- A Marxian Introduction to Modern Economics -

Contributions are welcome: Klaus Hagendorf, Paris,

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The EURO-Area Problem

The basic problem of the EURO-Area is that the German establishment, right and left, is celebrating the German World Championship in exports and the German balance of payments surpluses, which implies that they are celebrating the balance of payments deficits of the European partners.
The imbalances of the intra-European trade have to be overcome! And the Germans have to contribute to it!

The Crowding out Capitalism Approach to Balancing Intra-Euro Area Trade

Proletarians of All Countries Unite to Control Capital!

From the analysis of the optimal use of labour and it’s implications for the use of profits to maintain and augment the productivity of labour by reinvesting these profits we conclude that the overall strategy for a European economic policy must be to assure that the declining trend of the reinvested parts of profits is stopped and investments, private, public, and collective are reinforced. This calls for a European wide economic development strategy, which must take into account the imbalances of intra-European trade.

A European Monetary Fund (EMF) should be created in order to coordinate the economic and fiscal policies of the Euro area. The EMF should issue euro-bonds. The budgetary discipline of the Member States of the Euro-area can be assured by imposing upon countries with excessive budget deficits obligatory wealth taxes. The EMF should propose to the national parliaments to adopt a wealth tax of a certain level to finance the deficits.

The fiscal policy framework of the individual countries should include an investment contribution, a percentage of the wage being channeled into collective investment funds. The investment wage rate is an important economic policy instrument to fine tune the optimal use of resources, in particular consumption and investment.

Countries with current account deficits have to finance these deficits by capital imports which take the form of increasing private and/or public debt. To avoid this, direct foreign investment DFI has to take place or additional domestic savings have to be generated. The investment wage and collective investment funds provide these savings and investments and thereby further the countries competitiveness as investments increase labour’s productivity. Not the labour markets have to be structurally reformed but the capital markets! The surplus countries, notably Germany should be obliged to provide direct investment funds equalizing their balances of payments. These can be private, public or preferably collective funds. The creation of investment wages and collective investment funds is absolutely essential. Either the labour movement learns to supply and manage capital democratically or capital shall continue to control the labour movement!

Proletarians of All Countries Unite to Control Capital!

This approach is inspired by Keynes’ “Paying for the War” (The Times, 1939). Keynes had proposed a compulsory savings scheme to reduce actual consumption to free resources needed for the military. This would lead to the accumulation of wealth in the hands of labour and reduce inequality, paving the way for economic democracy.

- Amartyra Sen 2011 – It isn’t just the euro. Europe’s democracy itself is at stake!
- Le Monde 2011 – La crise européenne est une crise de la dette pas de l’euro.
- Michael Schlecht 2011 – Merkel rollt über Europa!
- Alternative Economic Policy Group: Special Memorandum 2011 – Euroland in der Krise!
- European Commmission DG ECOFIN – Europe 2020 – Country Specific Recommendations 2011

AFEP AHE IIPPE Joint Conference Paris 5 -7 July 2012

Film: Nous resterrons sur terre

Congress Marx International VI – 23-25.9.2010 Paris

The Economic Policy of “Crowding out Capitalism” is on CoCnet

The latest article (October 22, 2012)

Klaus Hagendorf Victor Valentinovich Novozhilov: A Marxian Mathematical Economist. In Honour of the 120th Anniversary of His Birth

Abstract: This paper attempts to present the important contribution of Victor V. Novozhilov to Marxian economic theory, the proof that the theory of optimal planning is the proper field of general economic equilibrium theory and that this theory, by fully respecting the objective law of value, leads to planned prices which equalize supply and demand and for which the labour theory of value holds: prices of production are proportional to marginal labour values. In Novozhilov’s and Soviet terminology marginal labour values are “differentially socially necessary labour” which includes not only the socially necessary labour needed to produce a unit of a given product, as it is commonly understood by bourgeois and many Marxian economists, but also the socially necessary accumulation of the means of production. In mathematical programming this is the rational for the Lagrange multipliers and norms of effectiveness. Novozhilov in fact proves that in an optimal plan (Pareto optimum), prices are proportional to marginal labour values and use values.

