 I talked last time about the possibility of constructing or the demonstration rather that one can construct and analysis an explanation of the observed phenomena of consumer demand theory, down resulping demand curves, income and price elasticities, Engel's law, essentially all the general properties that a textbook in micro should develop, but I showed that this can follow from the stochastic properties of a whole and don't depend on the details. And I mentioned last time that in fact in many disciplines including physics, there are no direct path from micro to macro. And one reason which I didn't talk about so much yesterday but I want to mention is that inevitably what happens at the micro level creates a macro pattern, but it is not a simple translation. And so now we call that emergent properties. In the old days we used to call it dialectics. The part is greater than the sum of its whole. I'm sorry, the whole is greater than the sum of its parts. And we call that dialectics. And if you don't know that, pick up, say, Mao's essay on dialectics or Lenin's essay on dialectics and you talk about how quality, quantity, change, all of that. And the point now rediscovered is that the interaction among individual elements creates the interaction among individual elements, creates properties of the aggregate which are different from the individual elements. So what does that mean in practice? Let's say that you have, let's say you believe, as I argue foolishly believe, that production functions operate at the level of a firm. I've argued elsewhere, I didn't mention it in the book, but that I don't believe that in the idea of a neoclassical well-behaved production function. But let's say you believe that. Then, if you had a simulation model of production functions at the micro level and you allowed them to interact and each one of the production functions had some form, like a CES or Cobb Douglas or any one of them, the aggregate relationship will not be like that. In other words, aggregation doesn't just result in a sum of all the inter in the individual elements, it shows a transformed shape. And in that chapter to which my previous lecture was devoted, which is chapter three, I make the point that every good economist understands this. Milton Friedman, when he talks about the theory of money and the demand for money in the individual level, he says, well, this motivation, that motivation, culture, history, that all of that. And in the end, he says, but when we aggregate, we're going to make the assumption that the velocity of money is stable, though it's not true for individual people, that's obvious. And we're going to make the assumption that there is a relationship, a stable relationship between money and income based on a stable velocity of currency. Now, that's an aggregate, and he's careful to say it's not true for the individual. So it's a result of an emergent property. Keynes, when he's talking about the consumption, says, oh, individual people consume in many different ways. They have class behavior, personal behavior is a question to worry about the future, transaction demands, all kinds of factors that determine their decision to hold money or to consume income. But in the aggregate, he says, I'm going to assume that the relationship between aggregate consumption and aggregate output is a simple one. Consumption is a function of output, maybe and wealth, and all the other factors cancel out. Now, this is legitimate because the individual factors vary across individuals and can cancel out. And what remains is the factor that's common to all, which is income, maybe wealth, something like that. So it's not surprising that aggregation creates a different shape to the function. That's a key point. It's an emergent property, the shape and the relationship itself. Is that point clear because I'm going to move on, but it's going to reappear when we talk about profit rate and all of that. Okay? Any questions? Yeah. The aggregate kind of was the... That the... Yeah, the propensity to consume out of disposable income, yes. Can you explain why that assumption is a good aggregate characterization? Well, as I said, the assumption is true of many different micro foundations, so that's an important point. So if you look across, let's say we examined your personal consumption over a year, right? How much pizza, how much this, how much that, and we would say, well, in any moment of time, people vary. They go for one food today, one next tomorrow, depends on their budget, their tastes, and some people will have the same food every day, other people insist on having a different one, but when you get an aggregate, when you get aggregates, you get stability in the mean. And that's just a general property of aggregates because what one person changes here and another person there. So I'm hypothesizing as we find in many, many different investigations that aggregates tend to have a distribution with the mean, and the mean tends to be stable. That is to say, it doesn't change much over time, or if it does, it changes in a determinate way. So by positing that the average propensity to consume out of disposable income is stable, you're setting up a stable relationship between income and consumption. That's another way of looking at that, right? And by showing that, at the level of the individual person also, I mean, the aggregate, you show that the aggregate demand curve will be downward sloping for necessary goods and consumption for luxuries and all of those properties. So the only thing you need to assume, only anything you deposit, is a stability of a distribution of outcomes. And that's a very well-known phenomena in a variety of disciplines, physical, biological, and so on. Groups tend to have a lot of variability among individuals, but surprisingly the mean is very stable. So if I were to take the average height of a class, I wouldn't expect every class to have the same average height, but if I take the population bigger and bigger, the class will approach the population mean, which is surprisingly slow moving over time. It doesn't mean it's fixed. And later on in that chapter, I talk about factors that can change it, but clearly the change in the mean has to be reflecting changes in the individual, so it's not going to be a rapid change. It's going to be a kind of slow, evolutionary change if it is at all. And by the way, the average height of people in capitalism has changed over time because better diet has caused the average height to drift upward, but it's not that it happens in a day, it happens over generations. So we can allow for the propensity to change, so to speak, and we need to ask what determines it. But we can't posit that out of our head. We have to look at those determinants and look at the empirical evidence and have a hypothesis about that that we can test and modify. But the average. And that hypothesis is actually an aggregate consumption function, another way of looking at that hypothesis. I did it for a market, a given market, but you can look at that over time in different markets and you would expect to see that in some cases they would disappear. For instance, the consumption of horseshoes is definitely going to have downward-sloping, downward-drifting propensity to consume. And when we move to cars, they're going to be very small propensity to consume of horseshoes, right? So that's all, it provides space for all of that. And the question is a good one because we then have to say what are the social forces determining that, factors going into it. But my main point is that individual variations tend to cancel out. And what remains is a commonality. What's a commonality? Income. You can't consume without income. And that becomes a very important common feature. Yes? So would this level of demand be more horizontal? No, not necessarily at all. Because I didn't posit anything about the distribution, only the stability of the mean. I didn't say anything about the standard deviation. But that's a question. Yes, we could ask that question. Is there anything, but given the stability of the mean, all the results were derived only from the stability mean, not from the second order issue of the standard deviation. And it's possible that there are phenomena in which that becomes important, but not for consumption functions at the level of the demand curve story. It might be very important. For instance, businesses care about that because the sensitivity of the add to advertising all depends on whether people are clustered here or you can pull some of them together. You can change the distribution by affecting their tastes and their preferences and all of that. And I don't want to argue that these preferences are given. What I'm saying is that they are stable in the large because they are socially structured. And social structures don't change very rapidly. There are instances, by the way, well-known instances where they do change very rapidly. I remember that after September 11th, the U.S. mounted attempt to, was it September? Maybe it was the Iraq war. The U.S. has so many wars, it's hard to keep track of this. But in one of those wars, I think it was Bush wanted to get a coalition of countries who would go into the war. Might have been Afghanistan, might have been Iraq, I can't remember. But anyway, France didn't join the coalition. And when France did not join the coalition, some Americans were so angry that they wouldn't eat fries, which are called French fries. And other Americans were not drink French wine. There was actually a guy in New Jersey who had a good seller of French wine. And he said in the newspapers, I'm going to pour this stuff down the toilet. People going, wait a minute, wait a minute. We could take it off your hands. But the fact is that his consumption changed dramatically before the break between their culture-rated preference. And this happens in wars and social change of all sorts. So we don't want to make the assumption that this is given by nature. It's given by the social web of influences and that network. And these can rupture. And when they rupture, people can change very rapidly. This typically happens in instances like that. But by and large, they don't change very rapidly for that same reason. Yeah. In terms of the social changes which will change that propensity to consume, I might be wrong, but is the model assuming that relative prices are like a done effect that propensity to consume between luxuries and necessities? Yes. I'm not necessarily assuming that. I'm just simply saying even the existence of a stable propensity to consume derives all that we already know about this. So then we might find in individual cases that it might. It might be that people will convince that something that's more expensive is worth more in some sense. That's a typical luxury good effect. But really, those are very localized. It is true that it might be when iPhones first came out that premium of $200 you got to have an iPhone. But now you've got 40 different competitors for the iPhone. And that doesn't work so well anymore, that particular argument. The scarcity of the fact that you have it. But it does work for some things. And we have to allow for that too. So here's my point. All the things we're talking about are well known social factors. And our theory should allow for that. But if we do allow for it, we get all the results and I don't ever have to mention utility, optimizing, maximizing. I'm not assuming that people's consumptions are perfect. I'm not assuming that they make the right choices. I'm not assuming any of that. I don't have to assume away regret. I don't have to assume away mistake. And nor do I have to say, oh my God, I just discovered that people are not perfectly rational of 100 years. I mean that's a kind of stupidity that makes no sense to me. It's a kind of discovery that indicates a deliberate ignorance. There's no way you couldn't know that. But you do it for tactical or career reasons. You finally discover that people don't behave in some way. As in no game theory, many of those game theory behavioral experiments they finally discover that people care about each other. My goodness. It's a breakthrough. Okay. Yeah. Would you say that stability of the mean would apply to all economic advocates, including investment? Yes and no. So here's an interesting question. I haven't come to that, but I'll anticipate. I'm going to argue that what motivates one of the important things in competition is profitability. And if you're talking about competition between industries, capital will flow from one to the other according to the rate of profit. And in fact, according to the difference between the rate of profit and the interest rate. Because if it's not above the interest rate, there's no point. You can get the interest rate by sitting at home. You get the profit rate by risking the battle. So that difference, which is