they were considered dangerous was that the couple in the picture seemed happy. Love and friendship, happiness, a truly human life -- it seems -- is too much to ask for people like us.


Sosa interprets "Si se Calla el Cantor" (trans. "if the singer falls silent", full lyrics translation), Guarany (music and lyrics), also sings and plays the guitar.

Thursday, 12 February 2015

The Weird Wide Web.

Well, well, well, it seems in my early fifties my dream finally came true: I've become a kind of sex symbol! Woohoo!

According to Blogger, I've been receiving visitors directed here from the “” website. It's far from a deluge, but it's better than nothing.

The blurb Google returns reads:
“Geile Porno Filme kaufen. Jeden Tag gibt es eine Vielzahl an geilen neuen Pornos – Diese können bequem online angesehen oder bestellt werden!”
Had I been forewarned of my new status, perhaps I would have dyed my hair and prepared something. As things turned out, I’m afraid I have nothing to offer in the way of “Pornos”, “geilen” or otherwise.


Wednesday, 11 February 2015

Good News: Abbott "Shockingly Incompetent"!

According to Joshua Kurlantzick, Asia expert from the free marketeer think tank Council on Foreign Relations, Australian PM ("conservative, centre-right, libertarian") Tony Abbott "has proven shockingly incompetent, which is why other leaders within his ruling coalition, following a set of defeats in state elections, may now scheme to unseat him." (Here)


In Kurlantzick's opinion, Abbott's irredeemable ineptitude can only be compared to that of Argentina’s President, Christina Fernández de Kirchner; Ecuador President, Rafael Correa; North Korea’s Kim Jong-un (!!!) or Russia’s Vladimir Putin. (For some reason, he forgot mentioning Idi Amin)

Double ouch!

The bad news for the Coalition is that Malcolm Turnbull, their main hope, has the habit of chickening out at the last moment (kinda sorta what Abbott did when Putin visited Brisbane last year, here). Fat chance of seeing a "shirtfronting" there.


At the other hand, considering the consequences of a more competently-led Coalition, maybe we should pray Abbott remains in place.

You know you're in trouble when the good news is that an incompetent is ruling the country.

Saturday, 7 February 2015

Marx vs. Malthus on Population.

Both Malthus and Marx wrote about population and its relationship to growth. What did they write? Where did Marx differ from Malthus?

Martha E. Giménez (Professor Emerita of Sociology, University of Colorado, Boulder) explains that and more in simple, clear, language in her concise exposition paper "The population issue. Marx vs Malthus", originally published in 1973, in Den Ny Verden (Journal of the Institute for Development Research), Copenhagen, Denmark.

Prof. Giménez generously made it available from her website, where you'll also find many of her published and unpublished papers.

A great read for all, but very especially for those learning about Marxism.

Friday, 6 February 2015

Brahim-Djelloul/Capuçon/Villa-Lobos: Bachiana nº 5.

Normally, when people outside of Ibero-America think of Ibero-American music, if they think of anything, they think of samba, bossa nova, salsa, maybe Tex-Mex (update: flamenco and tango). That's it.

Spain and Portugal themselves are assumed to have little of its own to add to the list.

That was Amel Brahim-Djelloul (soprano), Gautier Capuçon (cello) and the Orchestre du Violon Sur Le Sable interpreting the Brazilian composer Heitor Villa-Lobos' Bachiana nº 5.


Currently, no heterodox economist is more talked about than Yanis Varoufakis (and for good reasons, too). Here is one of my posts on Varoufakis: his views on Post-Modernism.


As Tony Abbott may face next week a secret ballot from his party colleagues to decide his future as PM, I was reminded of this:

Nothing like a good laugh on a Saturday morning.

Tuesday, 3 February 2015

Wicksell and the "Paradox".