The paper has been presented at the All-Russian Conference at the Saint-Petersburg State University of Engineering and Economics, Engecon, on October 15, 2012: The Mathematical and Economic Works of Victor V. Novozhilov. In Honour of the 120th Anniversary of his Birth.

Link to the Conference Web Site: Всероссийская конференция «Математика и экономика в трудах В.В. Новожилова»

Video of the Opening session of the Conference: http://нашинжэкон.рф/event/Vserossijskaya_konferenci/


Market Failure Globalized!

“The speculative and oligarchic circles who are related to the military-industrial complexes and who control the natural resources are at the origin of the crisis.”
Pedro Paez
Former Member of the Stiglitz Commission of the UN

“In 2007-2008 the central banks were not in the position to prevent the transmission of the price shocks of the natural resources and agricultural products (produits de base) to the prices of the consumption goods.”
Agnès Bénassy-Quéré et al. Politique économique, Bruxelles: De Broeck; 2009; p. 276

Socialise the Rent: An Open Letter to Mikhail Gorbachev

Land & Liberty, 1991

Abstract: A letter signed by a group of economists – including three winners of the Nobel Prize in Economics – urging the Soviet President to retain land in public ownership, while raising needed government revenue by charging rent for the use of land. This letter was delivered to President Gorbachev early in 1991. The letter is reprinted from Land & Liberty, January-February 1991.

Klaus Hagendorf. 2012. Progressive Macro-economics

Abstract: Progressive macro-economics is defined as theorizing organized capitalism with the aim of providing a theoretical foundation for macro-economic policy, introducing economic reforms paving the way for the transition towards Socialism. The basis of Progressive Macro-economics is the labour theory of value. From the most rudimentary analysis of the exploitation of labour it can be concluded that the decisive economic reform to overcome exploitation is the organization of the supply and control of capital by labour.

Klaus Hagendorf.2011. An Industrial Relations Framework for the Euro Area: Efficient, Converging and Equitable

Abstract: The excessive high public debt of almost all member states of the euro area, resulting from diverging tendencies of economic development, requires appropriate adjustment mechanisms. The crucial role of industrial relations is strengthened by the introduction of the economic policy instruments of investment wages and collective capital formation. The European labour movement is thereby empowered, together with the European and national macro-economic policy institutions, to engage in the macro-economic control of the euro area. The trade unions, using their control over Wage-Earner Investment Funds, increase labour productivity in the regions and sectors of the euro area such that the imbalances of intra-euro-area trade are balanced out by direct foreign investment. An ecologically sustainable and inclusive economic development of the whole euro area is achieved. The introduction of investment wages should not only re-establish full-employment in the whole of the European Union, together with the co-determination of the enterprises it is also a key instrument to further economic democracy.

Klaus Hagendorf Crowding out Capitalism: A Law of Historical Materialism

Abstract: This paper presents a modern response to the problem imposed by Marx in Capital in 1867, “to lay bare the economic law of motion of modern society” and to provide a vision on how on the basis of this law of motion the transformation of the capitalist mode of production to the socialist mode of production can be perceived. The analysis begins with a discussion of the Marxian analysis of labour values. To overcome the difficulties the marginal analysis of labour values is introduced and it is shown that in an optimal economy where labour is used in an efficient manner commodities exchange at their labour values. The transformation problem is thereby eliminated. In a further step the socially necessary character of surplus value as a fund of capital accumulation in order to increase and maintain the productivity of labour is presented and opposed to the capitalists strife for the private exploitation of surplus value. It is argued that the capitalist harmful practices, leading to economic and social crisis, can and must be overcome by the labour movement via economic democracy and collective capital formation thereby eliminating the ‘ultima ratio’ of the capitalists, the supply of and control over capital. Finally this process of crowding out capitalism is contrasted with the orthodox reformist and revolutionary approaches.
See also: Crowding out Capitalism