very central in the classical economics, especially in Marx, the difference between the profit rate and the interest rate, motivates the lateral movements. Now an interesting question arises. Is there a stable investment function? That's one way of putting the question, right? And the answer is we don't expect it to be stable forever, but we do expect if these are social factors that the primary determinant of the moves of investment will not be changes in the animal spirits, but rather in the profitability. And that's a hypothesis you can test. You can look to see whether there is a stable investment function over time. And we do that in the book, actually. On the other hand, I don't expect it to be stable independent of social factors. I don't expect it, for instance, to be unaffected by the oil price hikes of 73 and 79, nor do I expect it to be unaffected by a war. If you are at the receiving end of a war, well, obviously your expectation of the profit rate is dependent on your evaluation of what's going to be left standing. So I don't expect it to be true in that case. And we see across the world now, especially in the Middle East, you know that the town or the culture of the society may not be standing. We're not going to invest. Because the expectation of profit is the expectation of demand, of sales, of people, all of those things. So it's a subtle thing, but it's quite remarkable how in a stable climate that will be stable, we don't expect it to be true in an unstable climate. Another reason why we don't derive it from utility and all of that. And Keynes, by the way, is the one who says this, you know, if capitalists think that the future is uncertain, they're not going to hold back. Well, of course, that's very sensible. When you invest, you're throwing your money away. Right? And you're saying as Marx puts it, you'd throw it out and then you hope to fish it back later. But if you are, it's not going to come back, if you think it's not going to come back, you won't throw it away regardless of the promise of the rate of return because the promise is not just of the rate of return, it's of the conditions of return. So in business literature, by the way, we've talked about this all the time. We need to be able to explain how businesses operate rather than accusing them of not operating properly because we have a really bad model and they don't fit it. The job of a scientist is to explain how things work, not to accuse bacteria of being bad. Yes? Many economists is cyclical. Very sorry, investment is cyclical and this leads to the cyclicality of the economy in general. And with the idea of animal spirits, the idea is that the emergent property from the collection of investors is actually instability rather than the stability of demand. So I think this is an interesting way to look at it. There is a need for the emergent property from collective action is actually instability. Very good question. So here's the way I would answer that question. How do you know that it's not due to the cyclicality of profitability which you can measure? Well-established, by the way, why that happens. And this is even discussed in Smith and Ricardo and Marx and so it's not new. Business cycle, Wesley Clare Mitchell and his whole work was about tracking this. So what happens in a business cycle? You have a boom. In a boom, wages begin to rise. Profit margins begin to shrink because as the wage rises relative in real terms, you get a fall in the profit margin and the profit rate begins to shrink. Now as you approach, that effect causes the boom to turn around and become a downturn. That's cyclical and it's objective. It can be measured. Now we can ask how much of investment does not reflect that but if you don't do that part, you won't have any way to talk about it. It's not true that capitalist profit rates fall because they expect them to fall. They fall and their expectation begins to change. Let me give you another example of this. George Soros, who knows a little bit about money and finance, proposes what he calls a theory of reflexivity and the idea is that I'll give you the example and stock market is easier but it applies to everything in his estimation to society in general. If I think, if I can persuade enough of you that there's a stock that's going to go up, enough of you to buy that stock, it'll go up. So we can say that our expectation, if they are acted on, will cause the actual thing about which we have an expectation to change. So we expect it to go up, we invest in it, it goes up. Then Soros asks the question, well, if that's the case, why doesn't it just stay wherever it is? Because after all, if you expect it to go up, it goes up. He says, well, I, George, make my money by catching this wave. And what's the wave? When it goes up, the actual price goes up because I expect it to go up. The fundamentals, which are heavier, so to speak, don't change very much. They can, but they don't go up to the same degree. And so what a wave does is create a greater gap between the actual and the fundamental. And Soros says, I'm watching that gap. I'm looking to see when I think the actual has gone far enough away that people are going to start to say, now it's not sustainable and they start to bail out. Hopefully he says, I tried to be the one to bail out at the top. But then I bail out as people bail out as I do it. Other people are certainly going to pay attention and they do it and the whole thing comes around. And that's animal spirits, right? But that animal spirits is not just in your imagination. It's based on your estimation of the sustainability of the outcome. And so we may be able to talk about that. And stock market literature is full of tricks, of short-term cyclical indicators, of various things that chartists use, who chart these trends, look to see when the top is coming when you get out. That's objective. It's the object of interacting. And I think that's proper. But now suppose you had a false theory that said that there is no certain thing as a boom. You just get a boom because people feel happy and then they get depressed and it comes down. In fact, I've actually seen explanations of depression that say that well, you get a boom when people are innervated and then they start to lose that stimulus and then they start to come down and on the way down then everything falls apart. I don't believe in that. I do believe that our estimations are based on objective factors and we differ. That's another point. Everybody has their own estimation. There's no representative agent. It's a fiction. There's no calculation. You're guessing. And this is Keynes' point. You're guessing about what other people are guessing. But you're not guessing only about what they're guessing. You're guessing about what they're guessing about the profit rate, which is an objective phenomenon. And that's the anchor. And I'm going to use that to anchor Keynes' own argument because Keynes famously talks about this part, the Soros up reflexivity part. He doesn't talk about the Soros fundamental part. I'm not blaming Keynes. Keynes did extraordinary. They are, in my opinion, four economists in four centuries worth noting. Smith, Ricardo, Marx, and Keynes. One for each century. So if you're planning to be one, this is your century. It hasn't been decided yet. But the others are taken. And I'm arguing that there's a unified field theory that you're going to extract from their work that explains a huge number of phenomena with very simple principles. And on the other side, many people misread either their arguments or misstate them deliberately. And then they say, well, it's not true because Smith said this. They're taking phrases out of context. For instance, Invisible Hand. Poor Adam Smith. If he had not used that phrase, people would actually read Adam Smith. But he used Invisible Hand, and it suddenly became general equilibrium. There's nothing like that. Not a thing like that. He uses it about propensity to truck and barter. Everybody says, see, he says people are selfish. He doesn't say that. At the New School, we force you to read the history of thought, whether you want to or not. Because it's by reading those people that you realize how much smarter they were than we know and possibly how much smarter they were than we are. And that's a good way to proceed. Imagine that, of course, in music, and you're not allowed to read, not listen to Mozart or Beethoven. Only rock and roll? Well, that'd be a limitation, in my opinion. Okay. Other questions? So now I want to turn to the next subject, which is the theory of the firm. I'm sort of following the pattern of standard textbooks. And I ask you, in your own thinking, to try to think about a textbook that you use, how can you partition the pages into which parts are observable phenomena and how much of it is actually into just the theory and interpretation. Interpretation, I mean the following. You find the pattern and you say, ah, that's imperfect competition. Well, only if you believe in perfect competition. But since I don't think it ever existed and has any meaning at all, to attribute something to imperfect competition is just to tie yourself into that church. I want to show you, on the other hand, that competition is very fundamentally important. And that's the key point of Neoclassical theory, to say that competition is an important role. We have to then say, what does competition look like? And I'm going to call this real competition so that I can distinguish it from perfect competition. Is that point clear? I'm going to emphasize that again and again. Okay. First of all, when we're talking about the profit motive, we're talking about capital. And I'm talking about the laws that operate in capitalism. Those are the four economists that I'm talking about. Not just all societies and nothing of that sort. So what is capital? Capital is essentially the investment of money to make more money. That's profit, MCM prime. And that's, by the way, not just for Marx, but Cain says, ah, yeah, that's right. That's a circuit of the important point of Marx that capital is money invested into activities with the purpose of making more money. And the task that Marx sets himself is to explain where that profit comes from at the aggregate level. Individual level, it's okay. If it means I cheat you and you lose and I gain, that's okay. It doesn't add up to net profit or if it does, it's profit on transfer. Marx wants to demonstrate that he has the secret of where this comes from. And the answer is the production of a surplus product. We know that. But more importantly, that the production of a surplus product comes through the extraction of surplus labor. This is the key point that is Marx's contribution to the idea of profit anyway, is it doesn't come because you get more after you put in and you get more out, but rather that workers have to be induced to work longer than a certain amount of time for that surplus product to exist. And I don't know how familiar you are with that. I don't know when you've been exposed to that. So let me just give you the simple example which I use in the textbook, by the way, in the book. Suppose you had a certain amount of inputs, corn and iron, let's say, right? Wheat and iron. And you had labor. And the labor is a number of workers. And you combine machinery you can skip because iron could represent machinery. So you have inputs and you have labor and you've got to pay the workers. So there's some corn and iron they need. And after that, you get an output. But Marx's point is that that output only comes if you get those workers to work. If not enough to hire workers, you have to have them work. And so the question he says is, how many hours before their length of the working day is enough to produce the corn and iron that went into the production either directly for raw materials or for workers? And the point he shows, and one can show generally analytically, there is always a length of the working day which would be just sufficient to reproduce the inputs. Now that sounds abstract. So think about it differently. Suppose that you had a business and you were making some money. Your workers come in and they like you or they don't like you, it doesn't matter. They work, let's say, 14 hours a day. This is a business in, let's say, Asia right now, though it's the early England and the United States and France all had the same length of the working day. So let's say it's 14 hours a day. And let's say they struggle and they create a union and the result of that is that their working day is cut from 14 to 12, or let's say they go on strike. They go on slow down, which is really where they say, okay, we're going to work, but we're going to work to rule. We move slowly from one place to another. If you've ever been in any union struggles, you know the slow down is saying, we're not on strike, we're just following the rules. Well, if