Marx’s Capital Volume III – Chapter 2 – “The Rate of Profit”

~300 words, ~2 min reading time

Chapter summary

In this chapter, Marx distinguishes between the rate of profit and the rate of surplus value. In money terms, surplus value and profit are the same. But, they are different as rates. The rate of profit in Marx is the profit divided by the capital expended (including both constant and variable capital, that is non-wage expenses and wages). The rate of surplus value is the profit divided by the variable capital (the wage bill). Marx says that capitalists really only care about the rate of profit, as they don’t care what their expenditures are, exactly – they just care about the total expended. As a result, changes in the degree of exploitation (the rate of surplus value) are difficult to discern.

Why It Matters

I’m not quite sure where Marx is going with this at this point, but a point he emphasizes is that the same rate of profit may obscure significant differences in the rate of surplus value. So, for example, a firm that is capital-intensive may the same rate of profit as a labor-intensive firm. However, the rate of surplus value is higher for the capital intensive firm since it generated the same profit with a lower wage bill – so, more “surplus labor”.

Where Marx Goes Wrong

This chapter lacked theoretical substance, for the most part, so there wasn’t much wrong with it. The key problem of the labor theory of value runs through Marx, and that is no different here. If we start from the assumption of derived demand/value imputation, however, then everything turns on its head. What Marx calls “profit” is what Bohm-Bawerk identifies as “interest”. “Profit” then, is the result of capitalists delaying consumption for the money that they’ve tied up in the capitalist production process. It has nothing to do with the exploitation of labor.

Marx’s Capital, Volume III – Chapter 1 “Cost-Price and Profit”

~600 words, ~3 min reading time

Summary

In this chapter, Marx lays out the idea of the “cost-price” of a good. Suppose, for example, that a firm pays $400 for means of production (including some wear and tear on capital), $100 in wages, and sells the good for $600. By Marx’s terms, there were $400 in “constant” capital, $100 in “variable” capital (that is, labor), and $100 in “surplus value”.

Marx also considers how changes in the components above change the value (and therefore sales price) of the good. A change in the cost of the means of production would change the value – and therefore sale price – of the good. However, a change in the wage simply changes the division in how much of labor creates “surplus value”. This follows from two of Marx’s premises: (1) the price of a good reflects the value. (2) the value reflects the total labor content embedded in the good. So, if the cost of the means of production increases, then that is a sign that the value of the means of production increases – this value is then passed through to the final product. However, if wages change, that, in itself, doesn’t change the quantity of labor in a good. So, it doesn’t change the value of the good.

This chapter focuses on distinguishing cost-price from other ways of accounting. For example: we wouldn’t use the entirety of durable goods in calculating the cost – on the wear-and-tear portion transfers value to the finished goods. Also, Marx emphasizes that the sale price – NOT the cost-price indicates the real “value” of the good. Eliminating profit then would not eliminate the exploitation of labor. Rather than the surplus value accumulating to the capitalist, it would accumulate to the consumer.

Why It Matters

One of the most significant points that Marx makes in this chapter is that changes in wages do not change the value of the good (as stated above). So, for example, if wages get cut in half, then the value of the good will still be $600 (as above), but the money will be divided $400 for constant capital, $50 for variable capital (that is, wages), and $150 for surplus labor.

This has profound implications for things like minimum wages and labor union negotiations. Because, in the Marxian framework, wages do not affect prices, wages and surplus value are effectively just dividing up a fixed pie. So, imposing a minimum wage, or having powerful unions, would simply result in workers getting more money.

Where Marx Goes Wrong

The fundamental problem: this chapter is infused with the labor theory of value. This is the opposite of the more correct view – which is reflected both in Austrian economics and in mainstream microeconomics, though using slightly different language. Austrians discuss the idea of “imputation” – that is, that value starts in the mind of the consumer, and then is imputed to consumer goods and up the chain of production to the various producer goods and labor. In mainstream lingo, the demand for labor is a “derived demand” – specifically, it is derived from the demand for the goods being produced. Both of these show value coming from the final good to the goods being used to produce that. This is the exact opposite of Marx – where value starts in the labor that goes into the good – whether raw labor or labor embodied in the means of production.

To outsiders, this might feel like a very philosophical disagreement – but it has profound scientific implications. If Marx is right about the labor theory of value, then it DOES follow that the only effect of minimum wages would be a decrease in profit. If modern economics is correct, then minimum wages can create negative employment effects and price effects as well.

Redesigning Microeconomics – Reflections

~600 words, ~3 min reading time

This semester I redesigned my Principles of Microeconomics course. I want to give a brief run-down of what happened and thoughts for going forward.

(1) Engagement/Mastery division – I still like this idea, though since I’m switching to specs grading (more detail in a later blog post), the “weighting” of each will go away. But, I think it is helpful to be clear with yourself what the point of an assessment is. Is it simply to get students to engage with the material, or is it to test students’ mastery of the material? It is helpful to separate the two.

(2) Short Paper process – This semester, I required rough draft, peer reviews, and final copy (including a response to peer reviews). I’m scrapping the process in the future. Or, rather, I’m making it optional. The justification for the process was twofold: (1) students write better for each other than for professors, and (2) students understand comments from other students better than from professors. Students that I talked to were mixed about the value of the peer review process’s value for them. And, from the reviews I read, a lot of them were pretty useless. As such, they were mostly busywork rather than meaningful.