Klaus Hagendorf A Critique of the Cold War Definition of Labour Values

Abstract: This paper is not only a criticism of the generally accepted definition of labour value, first put forward by Nobuo Okishio, as seriously faulty and in contradiction with the theory of cost. It presents a Marxian microeconomic analysis of labour values which is then used to scetch an outline of a Marxian macro-economic strategy of Crowding out Capitalism against exploitation and unemployment by using the Cambridge Equation.
- Separation of Surplus Value into Capital and Revenue. In: Karl Marx. Capital, Vol. I, ch. 24.
- Spreadsheet – Definition of Labour Values

Klaus Hagendorf Labour Values and the Theory of the Firm. Part I: The Competitive Firm

Abstract: This paper is the first part of a Marxian critique of the theory of the firm focusing on the analysis of labour values. Starting from Adam Smith’s example of the deer hunter, marginal analysis is introduced culminating in the derivation of the Labour Value Function as the supply curve of the competitive firm in terms of labour values. The analysis is based on a new definition of labour value which is Marxian in spirit and respects modern mathematical optimization methods not found in Marx and offers a further development and coherent interpretation of Marx’s value theory. The analysis is limited to the case of the competitive firm.
- Spreadsheet to Labour Values and the Theory of the Firm

Klaus Hagendorf The Labour Theory of Value A Wikipedia Article

Klaus Hagendorf Monopoly Power and Labour Values

Abstract: This paper presents the micro-economic partial- and general economic equilibrium analysis of monopoly power in terms of labour values. In the partial analysis it is shown that the monopolistic mark-ups above marginal cost do not constitute labour values but real bubbles of values which prevent the economic agents to perform efficient decisions on the basis of the price system. Within the framework of input-output analysis it is shown that in the monopolistic economic system the over-evaluation of commodities and the under-evaluation of leads to less capital intensive technologies. Not even in the long term are marginal labour values equal to average labour values and marginal costs do not reflect labour values. It is suggested that the monopolistic mark-ups of prices above their labour values, the “real bubble effects” which lead to monopolistic unemployment, the inefficient use of labour and over-exploitation of the labourers, are the major source for the cyclical nature of the development. It is shown that the monopolistic exploitation is much greater than orthodox theory suggests leading to the “Over-Exploitation Hypothesis”.
- Spreadsheet – The “Real Bubble Effect” in the German Economy in 2005
This spreadsheet applies the methodology developed in the article to OECD data on the German economy of 2005.
- Spreadsheet – A. Harberger’s Study on the US Economy 1928
- Rudolf Hilferding: Finance Capital and the Restriction of Free Competition. In: Finance Capital, Vienna 1910. Part III

Robert Solow Growth Theory and After Nobel Prize Lecture, Stockholm 1987.

Abstract: In his Nobel Prize Lecture Robert Solow expresses some of the fundamental insights rendered by the study of the accumulation of capital. One of them is that in a dynamic equilibrium where consumption per capita is optimal, all profits are saved and reinvested. Solow expresses it as: “When is an economy capable of steady growth at a constant rate? … the national saving rate (the fraction of income saved) has to be equal to the product of the capital output ratio and the rate of growth of the (effective) labor force. Then and only then could the economy keep its stock of plant and equipment in balance with its supply of labor, so that steady growth could go on without the appearance of labor shortage on one side or labor surplus and growing unemployment on the other side.”

In mathematical language this is: s = rK/Y, or equivalently sY = rK.
(K/Y – capital-output ratio, r – rate of growth of the labour force (=rate of profit), s – savings ratio).
But it is obvious that this is generally not compatible with capitalism as it is the capitalist’s objective to consume part of his profits, rK.

On the other hand it is clear that in a SOCIALIST ECONOMY ALL PROFITS MUST BE SAVED AND REINVESTED (as long as the rate of profit is greater or equal the rate of growth of the effective labour force). When the reinvestment is controlled democratically this is the condition for the abolishing of exploitation of labour at the work place.
- The Need for Crowding out Capitalism (Data on Investment/Profit ratios for several countries)
- Correlation between Unemployment and Investmen/Profits Ratio for several countries

Joseph E. Stiglitz The IMF’s Switch in Time

J. Stiglitz’s interpretation of the data presented above: “we should have learned from the crisis that financial markets need regulation, and that cross-border capital flows are particularly dangerous. Such regulations should be a key part of any system to ensure financial stability … There is a wide range of available capital-account management tools, and it is best if countries use a portfolio of them. Even if they are not fully effective, they are typically far better than nothing. … But an even more important change is the link that the IMF has finally drawn between inequality and instability.”