Decades after the so-called 1870s Marginal Revolution, Knut Wicksell (1851-1926) was one of the early neoclassical economists who sharply criticized Adam Smith for not reaching the pre-determined conclusion neoclassical economists preferred:
"At the very beginning of the history of economic science, attention was directed to this distinction [i.e. value in exchange vs value in use]. One of the best-known passages in Adam Smith is that in which he explains that the word 'value' has two meanings, so that at one time it expresses the usefulness of an object (or what he calls its value in use) and at another its purchasing power over other utilities (i.e. its exchange value). Adam Smith also pointed out that those things which have the greatest value in use often have little or no exchange value-for example, water; and, on the other hand, the things which have the greatest exchange value frequently have little or no value in use, e.g. diamonds. But he stopped at this point. He speaks afterwards only of exchange value and never returns to the concept of value in use. And at this point science stood still, one may say, for almost a hundred years without it being noticed that Adam Smith's statement was really a striking paradox and involved a problem which necessarily demanded a solution." (Wicksell 1934, pp. 17-8)
Note that Wicksell starts by acknowledging the meaning of the "value in use" vs "value in exchange" distinction. He doesn't like many things in that "best-known passage", but he doesn't seem to have any difficulty understanding the distinction itself and that the passage is meant to explain it [$]. We shall return to it later, when discussing Joan Robinson's appraisal of Smith.

As other tormentors of Smith (and debunkers of the labour theory of value), Wicksell, too, adds his own personal touches to the urban legend. For him, Smith's personal neglect of use in value made "science stood still… for almost a hundred years".

Funnily enough, other authors, equally critical of Smith and the LTV, but apparently better acquainted with older literature, see the "paradox" making cameo appearances all over the place … and solved without marginal utility and without stopping the triumphant march of economics:
"Locke, Law, and Harris had contrasted the value of water with that of diamonds to show that relative scarcity governs [exchange] value irrespective of the usefulness of an article". (Blaug, 1985, p. 40)
Alfred Marshall in the preface to the first edition of "Principles of Economics" (1890):
"Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them." (Marshall, 1920)

In the preface to the second edition of his "Lectures", Wicksell calls for a dispassionate, hard-nosed study of economics, very much in the spirit of "positive economics". Keep these words in mind in what follows:
"It will not do to treat questions relating to economic policy, to trade and industry, and especially to population, as if they were metaphysical speculations in which each person can adopt the point of view which appeals most to his temperament -- and still more frequently, perhaps, to his private interests." (op. cit. p. xxii)
It's, therefore, instructive to consider Wicksell's own ideas about what the correct approach looks like. On describing it, Wicksell first invites readers to "a thorough examination of the theory of value, though only in general outline" (op. cit. pp. 14-5).

Without using the term, Wicksell starts by studying exchange in abstract.

Let's see what this means by considering his first move: whatever else they are, goods, commodities, and services are "utilities" (op. cit. p. 15). Their physical properties, how they are obtained, how much they cost, all that is irrelevant. What matters is their utility, to the point that the term "utility" is the genus, "good", "commodity" and "service" are the species. [&]

Wicksell never used the word "assumption", but that's an assumption and it's introduced unexamined and unannounced, almost surreptitiously, before explaining his theory of value.

What is "utility", anyway? Well, it's "related to useful, a term which has many meanings". In essence, that's it: "[T]here does not appear to have been any serious ambiguity or misunderstanding in economic science concerning the various meanings of the terms 'use' or 'utility'." (op. cit. p. 16). No more details are given. What for, it's clear enough, yes?

Wicksell also abstracts from production: utilities exist as costless, initial endowments to be exchanged, anywhere, any time. He doesn't say it expressly, but that seems to be an important virtue for neoclassical economists: this is the law applying to every economy, from the Cro-Magnon in the Altamira caves 43,000 years ago, in their "early and rude state of society", to Isaac Asimov's Galactic Empire, 34,500 years into the future and everything in between. In other words:

An aside: a young male critic a few years ago faulted Marx's own version of the LTV for its inability to explain his own preferences on women -- sorry, ladies, that most eligible bachelor doesn't like redheads much. As Marxists cannot promise an answer to that crucial question, he was bitter: the LTV is not the answer to everything.