you slow it down, you quickly see that the output will go down. You have bought the inputs, you're not being processed at the same rate and the output goes down. And you can imagine conceptually at how slow could they be before there is no profit for you, before the sales just cover your input costs. And this shows up in practice in union struggles and other things. I mean, in Puerto Rico, for instance, where the electricity is gone and people can still survive perhaps working, they can't work enough to make a profit because they simply don't have the conditions. So that, for Marx, the key condition is the willingness of workers to be induced to work longer than a particular length. Let's suppose the length of the working day is four hours at which working time they could produce their conditions for inputs and for their own consumption. So the whole point of capitalism is that they must be persuaded somehow to work longer than four hours. And how much? Well, obviously from the capitalist point of view, the minimum is four hours, the maximum could be as much as they can try. And that depends on the resistance of workers. Historically, it's always been true. They can drive them to the point of exhaustion. In my book, I cite a manufacturer in Massachusetts who says, I bring in these young men at 17 and by 25, I throw them away because they're burnt out and used up if they're no use to me and no use to anybody because I work them 16, 18 hours a day and at the end of that time they're so destroyed physically by that labor but that's okay, I have plenty more of them so I can just take more. So that's the upper limit, the upper limit which always comes about through the imperative to expand the working day and the speed up of the working day, the intensity at which you work. But that upper limit is a physical one in the first instance and it really is in the first instance physical. When the Europeans began to invade Latin America they took Native Americans and they worked them to death because they didn't really need them to reproduce, they needed them just to be worked until they died. Chinese laborers imported will also be worked essentially to the point of exhaustion and breakdown and they could throw them away. Not true of slaves because you own slaves and so you are paying for the whole length of the slave but for a worker you pay them for as long as you work them and if they drop dead or break down or something you get rid of them. So that's the intrinsic pull to go to the maximum but of course workers are not raw materials in that sense they're not inputs in the neoclassical sense they're active subjects and they fight back and that's historical struggle to change the length of the intensity of the working days takes centuries. It comes little by little the first time that they say we propose a 14 hour working day people go mad no capitalism will drop dead it cannot survive on 14 hours after all I mean we make our profit on the last hour this is the thing in Marx, seniors last hour we only make it on the 15th hour so you cut it and we'll not survive but capitalism does survive because that is a space of contention and over time in advanced countries the working day has gone from 16 to 15 to 14 to 13 to 12 to 10 to 8 and not because capitalist got nicer it's because workers got stronger so that key point is profit comes from that distinction between the necessary labour time and the length of the working day and that labour time Marx called surplus labour now you can formalize this I do that in the book and the algebra is pretty straightforward but what's interesting to me is that people who talk about profit and the surplus things such as the Seraphians never once mentioned the length of the working day they treat it as a physical property they say you have workers and you have raw materials they don't talk about how long workers work and then the output comes out but that implies that the length of a working day is somehow fixed by technology which it isn't, it's socially fixed this is specifically true in Seraphia but it's true also in Kurtz and Salvatore I teach a seminar in Seraphia by the way so this is very fresh in my mind we're just going through this right now okay so the point there is that profit is what drives individual capitalists because if they don't make profit they die and so the incentive is not from some kind of abstract thing floating in the air it's an operative incentive, it's a biological it's a Darwinian selection mechanism in competition because competition is a war between workers and capitalists because this part of that comes but also capitalists and capitalists because they also have to fight for space they have to fight for market share they have to fight for customers and that part of the fight is dependent on their ability to be profitable and very crucial there to lower their costs when you find someone saying you know 30% sale of something you want you're likely to move to flock towards them because of that difference in price but how do they get 30% down? well sometimes it's just a trick to bring you in there most often it's just a trick to bring you in there just buy other things that are not on sale but people who can lower the costs relative to their competitors, keep it below will steadily attract customers and it will wipe out the ones with the higher costs so price cutting and price setting are the two characteristic features of competition as a war now I'm going to come back to this in a minute but this is the key to real competition it's between workers and capitalists for that length and intensity of the working day all of that and it's also between capitalists and capitalists because if they are in the same market they try to beat each other and this is not new there's no business textbook I know of no business literature I know of that doesn't talk about competition as warfare but notice there that these are activities they're not passive they are price prices are set by firms and Marx puts it firms set a ticket on the goods they sell a ticket meaning a price tag it's a British term for the price tag so when you go in to buy something you look at the price well that price doesn't come from a well-raised auction here it comes from the seller and then you have to ask why does the seller charge that price and the answer is they're trying to attract customers and keep customers and at the same time they'd like to charge as high a price as possible so that brings us right away into the first dimension of the conflict which is every seller would like to sell at the highest price but on the hand they know that the lower the price the more customers they attract to the market itself and secondly the more they attract from others so there's a competition of sellers for customers lower the price more of us are going to be coming into shops everywhere but if your price is lower than theirs I'm going to come to your shop more often than I will theirs so that lateral difference is what forces prices to stay within line because your prices are lower they're going to have to cut theirs because their customers are walking out the door to you and so that creates a tendency for prices to equalize among sellers of similar goods now equalize I'm going to talk about what that means does not mean become equal it means a pressure I saw your hand first yeah so please so in that process what is the role of the differentiated products meaning that it states that you have a water and also you have the water with different color that sort of sell like in a slightly near price and so on and so forth okay save that question till I talk about how this works because a lot of that comes from people thinking that it means that all prices will be equal I'm not saying that so I want to show you even if you had apples that were roughly the same quality outside where I work at the new school there's a farmers market every Monday and every Wednesday now I walk around the farmers market looking at prices you know I'm thinking about my class prices are roughly the same now not apples or all apples are equal but now they're all organic nobody would dare sell you anything else in New York City and prices are roughly the same for similar products and sometimes they're products which are not similar and then there is a different price for them you know certain types of chilies and almost nobody buys but there's a price set for them so I want to come back to that but the first question is prices that are roughly similar will be forced to line up with each other so that you're not going to spend your time looking and it's very clear if I walk across four farmers market things apples and fruits and all the vegetables and one is selling them for $10 and the other is selling them for $1 it's pretty clear where I'm going to go so that forces them already they know that they're active subjects too so they totally know they have to keep in track so what they have to do is to have a price differential that they can get away with and that is an issue which I want to come back to what allows them to get away with it one thing is to persuade you that it's worth the price differential it's a piece or two well that's worth something but those differences are really small you'll be astonished at how small they are and if you're talking about a product which is essentially the same a particular computer or something like that it's amazing how small those differences are there's always a distribution there's always a mean and it's pretty stable there are changes over time but the local concrete factors account for the variation the main point is that the competition accounts for the fact that they're bound together and what I mean by bound is the following I can observe the prices of these every year as I do the apples let's say but in some years it's a bad harvest the apples are scarce then the price of apples goes up but everybody's price goes up because they're more scarce now the supply has gone down and so the price distribution may not change but the mean moves and I can explain that I'll come back to that to remind me so how do you criticize the argument in Boran's city's normal gap in terms of pricing? which argument? for city and Boran's argument about pricing I do spend a lot of time on that in the book but let me first lay out this argument because I haven't laid it out yet and if the phenomena are going to be many of the phenomena that they mistake from a monopoly are necessary parts of the dynamics of competition so I'm going to show you that and then we can come back and remind me of that too in the book I actually have a section which I'm going to be skipping which is a history of theories of competition a history of theories of imperfect competition and monopoly power beginning with Hilfiding and moving forward from Hilfiding to Suizi, Boran, Suizi, Kalecki all of those people so I talk about them at length and what led them to believe that this is monopoly rather than competition but first we have to explain what competition looks like otherwise we have no way of knowing so the point I made so far is that competition is a struggle of capital against labor but capital against capital it's also by the way a struggle of labor against labor a non-trivial point if there's a reserve army of labor or even if there isn't the workers are competing with each other for jobs they compete with each other for better jobs so competition is something in which everybody is set against everyone else the struggle of all against all and this is a very important point because it makes it seem as if it's natural it's part of nature and society but it isn't it's a particular expression of a particular society and that's an important point in other societies you might compete in different ways you might compete in warfare you might compete in jousts but in capitalism the competition is profitability, wages, prices so we're going to talk about two types of competition for firms the competition among sellers of the same goods let's say this table is one set of goods that's another set of goods so these folks here are going to be selling apples and they're going to look around and see what they're selling each other selling, what the market will bear so they set prices but they set prices with an eye on their competitors that's actually Kolecki's pricing equation indeed that's how he says that they set prices according to their costs and with an eye on the prices of others that's correct but it doesn't follow that that relation is a fixed one which is Kolecki's mistake so now we have another set of people selling lettuce and another set selling iPhones and another set I mean, yeah, iPhones and another set selling steel, industrial steel all of those people are selling to customers and they, customers are looking around for the prices of these goods also so there is that pressure to keep