Robert Solow An almost practical step toward sustainability
Resources Policy, 1993, vol. 19, issue 3, pp. 162-172.

Abstract: In this lecture Robert Solow defines economic sustainability, provides a measure of it and reveals the cardinal sin of natural resources extracting countries: “The cardinal sin is not mining; it is consuming the rents from mining.” (p. 171) Solow applies here the general criticism of capitalism to the case of the exploitation of natural resources. The general formular is: “The cardinal sin is not making profits; it is consuming the profits!”
- Prof. Matthew Turner’s Course on Environmental Economics University of Toronto

Robert Ayres Evolutionary Economics & Environmental Imperatives

Abstract: The long-range biological imperative for survival has its economic counterpart. The present technoeconomic system, with its heavy dependence on exhaustible stocks of natural resources (including environmental waste assimilative capacity) is unsustainable. The stocks of high quality raw materials, such as fuels and metal ores, are being drawn down rapidly, but this is the least of the problems because of possible technical “fixes”. More ominous, there is an irreversible disappearance of tropical rain forests and other valuable and irreplaceable ecosystems, erosion of topsoil, a buildup of toxic heavy metals in soils and sediments, an accumulation of “greenhouse gases” in the atmosphere, and a catastrophic loss of biological diversity. None of these trends is reversible by any known or plausible technological intervention. Long-run human survival therefore requires that the use of the environment as a “sink” for waste residuals, especially from fossil fuel combustion and dissipative uses of heavy metals, must be slowed down drastically in the near future.

The paper examines the relevant economic adjustment mechanisms in terms of both “standard” neoclassical and evolutionary theories. It concludes that a policy based on reliance on market signals (i.e. prices) alone to induce change is likely to be ineffective. Even if the polluter-pays-principle (PPP) were fully implemented, market mechanisms would not suffice. The problem is that existing large-scale systems evolved during a period when environmental concerns were not serious, and now retain their economic dominance partly due to economies of scale and partly through influence over the political system. Copyright © 2010 Robert Ayres. Published with the kind permission of the author.

Éloi Laurent Social-écologie. Contre l’écolo-scepticisme et l’écolo-fatalisme

Abstract: Economic inequality is at the roots of the environmental catastrophies just like the social disasters. Éloi Laurent argues that more democracy is the way out. To political, economic and social democracy is added the need for ecological democracy. This book is a soft contribution to Murray Bookchin’s social ecology.

Klaus Hagendorf A Critique of Gossen’s Fundamental Theorem of the Theory of Pleasure

Abstract: Hermann Heinrich Gossen is generally known as the predecessor of Walras, Menger and Jevons in preparing modern economic analysis. What is generally not known is his Fundamental Theorem as a marginal approach to the labour theory of value. This paper presents his Fundamental Theorem in terms of modern terminology and extends Gossen’s hedonistic approach of pleasure and pain to the analysis of marginal labour values based on technical production functions. It is shown that the marginal approach to the labour theory of value underlies modern economic analysis. Gossen’s introduction of the concept of marginal pain or labour in his Fundamental Theorem of the Theory of Pleasure is really the revolutionary part of the Marginalist Revolution and it appears to be rather natural that bourgeois and Marxist vulgar economists have ignored it.
- Gossen’s Labour Theory of Value – The Spreadsheet
- H.H.Gossen. Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln. Braunschweig: Friedrich Vieweg & Sohn; 1854.

John F. Henry Adam Smith’s Theory of Value: Chapter Six Considered
History of Economics Review, Vol. 31, Winter 2000.

