I really really want to get back to the main thread of this blog, which is modelling new kinds of economic institutions that abolish capitalist property relations. We had got to the stage of introducing profits, but I had to break off due to … well life. So, in the meantime, here’s a theoretical comment on Luigi Pasinetti’s views on the classical labour theory of value.
Luigi Pasinetti, arguably the greatest economist to emerge from the Post Keynesian tradition, is also my favourite economist, simply because I’ve learned the most from him. His work towers above most recipients of the economics Nobel. His work is predominately theoretical, with a heavy emphasis on linear algebra, and so there’s a barrier to entry. On the other hand, he writes with great clarity and transparency, and his mathematical models are always illuminating.
Pasinetti makes a strong separation between the study of economic systems at a pre-institutional or “natural” stage of investigation, concerned with the foundations of economic relations, and the study of an “institutional stage”, concerned with actual economic institutions. The natural stage reveals the fundamental constraints that any economic system must satisfy, whereas the institutional stage identifies how these constraints manifest in specific institutional setups.
The natural constraints are analogous to the interior of a building in which we live. The building doesn’t change. And its interior constrains the possible spaces we might occupy. Nonetheless, very different institutions may be housed by it.
At first glance, this separation may seem not to jive with Marxism, which is inherently historical. Some interpreters of Marx reject the possibility of “natural” properties independent of history and social relations. However, Marx had very different views, of which we saw a glimpse in his letter to Kugelmann.
The best introduction to his thought is the book, Structural Economic Dynamics, where he deliberately simplifies and models a pure labour economy (no capital goods). He identifies many natural constraints that any economy must satisfy. The most important is the hard limit of the available workforce (i.e., Marx’s total working day) and the challenge of reallocating that workforce to different activities in the context of ceaseless technical change and innovation.
Pasinetti’s work, in my view, is definitively in the Marxist tradition. In fact, I see Marx behind almost everything Pasinetti writes. I may be over interpreting. But he certainly matured as an intellectual in the climate of the Cold War. And, in that context, dissimulation was wise.
Pasinetti rejects Marx’s labour theory of value, and in this he follows his teacher, Piero Sraffa. He rejects the theory in virtue of the transformation problem, and firmly concludes that “a theory of value in terms of pure labour can never reflect the price structure that emerges from the operation of the market in a capitalist economy”. However, he argues that the labour theory of value provides a “natural” or ideal standard from which to analyse and critique the institutional setups of actual economic systems, such as capitalism (which indeed he does in a very profound but scientifically austere manner). Pasinetti, unlike most Post Keynesians, works with the labour theory of value and retains a normative role for it.
I have written an (unfortunately technical) paper that critiques Pasinetti’s attitude to the labour theory of value (which will appear in the Cambridge Journal of Economics).
The paper argues that the labour theory of value is not merely normative but is also a positive theory that applies to the price structure of a capitalist economy. I show that Marx’s transformation problem (and Pasinetti’s further generalisation of it) may be solved by applying Pasinetti’s own approach of extending and generalising vertical integration to encompass the institutional conditions of production.
I also show that transformation problems necessarily arise when we compare institution-dependent prices with natural, or institution-independent, vertically-integrated subsystems (such as classical labour values). We need to observe Pasinetti’s distinction between natural and institutional properties of an economy. The problems therefore dissolve once we compare prices with vertically-integrated subsystems induced by the specific institutional setup of an economy. We then compare monetary and real cost structures that manifest at the same, institutional stage of analysis.
So, contra Pasinetti, a (suitably generalised) labour theory of value need not be restricted to a normative role, but spans both the natural and institutional stages of analysis.
Post-Keynesians, in general, lack any theory of value. And the post-Sraffian separation of the classical surplus approach to income distribution from its labour theory of value do not constitute sophisticated rejections of naive “substance” theories of value but indicate a failure to resolve the classical contradictions, such as Marx’s transformation problem. The post-Sraffian reconstruction of classical economics, in particular, dispenses with an essential aim of a theory of economic value, which is to explain what the unit of account might measure or refer to. My paper shows that this separation is unwarranted, and starts to put the pieces back together again.
Here’s an (older) talk that also presents the ideas in the paper:
For those interested Soros’ (predictably pro-capitalist) Institute for New Economic Thinking, has a series of recent interviews (circa 2016) with Pasinetti on various topics. Nadia Garbellini, in the following video, asks Pasinetti on his views on the theory of value in Smith, Ricardo, Marx and Sraffa. For fans like me this is great stuff!