your prices within bounds and this does not imply equality it implies boundedness of prices so it's not the law of one price it's the law of roughly equalized prices roughly equal prices let me give you an example of that too my parents lived and passed away in Canada and I was in New York and when computers were first becoming hot which is a long time ago in the 70s, 80s my father wanted a computer then my mother wanted a computer and computers in Canada were roughly twice the price so very much higher maybe not exactly twice what they were in New York why? because there were big tariffs across the border and there's a transportation cost if the computers were produced in the Midwest or shipped to New Jersey and then shipped to Toronto and from Toronto to Ottawa the cost is going to add to it in itself but also there were big trade barriers now Canada was not a big computer producer so it was importing these goods and the price differential added up to roughly double costs NAFTA eliminated those tariffs and then immediately the prices in Toronto and the prices in New York were effectively the same except for transportation costs and tariffs but that's competition competition doesn't say that going from here to there the land will be flat it just says that if you're going from here to here the proper rate differential there has to be high enough for me to climb the hill and so we have to take hills into account we have to take the concrete factors into account but we can also say for any given hill there's always a difference of big enough for capital to flow that's what means it's competition that that hill is just a condition of the competition, the terrain but it doesn't mean the absence of competition just because there are bumps or hills in the road so let me now and the last point is that all of the and the second equalization so this is equalization of prices and then equalization of profit rates between different industries now here these guys sell apples and I notice that their profit rate is low and these guys are setting lettuce and their profit rate is high and the third set is selling iPhones and their profit rate is medium so there's going to be an incentive for capital to flow more into there now what does that mean capital to flow it doesn't mean new firms necessarily it means new money because capital is this MCM prime and it could come from the guys who are not doing so well I forgot whether you were doing well or not but anyway the ones who are not doing well could be the ones setting their money in because why should they put their own money that's not doing well they put it back into something doing better or it could come from new firms entering or a mixture of both so the entry of capital into a high profit rate sector does not imply necessarily the entry and exit of firms in fact it can come indeed from the people who are themselves making money who's the best place to invest in an industry people already there why would they invest is they make money as profit with the purpose of making more money as profit this is a key to the argument in Marx MCM prime M prime minus M is your profit but that profit is now already looking for another place to become M prime, C prime, M double prime and so on so the outward spiral that's inherent in the concept of profitability it's self-expanding capital capital as a unit of self-expanding value that's a key definition in Marx and that tells you pardon? can you say that movement of capital from a less profitable activity to a more profitable activity does not require necessarily an entry absolutely not suppose you are the most profitable industry and you just made a million dollars of profits where are you going to put it into the least profitable industry or your own? exactly so your capital enters new capital enters and if your profit rate goes up it'll grow more rapidly your industry because the profit isn't insane you're always growing you're making money, you're putting it back you're growing at a certain rate now your profit rate has gone up you'll expand faster so when you say industry is growing do you mean the size of investment in it physically? yes, the entry of new what I call capital let's say plant and equipment new employment all of that happens oil production oil price goes up Texas new production they don't actually drill they don't create new companies in Texas they just hire more people because there's profits to be made there it could be the number of firms it could be the size of the firms it could be the number of plants that a firm owns the firm is just an ownership entity but the number of plants that it owns is a different matter so if there's profit to be made with selling discount goods then Walmart moves into your neighborhood Walmart is doing really well it moves into the next neighborhood too or Starbucks is an example of that kind of movement right? yes now as soon as the road to capital flow to another industry exists what exists? the road exists it's another road to go or capital to move for example as soon as there is an industry that owns a state in one country and capital cannot invest in that industry if that industry has a high profit rate capital cannot grow okay so the two issues here the idea that capital is somehow this impotent little thing that cannot invest where you have to ask why cannot invest sometimes people say well the scale is too big big for what? it's certain every capital is too big for me because I don't have the money but it doesn't mean it's too big for capital in general so if you don't have the money it doesn't mean that someone else doesn't have the money if there is a need you will see the entry I'm going to cite the examples from business from the business cycle from Harvard Business Review literature where they do a study for instance of many different industries and they find the same thing when the profit rates are high bang money appears money doesn't have to come from any individual banks will lend you money they'll create the money they'll create credit for you to do it so the question becomes what prevents capital it's not other firms because whatever other firms can do some others can also do it has to be something that is either a government prevention they say no foreigners can come well but then local firms can do it that usually is not to protect entry it's to prevent entry by people outside and to protect you so that you can enter inside so the conditions of this are very rare perhaps you have a secret process right and no one can copy it like Kentucky Fried Chicken they have a secret process so what did they do they bought Kentucky Fried Chicken they just bought all damn things they took away the process they made him the guy who did it Colonel Sanders was actually not Bernie Sanders Colonel Sanders actually made them promise he's a formula and they swore to it they bought the firm two years later they put all kinds of chemicals and changed the formula and then he said you promise me they said so sue us we now own the company so that's one way of entry you buy the firm the real question is what are the conditions under which capital cannot enter and scale is not a condition absolutely because if it's big enough for some capital it's going to be big enough for other big capital they'll come looking the one condition is if it's too big for any capital like going from here to Mars and there typically the state builds the roads does a railroad from here to Mars and then capital will enter and capital will push the state to create the railroad or the road or the space path to Mars so they can enter so yes there are such things but they are not the way that they conventionally portrayed which is that oh this firm created a little barrier to entry and it can leap over the little barrier the road is too bumpy there's no such thing but it could affect the overshooting of the time indeed and if I'm going to come to that I'm exactly going to come to that point how does scale affect entry and exit but it affects it because it's lumpy that's all I mean you know you can buy the example I would give a photocopy shop are pretty cheap you can you can set one up for I don't know $100,000 or $100,000 you buy the equipment and all the copiers and so you enter pretty rapidly if it turns out that photocopying is hot then you set one up well a chemical plant costs a hundred million dollars so if there's a hot chemical plant industry you're going to expand mostly from the existing chemical plants because the scale of the lumpiness of the entry but if it's rising enough I think it's going to rise enough bang they come in and they may be wrong about that then those plants go out of business but they have to make the expectation that the whole investment will come back and that's just a concrete factor it's like a runner running along the ground and looking to see okay the ground is flat I run flat there it's a little bumpy careful hurdle I jump over the hurdle but there are very few hurdles that capital cannot jump over and that's something in the history of it so that's a very important thing one more question I've got to move on yes do you apply countries as well or is this like within a country well that's a very good point because then the question is what prevents them moving there's some cases where they're blocked but often it's transportation costs and costs of labor and infrastructure and all of that and sometimes they create it yep a solo model that capital would move to countries with higher return and we would see convergence between okay so I'm going to come I'm going to show you that that's not true and so the mistake is a convergence between profit rates of industries and profit rates of firm of countries so let me get there that's one of the points I want to stop at at there I'm already an hour into this okay I'm going to speed up a little bit so the first point I want to make is that all industries in any industry there will always be a spectrum of costs because there's a new one yeah oh this yeah because the idea of that firm set prices and they cut costs I mean set prices and they cut prices to attract people they have sales and lower prices but you can't really maintain a lower price unless your costs are lower and so they have a tremendous incentive to lower costs push down on wages but then the equalization of movement of labor will again prevent that as being a general advantage unless it's in another country and I'm going to come back to that but the other way is that they can change the technology now when a new technology comes in with lower costs it can lower prices and gain market share but it begins to drive out the older technology because the older technology will have higher costs and at any given price it's going to have a lower profit margin so here's an example all the price is 100 in the market but the costs the oldest has 82, 80, 78 and 76 right so these are the spectrum of technologies that are created by capitalist competition itself it's not exogenous they invent technologies to lower costs and at any moment of time there are old ones and new ones that's just like saying people are born and people die so it would be very surprised to say a person of a single age a representative person if you're a neoclassical but there cannot be any such thing because people come into existence and they go out of existence same thing for firms then the profits will then be the difference between the price and the cost the profit margin and that will mean that this capital it may not be a firm by the way it may be a plant it could be all in the same firm or it could be different firms this capital will have a profit margin of 18 this one 20 22 24 now it doesn't follow that their profit rates will follow from that because it depends on their capital stocks and output if lower cost firms have bigger scale of output and a bigger scale of capital stock then it's possible that the profit rate which is the profit margin divided by the capital per unit output could vary across firms I made up these numbers just to illustrate the point that the fact that profit margins are higher for lower cost firms doesn't imply profit rates are higher because profit rates are more concrete and that's going to become important at some point so let's suppose that we have this spectrum of profit rates we have the spectrum of profit margins and the key point is that equalization of prices will create this equalization of profits necessarily because technologies are different and the cost differences are created by capital itself not out of the sky so now we can ask the question what happens if the lowest cost firm here we have the lowest cost firm and I made the example in such a way that the lowest cost firm actually has the lowest profit rate so you might say well what's the point of having lower cost you have a lower profit rate and the answer is these