Anyway, it's worth the effort to imagine Wicksell's exchange (i.e. the Marshallian "market period"): somehow, you got "nourishment" (say, 75 kg of manna from Mount Sinai) to barter for "transportation" (say, a 2x1.5 metres magic carpet) in the Kasbah. You want that because, for you, "transportation" has more total utility than "nourishment": you gain with the swap. Your counterpart sees things in the exact opposite way, that's why she agrees to the barter: she gains, too. Both are right. The conservation laws of chemistry and physics do not apply to utilities: both sides end up with more than they started. Exchange itself creates utility, out of thin air.

It may sound like magic, like, well, "metaphysical speculation", but it isn't … by unstated, stealthily introduced, unacknowledged assumption … only.

Who needs old-fashioned, messy production?

Incidentally, note the word "barter" above. Although in page 14 Wicksell mentioned "money and credit", here he is talking of barter. His money appears to be another utility ("commodity money": a legitimate argument of utility functions), as opposed to the "fiat money" Post-Keynesians often talk about (an illegitimate argument of utility functions).


After that preamble, Wicksell seems ready to get to the point:
"The problem of the theory of value is to explain why one commodity has, either permanently or temporarily, one price and another commodity (or service) quite a different one." (op. cit. p. 16)
Before proceeding, note that Wicksell is defining what a theory of value is supposed to do: to explain value in exchange only (still, in page 18 he fulminates Smith for explaining value in exchange only, leaving value in use out).  He doesn't like labour theories of value and he aims to support a better theory of value, but he doesn't find anything particularly mystical, ideological or metaphysical in the label "theory of value" itself. We, too, shall go back to this when dealing with Joan Robinson.

However, we'll need to wait some more for his theory of value (he'll finally get to it in page 29); Wicksell stalls once more, introducing this:
"At first sight it might appear that this valuation must be due to differences of utility -- so that exchange value and usefulness would be one and the same thing -- or a least proportional to each other. And, in fact, it frequently is the case that exchange value stands in a more or less direct relation to usefulness. …"  (op. cit. p. 17)
For the second time Wicksell, by a sleight of hand, irritatingly indicates the answer he expects from Smith: he assumes (total) utility is equivalent to usefulness/use in value, suggesting Smith should have done the same (even if by doing so Smith would have exposed himself to criticism like Friedman's). Smith should have forgotten labour times/production costs/relative scarcity, and instead stuck to total utility, which for Wicksell is not "metaphysical speculation".


As Raghunathan put it in his popular exposition [*]: "Adam Smith's resolution of the paradox is inelegant for a modern economist" (Raghunathan, 2010, p. 173). Note carefully: there was a resolution; only it's not acceptable to modern economists.

One rapidly comes to suspect that any answer different from the one the "modern economist" approves of is "inelegant", which is just another way of saying "unacceptable" and is synonymous with "metaphysical", "mystical", "unsatisfactory".

At any event, this raises two questions: What is so special about the solution Wicksell constantly promises but keeps postponing? Why is Smith's resolution unacceptable?

Starting on page 18 and ending on page 29, Wicksell embarks on a convoluted and lengthy explanation (at times painfully illogical; at times deliciously ironic [%]) of the dire "consequences which this uncritical reception of Adam Smith's statement occasioned to political economy". [#]

It is, however, near the end of that explanation (op. cit. p. 28) when he finally comes clean:
"In the hands of the Socialists (especially Rodbertus, and Marx still more so) the [labour] theory of value became a terrible weapon against existing order. It almost rendered all other criticism of society superfluous. Labour was conceived by them -- Ricardo never meant or said any such thing -- to be the sole creator of value -- in other words, the source of value; and thus all other factors of production existing in private hands were to be regarded as parasites on production, and their rewards a robbery at the expense of labour, which is alone entitled to remuneration."
For all his conceptual malabarism, it is the political consequences, not the political economy, that really trouble Wicksell. Marginal utility is special because it is not a "terrible weapon against existing order", it has no "terrible" (political) consequences.

A labour-times based criticism -- whose origin Wicksell identifies with Smith -- wasn't the kind of "criticism of society" he wanted to hear. He preferred this kind of criticism:
"Economist Knut Wicksell made his name among the Swedish public with a series of provocative lectures on the causes of prostitution, drunkenness, poverty, and overpopulation. A malthusian, the young Wicksell advocated birth control as the cure for these social ills." (, 2015)
To quote from his own preface: he adopts "the point of view which appeals most to his temperament -- and still more frequently, perhaps, to his private interests".

