4: The Choice of Units

Is Keynes proposing a labour theory of value?

The ‘National Dividend’ of Marshall and Pigou is essentially what we now know as real Net Domestic Product (i.e., GDP minus depreciation). This kind of aggregation is totally taken for granted today so it’s fascinating to read Keynes’ criticism of it, especially since it was partly the ‘Keynesian Revolution’ that motivated the great expansion of macroeconomic statistics in the 1930s and 1940s. The statisticians are fully aware of the tangle of conceptual difficulties you find if you scratch the surface of GDP. But the argument is that it’s the worst measure, except for all the alternatives.

For Keynes, “it is a great objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in certain special cases, as for example when all the items of one output are included in the same proportions in another output.” [p. 38] In other words, how do you measure as part of the same quantity, the growth in the output of cars, haircuts and intercontinental travel, if you are trying to strip out the effect of price changes (and so can’t just add up the totals paid for them)? These problems are tied up with those inherent in constructing a price index, like the now-familiar consumer price inflation.

The problems are bigger in trying to assess the quantities of real additions to capital while stripping out depreciation, including obsolescence and not just physical wastage: “But, since this deduction is not a deduction in terms of money, [Pigou] is involved in assuming that there can be a change in physical quantity, although there has been no physical change; i.e. he is covertly introducing changes in value.” [pp. 38-39]

It’s not that the inclination to aggregate is wrong-headed – Keynes could hardly argue that.

I believe that the concept at which Professor Pigou is aiming is the right and appropriate concept for economic analysis. But, until a satisfactory system of units has been adopted, its precise definition is an impossible task. The problem of comparing one real output with another and of then calculating net output by setting off new items of equipment against the wastage of old items presents conundrums which permit, one can confidently say, of no solution….

Nevertheless these difficulties are rightly regarded as ‘conundrums’. They are ‘purely theoretical’ in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I hope to show, that one can get on much better without them. [p. 39]

Keynes argues that price indices, etc., are useful for historical description, but not for economic analysis: “To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement what Queen Victoria was a better queen but not a happier woman than Queen Elizabeth – a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus.” [p. 40]

Keynes is wrong if he is suggesting that we must be able to precisely measure and define something if it is to be important for economics. The price level is real – in that its effects cannot be reduced to the effects of the sum of individual price movements – even though it cannot be precisely defined or measured. Of course neoclassical economics often acts as if its analysis is more precise that it could possibly be – but my inclination is to say, ‘so much the worse for the differential calculus as an analytical tool for economics’, rather than chuck out the concept itself. (Which is of course not to deny the use of calculus in its place.)

Anyway, it is very interesting for the Marx-inclined that Keynes’ quest for an appropriately precise unit of measurement leads him to labour-time. Labour, like stuff, is irredeemably heterogeneous, but labour-time – the time spent in employment across the economy – apparently gives a homogeneous standard for aggregation.

When, for purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment will be a satisfactory index of the amount of resultant output; – the two being presumed to increase and decrease together, though not in a definite numerical proportion. [p. 41]

So instead of adding up ‘stuff’ to get real output, we add up hours of labour to get employment. This is, needless to say, not a labour theory of value in a microeconomic sense, that commodities exchange on the basis of the labour-time spent producing them. It is simply the proposition that labour-time is the appropriate unit for measuring output as a whole. But arguably this is what Marx’s theory of labour-time and value also amounts to, once he introduces the ‘prices of production’ concept to deal with relative prices.

The first issue Keynes faces here is the question of skilled labour. He deals with it in a similar fashion to Marx, by reducing it to ‘ordinary labour’ (Marx’s ‘simple labour’) such that an hour of skilled labour is equal to some multiple of the basic unskilled labour unit. This is full of conceptual problems rivalling those discussed above. But they do not present a problem for Keynes because of his acceptance, discussed in Chapter 2, of the (neo)classical doctrine that the wage equals the marginal productivity of the worker. Thus he can assume that the actual wage gives information allowing the skill level to be quantified.

(Keynes’ view is a little more complex than the crude (neo)classical – he treats the wage as equal to the marginal productivity of the worker of average efficiency for that level of skill, in times of normal capacity utilisation. The wage tends to be the same for all workers doing the same kind of work (or it did in Keynes’ time), and wages tend to rise rather than fall in periods of high capacity utilisation, even while firms have to accept less-appropriately-skilled workers.)

If we don’t accept this equation of the wage with marginal productivity (which I don’t), then this procedure is a problem. In fact I think it’s impossible to measure the productivity of an individual if production is a collective activity. But if Keynes is not interested in microeconomic issues here, why does he need to make this modification in the first place? Why not just take labour-time straight? You could treat the extra remuneration of skills as the outcome of competition among workers (and between workers and capitalists to the extent that the scarcity of certain skills forces the latter to pay higher total wages). But because Keynes is not interested here in relative wages and prices, since he thinks the (neo)classical explanation is adequate, he wouldn’t even need to think about that.

I suppose Keynes does what he does because he wants ’employment’ to be a closer proxy for ‘output’. But in doing that he loses the common-sense definition of ’employment’. We don’t generally consider the unemployment of a skilled labourer to be twice as much of a social problem as that of an unskilled worker.

On second thought, Keynes also goes this way because he wants ’employment’ to be a closer proxy for ‘labour cost’. Aggregate supply depends on the cost of employment rather than employment as such.

To predict how entrepreneurs possessing a given equipment will respond to a shift in the aggregate demand function it is not necessary to know how the quantity of the resulting output, the standard of life and the general level of prices would compare with what they were at a different date or in another country. [p. 44]

At any rate, at least Keynes continues to be very clear about how he defines his concepts. Keynes’ labour unit is a unit of labour-time modified by the skill of the labour involved. Thus the wages bill equals the total quantity of labour (measured in labour units) times the wage. (E = NW) [p. 41]

Finally, Keynes returns to his aggregate supply equation, explaining how it can be derived from the aggregation of supply curves for individual commodities. Now we understand why aggregate supply and demand were given in terms of labour units (N).

For a particular kind of commodity, the price equals the sum of the proceeds (net of user cost) and the expected user cost of producing the total quantity of the commodity at a given level of employment, divided by the total quantity produced. (I think seeing it in words is actually less clear than the equation!) Because the ‘total quantity produced’ cannot be aggregated across all commodities, for reasons discussed above, Keynes must remove quantity from the equation. So he expresses the proceeds (Z) and output (O) as functions of employment (N). This can be done for the industries producing each particular commodity, and can therefore be added together to get the equation for aggregate supply.

Published in: on 9 October, 2007 at 8:42 am  Leave a Comment  

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