Value and Price: Quick Though on the Worth of Marx

One of the main difficulties I find with Marx is the determination of value and price and how they are different. In a way, value seems to be a qualitative subjective thing, but the word we use for it is synonymous with price. At least how much worth something has in relation to price.

Is it even possible to talk about value in the abstract without comparing it to something so that it has more or less value? Or even worse do we just put a number on it in terms of willingness to pay and point at the consumer or producer surplus and say that this was the value realized?

And then this is tangential, but one of the things that struck me when I was first reading on Marxian economics was that Marx himself didn’t have all the charts and graphs I was used to M – C – M’ was well and good but I wanted some of Marshall’s scissors on the page. And that kind of lead to the question in a larger sense about why Marx has been marginalized (pun intended). Is it because there aren’t enough charts and graphs? Is it because Economics has evolved as a British and then American science so the German Jew’s work isn’t important especially in light of the 20^th century and the people he inspired. Or is it just that no one really felt comfortable with the answer to the transformation problem?

Malthus: Not Wrong But Early

If you have any familiarity with the name Thomas Robert Malthus it is probably based on the following assumption.

Draw the first quadrant of the cartesian plane.

Draw two functions. The first being f(x)=x and the second being f(x)=x^2.

Now look and there’s a point where x=x^2.

That point is where growth in the linear function is surpassed by growth in the geometric function.  As a purely mathematical proposition, it’s easy to see that they intersect where x=1.

But to complicated the matters, we have those functions actually stand in for something, then the linear is the growth in production and the exponential is growth in population. Then you have at that intersection point the place where human population exceeds the productions of technology and then people will solve. (I’ll leave his policy prescriptions for another day). As a thought experiment it seems to work, but it rests on two big assumptions.

The first is that production is linear. Malthus was writing at the early stages of the industrial revolution, but we are children of Moore’s law. Technology has increased at the exponential rate in our lifetimes. Perhaps he was just on the point of the curve where the exponential function looks linear. Though this is a gross over-simplification. Moore’s law is just speed of computer chips and we have to ask what the output of the technological revolution is that makes our lives better.

The other assumption, of course is that population growth is exponential. In current times especially in developed economies, that seems the opposite of true, as western nations are worrying about how to deal with the aging of populations as the later generation are not having babies at the replacement rate for the population and countries are making policy to induce people to have kids.

So, in a way, it looks like on the back of the envelope that the prime conclusion is exactly backwards. Though the world population is growing, the rate of growth is slowing and we are on target to peak. Now that peak is so high that in Malthus’s day it would seem that his population growth projection is correct, output is such that we haven’t met that point of intersection point at a large scale.

But just because we haven’t met it yet doesn’t mean we won’t. Though Malthus takes his inevitable meeting of that point as a reason to keep down the working class, it can be a valuable metaphor for the inheritors of his economic though. The entire economic problem is often defined in some way speaking of finite resources and infinite wants, and that to me is trill true. Though we might not seem to have gotten close to carrying capacity there have been scares with mass famines thwarted by the green revolution and worries about peak oil averted by greater drilling technology. These points can serve as a reminder of the original Malthusian hypothesis as we deplete resources and create chaos on the planet. In a way when we look at the most famous conclusion of Malthus the most important the way to really judge him was not if he was right or wrong. It is better to ask: “Was Malthus too early?”

Why is America Richer than Mexico?

One way to look at the relative wealth of the United States over that of its neighbor Mexico would be to say that the US has a surplus of at least one of the three factors of production. We can say there’s better and more land, more and better trained people, and even that it has more capital stock built up that is also more productive. Another might throw in entrepreneurship but that may be too much like a black box and much harder to quantify. To me, that is one of those ex-post rationalizations you use when you have nothing else to point at. 

But if we want to look at what makes the country to the north richer there are many other factors that we can look at. We have to look not just at one point in time but to the flow of history.

One is to go look at the strength of the institutions like Acemoglu and Robinson speak of. In this framework, the stronger the institutions, like the rule of law in the judiciary, the stronger and wealthier the nation no matter the economic system. So we can point to American fealty to the Constitution over the last 250 years and not matter how flawed the document is, its very constancy has allowed consistency that has not been available in Mexico with its one-time occupation by French forces and having its revolution 100 years ago and then generations of one party rule.

Another way would be to look at the way the flora and fauna of the countries developed. In a theory popularized by Jared Diamond, the layouts of the continent really matter. The US is much broader from shore to shore than Mexico and at the right latitudes that the weather was more like the weather in the vast Eurasian continent. The plants and animals that evolved on the larger continent faced more pressure and competition so what survived there was stronger and more well adapted. Many of the hardy plants and animals that were foreign invaders on the North American shores helped human development and were more suited to the United States. Alternately, there were bacteria that came over too that had negative effects on the population. The cold American winters could shorten the life span of the more deadly tropical diseases that could find their victims in central and southern Mexico.

Geography and history over time had its hands in different aspects. As a British colony, the various colonies could take on the technology of the mother country right at the beginning of the industrial revolution. It didn’t have to lead because industrial capitalism was developing over the Atlantic. Once the revolution was over policy was put in place to protect the young independent country’s producers from foreign competition in infant industry protection – and protecting intellectual property with patents and copyrights while not doing the same for borrowed tech. The early states were split. In the north there were crisscrossing waterways that provided the motive power for the new factories. IN the south there were fertile fields producing tobacco, sorghum, rice, and cotton.

You can’t ignore history if you want to ask why the US is richer than Mexico. You can’t ignore that in 1848, US troops were in Mexico City and expropriating a third of that country’s territories. These lands spread from Texas to California which are now two of the most productive states in the United States. You also can’t ignore the entrepreneurship and inventiveness that led to the cotton gin, but you can’t turn a blind eye to the use that that fertile southern land was put to. We have to reconcile that a lot of the wealth generated in the US for its first third of its existence was through the institution of chattel slavery. On the eve of the civil war, there were more millionaires in Charleston than in New York City.

There was a great war, one of the first to kill on an industrial level – and though it remains the worst war in US history, the rest of the world took it as an example and killed more efficiently. But for those both countries were protected in their sovereignty by two vast oceans. Since the last world war the US has developed from the technology boost of the war and the ensuing cold war. Mexico did not invest those resources and the difference. It is hard to pinpoint where they diverged, but you can’t ignore that the US GDP is thirteen times the size of the Mexican economy. If you ran back history, could you run it so that Mexico would develop into the stronger economy? How far back would you go?