Abstract: This article shows convincingly that the attempts of modern orthodox economists to purge Smith’s “Wealth of Nations” of the dangerous labour theory of value are ill-suited. It is shown that the immediate followers of Adam Smith acknowledged unambiguously his position as based on the labour theory of value whereas modern economists try to introduce a paradox between the labour theory of value of the “early and rude state” of society and the adding-up theory of labour, rent and profits. In fact, for Smith there is no such paradox.
© Published with the kind permission of the author.

Klaus Hagendorf Towards a Political Economy of the Hunters and Gatherers

Abstract: This paper uses the mode of production of the hunter-gatherers as a background to explain basic economic concepts, in particular the meaning of the labour theory of value and it’s relationship to optimization of resources. A proof of the marginal value theorem is presented. A new term is introduced to designate labour surplus value, roundabout labour. The analytical expression for socially necessary labour is derived and Adam Smith’s paradox between labour value and the adding-up theorem of wages, rent and profit, is resolved. It is shown that far from being limited to the ancient form of society of the hunter-gatherers the labour theory of value holds also in modern times.

Harold Hotelling General Welfare in Relation to Taxation and of Railway and Utility Rates*
Econometrica, Vol. 6, No. 3 (Jul., 1938), pp. 242-269
*Presented at the meeting of the Econometric Society at Atlantic City, December 28, 1937, by the retiring president.

Abstract: In this paper we shall bring down to date in revised form an argument due essentially to the engineer Jules Dupuit, to the effect that the optimum of the general welfare corresponds to the sale of everything at marginal cost. This means that toll bridges, which have recently been reintroduced around New York, are inefficient reversions; that all taxes on commodities, including sales taxes, are more objectionable than taxes on incomes, inheritances, and the site value of land; and that the latter taxes might well be applied to cover the fixed costs of electric power plants, waterworks, railroads, and other industries in which the fixed costs are large, so as to reduce to the level of marginal cost the prices charged for the services and products of these industries. The common assumption, so often accepted uncritically as a basis of arguments on important public questions, that “every tub must stand on its own bottom,” and that therefore the products of every industry must be sold at prices so high as to cover not only marginal costs but also all the fixed costs, including interest on irrevocable and often hypothetical investments, will thus be seen to be inconsistent with the maximum of social efficiency. A method of measuring the loss of satisfactions resulting from the current scheme of pricing, a loss which appears to be extremely large, will emerge from the analysis. It will appear also that the inefficient plan of requiring that all costs, including fixed overhead, of an industry shall be paid out of the prices of its products is responsible for an important part of the instability which leads to cyclical fluctuations and unemployment of labor and other resources.

Klaus Hagendorf The Labour Theory of Value and Economic Crisis

Abstract: Orthodox economists deny generally the necessity for a labour theory of value. Relative prices could be explained also without it. Thus they do not only misjudge the fundamental meaning of the labour theory of value for political economy, understood as the science, which investigates the material basis of a society, in particular the conditions of its material reproduction. It is the labour theory of value, which makes the “natural” integration of the members for a society possible on the basis of social equality. The labour theory of value is thus an indispensable basis also for the liberal political economy. To the degree, in which the validity of the labour theory of value is reduced, the social integration of humans on the basis of social equality is also impaired. Therefore the right to work is a human right. In the following it is shown that the labour theory of value is also fundamental for the understanding of economic processes and crises.

Klaus Hagendorf Spreadsheet with Solutions to Kantorovich’s Problems of 1939 using the OpenOffice Solver.

Abstract: In 1939 Leonid V. Kantorovich had published an article in which he presents a method of mathematical optimization later becoming known as ‘Linear Programming’. The zip file contains an OpenOffice Calc document with spreadsheets which solve the problems put forward in Kantorovich’s article using the OpenOffice Solver. The OpenOffice Solver is an integration of the lp_solver into OpenOffice calc. In addition all problems are also solved directly with the lp_solver. The problems are defined in files of lp_solver format. The Reader is encouraged to read also Kantorovich’s book ‘The Best Use of Economic Resources’ of 1959 in which similar problems are discussed. Of particular interest is the relation between linear programming and the labour theory of value.