lower costs allow you to inflict more damage on them than they inflict on you it's like asking what's the point of having a nuclear weapon I mean hell it's going to kill a lot of your own people and you'd say yeah but it's going to kill a lot more of the other people and that's why it's an effective weapon because the damage in a warfare it's a question who sustains more damage and less damage not a question of sustaining damage both sides are sustaining damage so suppose that this firm this new capital came in these prices are 100 and it finds its profit rate is a little bit below but suppose it lowers its selling price now it can go down to 76 as a warfare tactic but let's say it picks a roughly 90 then its profit margins will go down but so will the others its profit margin goes down from 24 to 14 but the other goes down from 18 to 8 and you can quickly work through the calculation the profit rate is now the highest or second highest for this firm that previously lower because by setting its price it can make the others give up you can see this if it lowered the price to 82 then this capital is out because it's making no profit you don't need to go that far you don't need to make its profit rate equal roughly to the interest rate that's got the scrapping margin you don't want to keep it going you don't want to keep investing in a business that's not making more money than if you left it in the bank so you could make its profit rate come down to the point where it and maybe the second and the third know their doom because they know that you have the capacity to undercut them this is the Walmart strategy the Costco strategy all of that and it's absolutely the dominant one it's always been from the beginning of capitalism it's not something new it's always been true so here you have price setting behavior and price cutting in order to gain market share can make you actually the highest profit rate and people say well but why would you do that your profit rate will go down and the answer is because you gain the whole market you gain much more profit you take over the whole market and the fact that your profit rate goes down doesn't mean anything because theirs goes down more and you can ensure that they die so it's exactly like asking you're in a war but we don't want to actually hurt anyone and we especially don't want to get ourselves hurt so we want this war in such a way that we hurt other people but not us and of course they have the same incentive you have to make a judgment about what costs what damage will be sustainable and this is what firms do all the time I'm going to come back to concrete examples of firms operating that way but I just want to make that point clear that it's inherent to the concept of price competition yeah this is a small question is it the assumption that that firms are competing for leading the other firms out of the market rather than for greater profit yes the firms are competing for survival and growth but then why would they increase their price if they're going to get a lower profit rate that's the point I just made suppose I say to you look you two are in a war and they have gotten a better artillery and they're going to attack you and you know that and you say why would they do that because I'm going to fight back and I'm going to kill some of them and they say yeah but we're going to kill more of you the purpose of a war is not to avoid damage is to inflict the most damage and every business literature tells you exactly the same thing I have lots of examples in the book of people saying you know that's how we compete we want to kill them before they kill us and by the way that gives you an incentive to copy the same motive is no it's not because it's motive ceases to be maximizing the profit rate without taking into account the amount of capital yes you could be a small shop on the corner and have a high profit rate you're not a player in that market unless you can get market share and you can get control of the market you won't grow the point is to make profit in a sustainable way that you can grow and this is an evolutionary thing it eliminates competitors that's what evolution is about by the way it's not about maximizing your happiness or anything like that it's survival and being able to create the conditions for expansion and growth yeah so I think this I think this point but I wanted to ask this when I was reading this champion book is I mean don't you start to see there's only there's only five four firms how you would start to see some kind of strategic behavior on the part of the actors I mean I hope so Walmart for example let's say they pretty much have a detente where they're not cutting prices we can both sort of live in that in this environment I don't believe that no no I don't think that's true I don't believe that inflation that they're not cutting prices anymore but you have to look at relative prices or an absolute prices remember we're talking about I showed you those graphs earlier for exactly this reason in an inflationary climate is the huge rise in price in the post war period due to coke and Pepsi agreeing to raise their price or is it due to something else I'm going to argue that that inflation does not come from collusion because we can see price rise Argentina you know 1000% in a year so we know that there are other factors so then in a rising climate you don't know that they're not competing by price in fact they are all the time as they will tell you competing by relative price relative to the price index the price of coke is much cheaper now in real terms than it was when I first started to drink coke which was a luxury item by the way in Pakistan but later on the iPhone everybody will tell you isn't Apple the only producer of iPhones well look around Android came within three five years bang took away it's the biggest market now biggest producer of those types of phones so there is no evidence that they're colluding there is evidence that they're not able to kill each other that's a different matter in warfare you get India I mean you get Germany and France and Italy they attack each other there's some wins some lose France, Italy Russia yes but it doesn't mean they didn't have a war count the numbers are dead that's how you know where there's a war and that's exactly the point here in the book I have lots of examples but I really have to move on a little bit because this is just the first part of the story I want to talk then about one thing which is very key which is the cost structure because this suppose all firms within the industry had roughly the same cost I didn't make it as a flat line but I make as a spectrum because even if you all use the same technology you won't all use it the same way some of you will be better than others some of you may have good location better luck things break so you want to say that even if they had one type of technology there would be a spectrum but the key point is that if they have one type of technology then the regulating conditions the conditions of entry of new investment is going to be this kind of average and it's expandable because you can build new plant and equipment at the same time so if all of you had that then the regulating condition the conditions for new investment is going to be that we're going to look at the profit rate on the average capital in this case but suppose that you had a situation and this is the old thing of rent in which the regulating conditions are now why would that be well Ricardo gives us that answer and we know that the theory of rent he says let's suppose that this is the conditions of production in the beginning let's say when land was fertile land was widely available so we produce agricultural goods here and you keep expanding the production expanding production and then you hit a limit on that land what's going to happen you can't produce anymore on that land so the price is limited by that and the price will rise and it'll rise until it's beyond the price of production of the next land when the market prices rise enough to make it justified you bring the next land in and the increased supply of next land will bring the price down and now it'll fluctuate around a higher level now when that land is fully utilized then the price will rise again and then it'll kick supply in for a new higher cost producer and you'll come back down so the regulating conditions of production will rise over time in Ricardo's story if it is due to conditions which cannot be reproduced good land second good land and now the third land in use and that leads Ricardo to say well but everybody's still producing but the cost that's regulating or the price of production that's regulating is here that means the others are making excess profit because this one has got a normal profit this one is selling at a normal at that same price but it's price it'll give you a normal profit is lower so it's getting excess profit and this one is getting an even higher excess profit higher than the current price everybody follow me there that's essence of the theory of rent but notice here rent is determined by competition that was Ricardo's point rent is a competitive outcome when you have conditions of production that are not generally available for new investment and there are other things patents are an example of that but the patents are limited so you have them for a while and that should protect your investment they say until they're released and then the price goes down and Marx's criticism of this was that's all very well but it doesn't follow that this is a historical thing the new land may come in to be this and then suddenly the old lands will be up here and they may even drop because the new land is closer you won't use the old lands you'll drop them out it depends on whether you can fulfill the production demand from society product demand from society with just one land two lands and three lands I've made these lands not to be infinitesimal but to have a duration a spatial component so that we're talking about a quantity of land not just infinitesimal so this is not a rising average supply curve this is a lumpy one and the lumpiness is a very important feature of real competition scale scale in this case of type of land is very important so that leads me then to the key point there's a third type I'm sorry I forgot that which is suppose you have in any industry three types of producers old technology middle aged technology and new technology these little dotted lines means that you can expand all of them because after all you can always buy an old machine or produce an old machine and make some more so you could expand this way but if you have this available you're certainly not going to do that for any new investment so this is the expansion path but if this one is available then the expansion path is here in other words regulating capitals will look at these the highest cost one that doesn't make any sense if I can duplicate lower cost ones and which is the lowest cost one I can duplicate it's C3 so the general generally reproducible lowest cost conditions are the regulating ones because they give you the biggest advantage the biggest probability of survival in competition okay so I want to show you then what the implication of this is what I've just finished saying is that in any industry there will be an average here B and C and these averages depend on the concrete factors they depend on the spectrum of technologies the spectrum of lands or whatever so they'll be different right so at any common price in an industry you're going to get a spectrum of profit rates I didn't say that properly again let me go back in industry A I have all different conditions of production they're selling it roughly the same price so I'm going to have a distribution of profit rates industry B some other prices are different goods this is apples this is lettuce they'll have some average profit rate industry C which is steel they'll have some price of steel roughly equated and this is the average profit rate that's not going to tell us where the entry and exit of capital takes place because we need to know what are the regulating conditions so if industry A is agriculture we know the regulating conditions may be the lowest profit rate because that's the one you can expand industry B is the what did I do here I'm sorry if industry A has the regulating condition at the average it'll be here if industry B has a regulating condition the mistake here I don't know what it is anyway this is the regulating condition industry B we see the regulating condition may have the highest profit rate so in that case the equalization of profit rates takes place only for the regulating conditions it does not take place for others I mean that may sound mysterious but it isn't really you're not going to invest in an industry if you think its profit rate is high you're not going to