And because for Wicksell that terrible weapon has its origin in Smith, he wants a blank slate from Smith and up to the 1870s. That's the reason why "almost one hundred years" of economic thought must be disregarded.

It also explains why production, the conservation laws, space and time, money, elemental logic, and intellectual honesty must be "abstracted" in favour of utilities.


Frankly, I wish I could find a gentle, humorous way to close this post which is already too long. Sadly, I can't.

After reading Wicksell, I'll have to make do with the answer Joseph N. Welch gave on June 9, 1954 to senator Joseph E. McCarthy:

"Have you no sense of decency, sir? At long last, have you left no sense of decency?"


[$] A little later (op. cit. p. 29) Wicksell returns to the "paradox", taking back whatever acknowledgement made on pp. 17-8: "Literally interpreted, this thesis appears to be either meaningless or a contradiction in terms". Years later, Robinson will repeat that appraisal almost to the letter, either oblivious to or uninterested on any inconsistency.

[&] Wicksell follows Marshall on this: "Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities" (Principles, book ii, chapter iii). Marshall is aware of the conservation laws: his way around is to shift the focus, from matter/energy, which can be measured, to utility, which cannot.

[*] Raghunathan adds Friedrich von Wieser to the list of "paradox" slayers, which also includes Carl Menger and W. Stanley Jevons. (op. cit. p. 173)

[%] A quick example of the second kind: "By these various simplifying assumptions Ricardo greatly facilitated his analysis. […]  But his conclusions thereby frequently assume an abstract and even unreal character." (op. cit. p. 23). The virtuoso of stealthily introduced abstract assumptions criticizing precisely that!

[#] Technically, Wicksell is appealing to the consequences (see here, for an explanation of the logical fallacy).


Blaug, Mark. 1985. Economic Theory in Retrospect, 4th edition. Cambridge University Press: Cambridge. 1985.

"Knut Wicksell." The Concise Encyclopedia of Economics. David R. Henderson, ed. Liberty Fund, Inc. 2008. Library of Economics and Liberty
[online] Aavailable from
[Accessed 1 February 2015].

Marshall, Alfred. 1920. Principles of Economics (8th edition). Macmillan and Co.: London, 1890. Library of Economics and Liberty.
[online] Available at
[Accessed 1 February 2015].

Raghunathan, V. 2010. The Corruption Conundrum and Other Paradoxes and Dilemmas. Penguin Books India.

Wicksell, Knut. 1934. Lectures on Political Economy (2nd edition). Augustus M. Kelley Publishers: Fairfield 1977. Vol I: General Theory.

Monday, 2 February 2015

Greece: Answering Juergen Kaiser's Question.

Using the German historical experience as illustration of the convenience of debt relief, Juergen Kaiser ("One made it out of the debt trap"), from the social-democratic Friedrich-Ebert-Stiftung, makes a good case for debt relief to Greece (h/t Bill Mitchell).

Kaiser structures section 4 of his paper as replies to a series of objections against debt relief. Ironically, in that section, he himself points precisely to the reason further debt relief is unlikely to be voluntarily given.

This is the fourth objection (page 19):
"Germany obtained its debt relief only because of the Cold War".
And this is his reply:
"Quite correct. The agreement and its generous terms demonstrate two things: (1) the strong commitment of the Western Allies not to repeat the mistake committed after the First World War, namely destabilising the defeated enemy politically and socially by imposing an unpayable toll; (2) the ability of the Adenauer government to capitalise on West Germany’s unique position as a front-line state in the Cold War. Without this latter point, aspect (1) would still have been valid. John Maynard Keynes and other architects of the post-war global economy stressed it time and again. However, the ultimate relief might have been somewhat less generous, had it not been considered to be a contribution towards the containment of the 'communist threat'."
He closes that reply thus:
"But what does that mean? Are present-day commitments -- for instance, to economic and political stability in the Eurozone or to the Millennium Development Goals -- less serious than Western political interests in the 1950s?"
My answer: Obviously.

See here.