Klaus Hagendorf The Cobb-Douglas Production Function and Political Economy

Abstract: In classical and Marxian political economy economic advancement takes place in stages of development. These stages are characterized by different functional distributions of income. In this paper we show that the Cobb-Douglas Production Function is the only production function which has the property of a constant functional distribution of income of the factors of production. Furthermore it is argued that an aggregate production function is not appropriate to analysing macro-economic processes of a capitalist economy. But it is a very useful tool in the hands of a socialist planning authority.

Klaus Hagendorf Principle of the Distribution of Income in a Socialist Market Economy

Abstract: This article examines the conditions for a classless society on the basis of the degree of social integration. At first the classical model of distribution is presented where the social degree of integration is zero, capitalists receive only profits, workers only wages. Then the degree of social integration is introduced and the type of cross-distribution is presented which yields a classless society as every individual receives his income from the different sources in equal proportions.

Klaus Hagendorf The Labour Theory of Value: A Marginal Analysis. Revised Nov 12, 2011

Abstract: The difficulties of the classical and Marxian labour theory of value are overcome when labour value is understood as cost, analogously to marginal cost as marginal labour value. Marginal labour value is the reciprocal of the marginal productivity of labour. Under “perfect competition” relative prices are equal to the ratio of marginal labour values. Indeed, Pareto-optimality implies the validity of the labour theory of value. But it is shown that, in principle, a capitalist system can never be in a Pareto-optimal state. To assure a maximum productivity of labour, and therefore minimum socially necessary labour values, society has to overcome capitalism and organise the formation and control over capital collectively. This article presents the marginal approach to the labour theory of value.

Klaus Hagendorf A Note on Ronald Meek’s ‘Studies in the Labour Theory of Value’

Abstract: Ronald Meek has (deliberately) ignored a very important discovery of Jevons. When labour is measured in terms of marginal labour values prices are proportional to these values and commodities exchange accordingly. This has been rediscovered by Soviet economists and that has been published in the JEL in the 70ies. Furthermore it is shown that under neoclassical assumptions the vector of marginal labour values is equal to the Sraffian vector of quantities of dated labour.

Chang Tse-Chung The Main Aspects of China’s Economic Reforms
Economic Analysis and Worker’s Management, 3, XIX,(1985), 307-315

Abstract: In this article of 1985 the author asserts: “Prevailing practices have become a hindrance to the expansion and modernization of the economy. If we had not begun economic reform to establish new organizational structures and institutions to assist the pace of economic development, the aim of modernization would not be realized, nor the quadrupling of the gorss annual value of industrial and agricultural production by the end of this century.”

© Published with the permission of the Institute of Economic Sciences, Belgrade.

John Bates Clark The Ultimate Standard of Value

The Yale Review Vol. 1, No. 3, November 1892. available at: Institut de France

Abstract: In this article John Bates Clark introduces explicitly the concept of marginal labour value and gives it an interpretation based on a technical production function. This is an improvement of Gossen’s and Jevon’s hedonistic interpretation of labour. But he did not provide a mathematical presentation of the notion of marginal labour as the reciprocal of the marginal productivity of labour. The article has been published again in 1896 in a slightly modified form as “The Unit of Wealth” in Festgaben für Karl Knies zur fünfundsiebzigsten Wiederkehr seines Geburtstages in dankbarer Verehrung dargebracht von Eugen v. Böhm-Bawerk … O. v. Boenigk … J. B. Clark … Berlin: O. Haering, 1896; edited by Otto Johannes Eugen Ferdinand Wilhelm (Freiherr von) Boenigk. This book includes also Böhm-Bawerk’s article “Zum Abschluss des Marxschen Systems” (“Karl Marx and the Close of His System”). There is another publication with the same title: Clark, John B. 1893. The Ultimate Standard of Value. Publications of the American Economic Association 8, no. 1: 82-87, which concentrates on the main points of the argument.
Klaus Hagendorf 2011 – A Note on John Bates Clark’s Ultimate Standard of Value
Under preparation.

Copyright © 2011 Klaus Hagendorf. All Rights reserved

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