invest in old technologies you're going to invest in the lowest cost that you can because that gives you the chance of sustaining and so the cost conditions are determined here are are specified here as a star and this is the punch line the equalization of profit rates will then take place because the regulating conditions in different industries will cycle around some common center of gravity so this is a regulating condition in B it's below average that means that capital will grow more slowly here relative to demand so the price will rise and it will come to a higher level in A it's above average so capital will enter A drive the supply up lower the price and so it will come down but that same process will now create a difference in these two so the difference will reverse and so you get a perpetual fluctuation in principle and you see in practice perpetual fluctuation of equalization of profit rates of regulating capitals only is that point clear? that's very important it's not averages it's of the regulating conditions and if you are an investor you will understand this you look in the industry and you say well that one's doing well this technology is what we can use and move that to this so we add that is what we give more money to and the same thing if you're a bank you're not going to give more money to someone using it doesn't make any sense you have to give it to someone who's going to use the newest technology even if their firm has only backward technologies they can add new plant and equipment yeah just for the pilot pilot it's for the sake of so it's just for shareholders and you just define regulating conditions yes regulating conditions are the lowest cost generally reproducible conditions and you think of an investment investment is reproducing some conditions right or bringing in new ones so that will be the target of investment the target of entry so to speak in the process and that's sort of driven by technology and other things lots of factors location technology those are concrete factors but if you are making an investment you would know what they were you would have to know now an implication of this kind of equalization is turbulent equalization only of regulating conditions is that there's no reason why countries would have the same profit rate and you can see that because every industry has a spectrum of profit rates and so we have three industries with three spectra it doesn't follow that the average will be the same one country could have the top part of the spectrum and the other lower part of the spectrum there's nothing that guarantees that every country will have A the best technology or the same spectrum and B that the same distribution even within an industry you can have backward industries in one country and advanced industries in another or you can have good land in one country and bad land in another so nothing implies here that either by region or country that profit rates would be equal you cannot look there because the theory already tells you you're not going to find it there you're going to have to look by industry and that's very important is that point clear because often in the literature Mandel for instance in his book says well profit rates clearly don't equalize because looking across countries you see they're not equal but I want to show you they are equal across countries because you're looking in the wrong place so let me just summarize here and then move on to the data what is the features of real competition what are the features first competition within an industry so that people all produce the same good and they're competing with each other for apples sales of apples price cutting behavior which is ultimately related limited by operating costs if you're going to have a sustainable price war you might by the way give your product for much less than its cost that's called a taste the cigarettes you give out to young people you go to high schools and give them cigarettes right for free you want a cigarette here is a packet of cigarette dope dealers do the same thing by the way they're well schooled in the theory of competition and they know they give things away because later you'll come back so the setting price and the entry price doesn't have to be the sustainable one but it is to get you hooked on the products so to speak right so then the selling price of the firms will be tied to the price of the leader who's the leader the leader is clearly the lowest cost reproducible that's a price setter the ability to cut costs dominate the market by it because they're cost lower they cut prices so the prices will be roughly linked of different firms within an industry regulating capitals of the price leaders the ones whose price others are forced to match because that's the the new lowest cost producer then that means that non-regulating capitals have their profit margins determined by the price set by the regulating capitals their profit margins are passive because they have costs but they can't determine the price if they do they lose shares so they have to match the price so their profit margins become endogenous they don't set their profit margins lowest cost productions have the highest sustainable rate of profit in the face of price cutting behaviors firms constantly cut costs and develop new technologies you have a spectrum of unit costs and capital intensities within a firm as newer, older technologies are scrapped and newer ones brought in you'll have unequal profit margins within a firm due to price equalization you'll have unequal profit rates within an industry I said firm industry due to profit price equalization and unequal profit rates due to price equalization and you'll have a positive correlation between profit margins costs and scale because if I everybody's selling at the same price the lower cost ones have a profit margin higher profit margin how do lower costs get there generally lower cost means bigger scale of production the Walmart is a lower cost in your local stationary store your hardware store because of the scale and secondly the higher investment in capital Walmart has a much higher inventory much more machinery and all of that so Walmart is more capital intensive it's bigger capital bigger scale lower cost that's how it wins that's the key point and that means that you get a correlation between profit margins and profit scale even if everybody's selling at the same price and so this is interpreted in the literature of post-engine economics as proof of monopoly power because they assume that competition means everybody is alike my point is that competition means that everybody will necessarily be unalike because they self-differentiate in order to survive they mutate that's the key point now competition between industries sort of farm medicine regulating the costs and the most productive farm investing in technology is why is that not part of real competition it is in fact the ones who get there are the ones who do that but then there's nothing in here that sort of like is sort of guiding that behavior in the sense that which is a farm that's actually regulating costs which is the most productive there seems to be something in terms of price setting and no no I didn't say that it's very important to understand that firms are constantly trying to innovate they're constantly trying to reduce costs create new technologies but you don't know in advance which one's going to work it's not like you pick it up off the shelf you have to create it and the ones that succeed are the ones that have lower costs absolutely that's from the framework in the way you describe competition well I'm talking about the fact that there is a constant birth and death process and the new firms come in with lower costs and that's an imperative forced upon them by competition so the business literature tells you in detail how that happens I mean you hire engineers you pay people for research and development all of that in the hope to get at this but it doesn't necessarily work I mean drug companies are a classic example they're looking for new drugs lower costs or better drugs most of that money is wasted because it doesn't succeed oil wells you're looking for a more productive oil well so you spend a lot of money that part is extremely well known I'm interested in showing you the implications of that part but in the business literature innovation is extremely well documented so this week okay and in the book I I mean I'm doing very condensed versions of this stuff in the book there so what is the implication of competition between industries the implication is that the profit rates on regulating conditions are equalized not on average so let's say that he is a regulating capital he is a regulating capital she is a regulating capital she is a regulating capital she is a regulating capital their profit rates your profit rates will be roughly equalized but the others will not because you have different costs and different profit rates so the equalization of profit rates does not imply equalization across all firms or even across industries only across targets of entry of investment now unequal profit rates therefore in any given year because even for regulating capital this will be a cycling of the process I talked about that last time average profit rates not equalized because the regulating ones are equalized doesn't mean the others will the others will be different and so their difference will create difference in the average industries with higher regulating capital intensities have higher regulating unit profits we said this before if your if profit rates are equalized then it follows necessarily that those which have higher capital intensity will have higher profit margin so if r1 is equal to star is equal to let me just write it as profit margin over the capital intensity is roughly equal to the profit margin of the second one these are profit rates by the way if these profit rates are equal then those industries which have higher capital intensity must have higher profit margins otherwise they wouldn't have equal profit rates in other words the implication of equalization of profit rates is that profit margins will be higher in more capital intensive industries for regulating capital but regulating capital and the average profit rates are likely to be correlated in that respect so we would expect to find that industries which are more capital intensive would have higher profit margins but that is not a sign of monopoly power that's a necessary consequence of competition absolutely necessary but when you say capital intensive capital is at least labor no capital per unit output so a profit rate is I always take the marker we did this before p over k which is p over q and k over q and that's the profit margin per unit output and this is the capital per unit output or you could divide it by sales which is empirically what you do capital profit margin on sales and so on now this is important because when we look at the empirical evidence we want to know how to know if it's contrary to competition or not right and that's the key point okay skip this I want to just talk about some evidence we have because this is important this is a study done by a lot of this literature is in the business literature so this is studied by done by Dawan who is a business economist he takes a large sample of firms I forgot what it is but it's several hundred by the time he gets it down and he looks at them in terms of their size everybody with me the size is measured by millions of dollars so firms who are zero to 25 in terms of sales are small 25 million are small 25 to 250 million are medium 250 to 1 billion large and extra large is greater than 1 billion and he looks at their profit rates and the average profit rates are 13 here 12 11 and 10 so the larger firms have lower profit rates on average and as he says this is a very well known phenomenon in the business literature but it's an interesting question how why would larger firms have lower profit rates and the answer which he doesn't dwell on but you can get from his data is if you look at the standard deviation of the profit rates and you look at their coefficient of variation you see the larger firms have a lower coefficient of variation in other words the larger firms are more stable in terms of their profit rates but more importantly if you look at the failure rate small firms have a very high failure rate and the failure rate declines rapidly with scale so large firms are dinosaurs but dinosaurs don't die very often small firms are mice and they die a lot so when you adjust for profit rate adjusted for failure or risk adjusted you find that the profit rates are remarkably similar they're around 10 to 11% that's expected from you think about warfare you have small tactical units they attack gorilla warfare big failure rate you have these entrenched things protected and all that they may not win but they have much less of a casualty rate so we know that from history then I did something with a data set which we had from the big compute set data set I had a sample which was 39,948 observations and much of the data there is good but sometimes firms list negative assets or stuff like that because they don't want bother to fill in the sheet so you have to filter you have to clean it up but you still get close to 40,000 and what we looked at is the association between sales, costs, profits and assets for instance this is the capital intensity in relation to the ratio of capital to sales in relation to the size of the firm which is defined by its assets so the larger size firms are more capital intensive the larger size firms don't have higher costs or lower costs now this seems like a puzzle if larger firms are expected to have lower costs why don't larger firms here have lower costs and that's because the hypothesis is that if firms are bigger their cost per unit margin cost I'm sorry cost per unit quantity goes down but their price goes down too because we saw that they can also set lower prices so the cost over sales which is the cost per quantity divided by the price and this thing is going down but this whole thing one over the price or this one is going down so the ratio of the two doesn't change very much and we know this when we look more concretely firms with lower costs have prices which are lower and that lower price means that the cost per unit sales are roughly the same but of course it means that they have bigger sales because in the warfare of the market they're able to maintain a much larger range much larger sales base Costco is an example Walmart all of that then I want to show you one more thing I'm going to skip some data but we ask the question about countries so this is profit rate data across countries and here is the average profit rate in world manufacturing for a bunch of sectors the names of the sectors are down below the names of the sectors are below so I will get to them in a second but you can see that the profit rates don't equalize so if you look at world manufacturing by country the profit rates are unequal but that is not a surprise because we don't expect the world the profit rates to be equal we expect the profit rates on new investment to be equal and here the same country the same industries the same data except we calculate the profit rate on new investment and you can see how much they go this is food, textile, paper, mineral so on and so on and you can see the equalization around the average the average is not some mysterious Shroffian entity calculated by numbers this is just the average the fact is they oscillate back and forth so this is what it means to say profit rate equalization and it's perfectly consistent with inequality of profit rates by country I'm going to skip the other examples of this US data Greek data all of that because that's repeating the same point I have a lot of data in the book I would say the book is about 40% data yes so do I use to trade like small scale sweatshops so called sweatshops in terms of our scale and unit costs well it depends on whether they are small scale or not in China they're not small scale indeed in the United States in the beginning they were the scale everybody was sweatshops so the question then becomes are sweatshops reproducible conditions and the answer is no because they are generally based in the western world they're generally based on extreme conditions on conditions where you have a labor pool which can be forced to work in those conditions generally they don't have visas they're insecure in terms of their location in the country so you're drawing on a pool of cheap labor and you are definitely part of the non-regulating capitals in this case non-regulating capitals with possibly lower costs but they cannot use their lower costs to take over the whole city so to speak because their conditions are not reproducible so they are local pockets they're not free from competition they still have to sell their goods at the same price but the difference is that they can make a higher profit margin because they have lower costs and part of what I abstracted from what I said in the beginning is that the equalization of wages applies to where wage equalization can take place and this is an instance of a pool within a country now if it's in another country it's a different matter because there it's like having different land you have basically a condition of production where you get excess profit maybe until others reproduce it's not clear by the way another country the location is something that labor cannot necessarily cross but capital can capital is perfectly happy to go there and that's exactly how countries take advantage of that India, China, Indonesia say come to us North Carolina says we've got cheaper labor come to us so even though North Carolina labor may not move to New York City or New Jersey the capital will definitely move there and this is a constant theme in the mobility of capital is the other side of the mobility of labor so you don't need the mobility of labor per se in all of the standard enterprise equalization models they say abstractly we don't need mobility of labor because the mobility of capital will make the wages equal now that's not true but it does compensate for the mobility of labor if the conditions are there which is transportation infrastructure governance ability to take your profits out and all of that yeah wait there are some structural differences between say unionized workers and precarious and they exist in fact the other business is to a certain extent it's about that it's about that difference and we are not necessarily in new countries it's true that it's widespread in countries like China but we see them in New York it's just big absolutely there are no regulating capital the regulating conditions come where capital can expand and reproduce Uber is an example if you want to be a taxi driver you have to buy medallion medallion prices will go up to a quarter million half a million because demand was rising and the supply was very limited Uber comes along now suddenly Uber is the regulating price for taxis and the medallion price that those prices are supposed to Uber is dropping that's a transition from the old regulating capital for taxis which are these taxi industries to the new one and that transition should not be understood to be instantaneous or anything like that it's a struggle between two different forms and if Uber continues to expand and win the price of taxi services goes down definitely those medallions become worthless I mean there are people who work their whole life to get that medallion and they have to depend on some owner and now it's becoming to the point where they can't get rid of it and they've spent more money on the medallion than they just did something else so that's part of the the dynamics of competition losers and winners okay let me just do one more thing I didn't get your chance to have questions or a break but I need to finish this part because how do the choice of new methods of production there are two issues the generation of new methods but every firm, every capitalist every research business research institute is paying people for new methods and when in the United States when the US got to a certain point they began to heavily invest in ceiling ship technology first they did railroads because they want to get stuff from one part to another and the government helped but they were also private railroads but they wanted to invest in fast-saving ships why? because the market for materials and for finished products in Europe had to be reached and how do you get from there? you can't do it by railroad so you need to develop ship technology and businesses are very important in developing ship technology same thing for communications how did you know what was happening in the stock market in the US if you were in England well, ships there was no other way birds can't fly that far you could have a pigeon but from the US definitely didn't work so the ships but the ships also developed signaling devices semaphores to give information because the first one to get it can make a killing in the stock market oh, corn harvest was really good price of corn is going to go down sell now it was really bad by now and the ships would come and they would signal and so there was a competition for communications for transportation and of course for spying this is warfare advertising is propaganda mobility of capital is the invasion of territory that's what all it is and signaling and spying is a very important way of getting information companies will buy other people that's why they have no compete agreements by the way which are routinely ignored is not often worth pursuing but anyway the point is that the analogy to warfare is very sharp and if you look in the business literature they say you want to study the art of warfare if you want to be in business what you don't want to do is study Varian or Moscow you don't want to talk about a firm that's passive and maximizes profit and doesn't affect anybody else and it just does what is good for itself and therefore it's good for the rest of the world they're not interested in that they hire you as an economist don't admit that you read Moscow because they'll definitely have to get rid of you ok one more point profit rate profit rate can be written as unit price as a profit margin over capital intensity but you can think of that as price minus unit cost over capital per unit output physical output through by price then it is cost per unit price and capital per unit price or in other words cost sales margin and capital to sales intensity that's how the business literature does it and the reason for that is simple if you're aggregating an industry you don't have a single price but you have the money value which is sales so you can divide cost by sales which is money also now the question is how do you choose do this every time suppose that your choice of technology was one in which you have to choose lower cost and that's the argument I'm making right so this is a range of all the technological possibilities then this part is the space that you want to be in right you want lower cost you're going to survive in a war of competition if there's if it's neutral this is the change in unit cost and this is the change in capital intensity if there's a neutral range of possibilities so lower costs are not associated in particular with any change in capital intensity then the average is going to be in the center of this half space maybe with me that's just statistically because a lot of concrete factors that determine individual technologies individual markets and so on so stochastically you're going to end up here which means that your costs will go down but your capital intensity will be roughly the same as before there will be no rising organic composition of capital but costs will be falling definitely if however costs lower costs come because of expansion of scale expansion of capital intensity then the possibility space is going to be biased in the sense that you have a tendency for lower cost to be associated with more capital intensive production and so this is the shape of the curve and the feasible space is where costs are lower and capital intensity is higher because that's the available space so you're going to be in the center of that somewhere stochastically it doesn't matter the center but the point is then you're going to get an association of lower cost the change in the unit labor cost is negative with higher capital intensity which is a higher capital cost and that's just a stochastic thing but if that's the case then you get the argument in Marx and the falling rate of profit this is called Marx biotechnical change by the way in the literature and what that basically says is that if you can model this as your unit labor costs are some initial cost times a factor which is a factor of time and this is 1 minus something so this is less than 1 so this unit costs are falling and capital intensity 1 plus b times t so they're rising then the profit rate can be decomposed into this initial cost the cost reduction factor the capital intensity reduction factor and you get a very surprising result which is that the profit rate other things being equal will be decomposable into two terms 1 over the cost reduction factor and 1 plus b over the cost reduction factor and you can easily show that in this simple illustration the profit rate will tend to fall at some point I'm going to skip the details of this because it's in the book but it's simple baby algebra but you will get only two types of paths for the profit rate you get a path in which it rises at first and it falls or you get a path in which it falls once it begins falling it falls if capital a lower cost of production are statistically statistically associated with higher cost higher capital intensity now what's the relevance of this I want to just bring it back to the idea of a cost curve in the business literature they say the following suppose we have average fixed cost curve and we have prime cost curve average variable cost curve and the sum of these two is some kind of average cost curve that's basic algebra, actual cost curves don't look like that but that's another issue I can come back to if you want what the business literature says is that what your technical change does is to lower this but the cost of lowering this is to increase that in other words in order to get lower costs you have to commit a larger quantity of fixed capital on average and not for every industry that's a general drift and therefore these two have to add in such a way that the cost curve, average cost goes down so average variable cost you reduce prime cost raise the productivity of labor labor cost goes down you process materials more rapidly the materials cost goes down and the average cost curve has to go down and business literature treats this rise in the average cost curve as being essentially the paradigmatic case because they see it so often but if that is true then it necessarily implies that statistically, stochastically capital intensity will rise a little bit over time not from any aggregate but from all the individual decision some of you may be lucky to have a new technology that lowers your cost and lowers your capital intensity others will have the opposite but the average if it's in that direction will produce this kind of result now I bring this up because this relates obviously to two important questions the Okisho theorem which is based on the idea that firms do not set prices and this is based on the idea that firms do set prices and they set them according to their ability to lower costs so the key factor is not price taking the prices given but choosing the lower cost in order to be able to reduce price we've talked about this in 1978 in a paper essentially criticizing the existing Marxist literature Romer Andrew Glynn and others as well as the Swarovians all of whom treat competition in the same way that Neoplasma theory treated it really astonishes me how people say, well we're taking this from Marx and Samuelson, we're essentially the same and I'm not the only one to say that Marx and Samuelson are the same the monthly review school has in one of their and I cite this in the book a description of competition how do you know that it's monopoly well it doesn't look like competition what is competition and they say Milton Friedman explains what competition is I actually happened to a red note of Friedman because that was a textbook I used as a graduate student thanks to Gary Becker and it was about perfect competition so you get trapped into thinking that competition is perfect competition and then what you see must be due to monopoly how do you know that? well they're big oh big is bad because in perfect competition they have to be small I want to reverse the argument big is the means of competition it allows you to be more competitive more heartless one more point in the first issue of the Cambridge Journal of Economics is an article from a man who worked on these issues Jim Clifton and he makes the following point he says that people say that one firm owns a lot of industries then it's a kind of monopoly because they won't compete and he says no that's exactly false he actually worked for the agency that monitors these firms he says that's false if you own pizza making, tomato making and iPhone making in one firm when you make your profits where are you going to put your money when you put it back in your own firm you're going to put it back in the portion of your firm that makes the biggest profit and in fact he says those firms are more ruthless in their competition because they don't care which country, which region which nationality Kentucky Fried Chicken doesn't care whether you're on the west or the east they only care where they can make more money so his argument is that scale actually intensifies competition because it intensifies the mobility of capital there are no personal attachments no regional attachments no language attachment they go for where the rate of return is higher so they are in that sense pure in their evaluation of alternatives I'm almost out of time and I think I've run through a touch on the empirical evidence that I wanted to but this at least ends that part now I'm already a lecture and a half behind so I have to ask you because we have two things possible one is macro and the other is the crisis it's unlikely I'll be able to do both I do want to talk a little bit about macro I haven't even finished the empirical evidence here so I'm going to say I'm going to skip part of the empirical evidence which is chapters 8 in the book which is about why I would argue there is no evidence of full monopoly power that all the phenomena that are typically used to establish monopoly power come because they mistake what is a natural consequence of competition for monopoly because they're always doing imperfect competition let me give you an example you find a firm that has $2 million that's a barrier to entry wow that's a barrier to entry a barrier to whom a barrier to me that's for sure barrier to the usual professor that's for sure barrier to capital $100 million plant is not a barrier to capital a billion dollar plant is not a barrier to capital because you can borrow the money or aggregate the money and it doesn't come from your personal account it comes from your investors so the idea that a barrier to entry is due to the fiction that entry and exit must be competitive if you're tiny and I hope I've tried to persuade you that that's simply not the case there's no evidence for it then on this you can look at whether there are any correlations between concentration which is number of firms if you have 8 firms that's called the 8 firm concentration ratio you take the percentage of sales held by 8 firms any relationship between profit margins the answer is no is there any relationship between concentration of firms and profit rates the answer is no for every year where you can find such a relationship in another year you find the opposite relationship so if you look at it dynamically as this cycles and ups and downs you see there isn't any and this has become so much the case that the literature that began with Bain and the whole idea of imperfect competition in the 1950s has essentially collapsed they admit now that every study they do the next study proves them wrong so they dropped it and they talk about more concrete factors but they've dropped the idea of monopoly power they've dropped the idea of markups related to concentration, scale and so on but those same phenomena can be derived from the patterns that I've talked about and in that missing part of the book of the chapter 7 I do two things that trace the history of competition with Smith, Ricardo and Marx most people have no clue that there was another theory of competition before Friedman and then go on to talk about the rise of perfect competition the rise of imperfect competition John Robinson, Chamberlain, Kalecki and the post-cainzian school and all of that and try to make the point that where they talking about empirical phenomena it is exactly what you expect from a model of competition, real competition when they're talking about claims that monopoly power and concentration ratios you don't find any evidence for this at all now it doesn't mean that there's no such thing as monopoly the question is how would you know if it's a monopoly you can't say because it's big because that's certainly part of competition you can't say that it's slow entry and exit that scale issues and perfectly reserve capacity well if you're bigger you're not going to jump in so if demand goes up you're going to use more of your existing capacity if you're small you might jump in and then jump out because you're less to lose so reserve capacity is related to scale but that does not imply something inefficient on the contrary it's very efficient because it prevents you from jumping in with something that's going to be unused until there's enough demand for it so all of those phenomena I would argue are based on an attachment to and ultimately an allegiance to perfect competition because once you get attached to it to prove that you're not like them you don't have to prove that they're important because otherwise you're not like something that's not important and what's the point of doing anything then so you become attached to showing that that church is important in order to prove that you're important because you know where the church went wrong at least you know which bishop was bad I'm urging you to try to step back and say look if we had to start this from scratch what would we do how would it look and then the empirical evidence falls into place I'm going to skip that because I didn't get to it today at all but that's chapter 7 take a look at chapter 7 tomorrow I'd be happy to talk about it so what I want to move on to is the next step in the argument which is the argument I've made here turns out to be the foundation for the theory of macroeconomics of effective demand and the reason is I've argued here that the i-th firm investment of the i-th firm is a function of its expected profit rate in excess of the interest rate why do you need the interest rate because you're not going to bother if you only get what you can get from the bank right so if your expected rate of return on regulating capital so that's what the star is on regulating capital is what determines mobility of capital across sectors well that same thing implies in the aggregate so this is individual firm and this is the aggregate that same thing will imply that investment is a function of expected profit rate really regulating rate to be precise investment and this is exactly what Marx has and Keynes I'm sorry you can't see it okay right in black so this movement from the individual yeah I see what you mean individual firm profit rate is a function of the expected rate of return in excess of the interest rate but aggregating that up will give you also investment I said investment depends on that difference investment depends on the same thing in the aggregate and that is Marx explicitly he calls this profit rate of enterprise and in Keynes he calls this marginal efficiency of capital minus the interest rate so both of these here are actually explicitly mentioned as central to aggregation to aggregate movements but that is the foundation the analytical foundation of the theory of effective demand in Keynes this is how you start investment depends is given on profitability and you have a fixed savings propensity consumption propensity that's a multiplier right but you already have that in Marx and you already have it in the classical tradition of equalization of profit rates the difference is that Marx links this expected profit rate back to the actual profit rate and Keynes leaves this hanging in the air it doesn't mean he wouldn't have done it he died quite young Keynes died of heart disease quite young after an enormous labor trying to set up not only the theory but policy in advanced countries Bretton Woods all the arrangements so we don't know maybe he would have gone back he doesn't have a theory of competition that's clear but when he talks about competition it's very clearly not neoclassical competition so I'm going to argue next time Keynes properly that his own argument leads back to the theory of real competition and indeed leads back to the idea that investment is determined by the real conditions of profitability and that means that now we have a unified theory classical foundations for real competition Keynes would have no trouble with what I did with consumer theory that's pretty obvious if you read Keynes the foundation and that implies also a place for Keynesian economics and then we can talk about the effect of governments printing money and finance and all of that stuff which I want to talk about including what I've written recently about the problem that might be facing Britain if Corbyn comes into power the limits so I want to do that next time and if I get there then on Friday we're going to talk about the crisis the current crisis the same framework always it'll be the same consistent framework I don't need to invent that's not to say they're not concrete factors but I don't need to invent new hypotheses and that's what I mean by unified and that's what I admire about new classical theory and indeed about post-Keynesian theory because they're consistent but this is a different one okay folks you've been very polite and sat through this whole thing so time for pizza and beer and then tomorrow