(3) Engagement activity options – Students were a little confused by the fact that they had choices, but this went okay. One tweak: I’m going to scatter due dates through the semester rather than have everything due at the end, just for the sake of grading sanity.

(4) Grade proposal – Scrapping this. Most of them were written by students who had earned an A anyway. A few were by students who did worse – but they were rarely very convincing. Also, they didn’t prevent grade-grubbing. On the whole, I think was pretty useless.

(5) Comprehensive Final & Midterm Diagnostics (not for a grade) – I liked this. Building in a buffer worked, and scores turned out okay – no worse than when I used non-comprehensive tests.

(6) Class attendance – not going to be part of the grade going forward. Including it in the grade led to some students coming who were WAY disengaged in their time in the classroom, and others grubbing their attendance. Strong correlation between attendance and other grade elements suggest this is not necessary.

(7) Class preparation questions – went pretty well, though I need to refine them. Multiple choice need to be sure to reflect the final exam to some degree, and short answer should be more closely linked to Bloom’s taxonomy levels. I also asked students for “curiosity questions” that could be used to inform the class if time permitted. Scrapping these. Students often used these not for curiosity/discussion questions, but for “here’s a topic I don’t understand” questions.

(8) Flipping the classroom – worked pretty well. Class time was more focused on covering what students didn’t understand – so less wasted time. Classroom response system (“Plickers”) worked well, though I need to assign them at the beginning of the semester rather than have students pick them up and turn them in each time. I still need to work some on becoming a less-awful discussion facilitator.

Going Forward

Apart from changes listed above, I think that switching to Specs grading will be good. I’ve also debated switching to a more problem-based learning format, but don’t currently feel confident in making that switch for Principles of Micro. However, it might make sense to design my Environmental Economics course around this format…

Hacking Backward Design

~1000 Words, ~5 min reading time

The “state of the art” in course design is called “backward design”. This design philosophy isn’t new, by any means. But, let’s walk through what it is for those who might be uninitiated. First, though, let’s consider the opposite of backward design. I’ve seen a few names for this – I don’t like any of them. But, here’s how the course design runs…

Step 1: Pick the topics for the class. (Perhaps based on textbook.)

Step 2: Present the topics to the class using various methods (lecture, demonstrations, practice problems, etc.)

Step 3: Come up with a test or other assessments (papers, problem sets, etc.) based on what you did in class and assignments outside of class.

This is often the way that college professors will design a course, ESPECIALLY if we’re teaching it for the first time. The old joke runs that you just have to stay one chapter ahead of the students. And, often, that is basically the way that we approach course design – flying by the seat of our pants, so to speak.

However, there’s a serious weakness to this approach: the question of WHY you’re teaching what you’re teaching is often secondary. “It’s in the book” is hardly a good answer, seeing as so many things are in the book that we don’t teach. Now, that doesn’t mean that we don’t think about these things – but rather that the “why” question tends to be asked piecemeal, with little attention paid to the overall story of the course. A shame, since we know that one of the best ways that we learn is by making connections between what we know and what we’re trying to learn. A well-integrated course design that tells a clear “story”, then, can be profoundly beneficial.

So, what does “backward design” look like?

Step 1: Determine learning outcomes for the course and the various units within the course.

Step 2: Determine assessment instruments based on those learning outcomes.

Step 3: Determine teaching methods – lecture, demonstrations, etc.

Unlike the previous method, backward design is filled with intentionality. The “Why” question should be obvious to the professor, at the very least, even if it isn’t obvious to the students.

The point of this post, though, was not to convince you to use backward design. It was to help you “hack” it. Why hack it? Because most college professors have almost no pedagogical training. As a result, Step #1 above is extremely difficult. We may have learning outcomes handed to us by our departments (the Higher Learning Commission certainly wants us to!), but we generally don’t know how to write them ourselves. The fact that most learning outcomes that are given by departments are at the course level doesn’t help – as they tend to be so broad as to be basically useless. So, let me allow a small hint.

If you don’t know how to write learning objectives – or are even just a bit hesitant about doing that – skip step 1 above. Instead do this.

Step 0: Write a traditional test (essay, short answer, problems, multiple choice, whatever you’re comfortable with) based on what you anticipate teaching.

Step 1: Determine what learning outcomes that test would assess. A well-written learning outcome is basically a test question, but stated in terms of what the student has to do to answer it. (Notably, very few course level learning outcomes you find in syllabi are written this way.) Eliminate those that you realize aren’t actually important. Add new ones as you’re inspired.

Step 2: Determine how to assess the learning outcomes. (Note: it might be that the test you write is the best way to do it. But, it doesn’t have to be so.)

Step 3: Determine learning activities.

My own experience is that I’m not very good at writing learning outcomes in a vacuum. However, I love writing test questions. What this method does is let me start with something I can do, and then forces me to back up and ask the “why?” question.

Consider this example. Test question: “Suppose that the economy is booming, and incomes are rising. What happens to the demand for filet mignon, given that filet is a normal good?” This is a pretty standard Principles of Microeconomics multiple choice question. What learning outcome does it imply? Something like “Students will be able to identify the effects of changes in income on demand for normal goods.” Notably, “identify” is the verb I used. “Predict” would be appropriate as well. “explain” would NOT be. Why? Because the question doesn’t ask the student to explain the answer. So, as a professor, I can start asking myself – “Do I want students to identify or explain or both?” I can also use this outcome to imply other outcomes. Do I want students to be able to identify the effects on demand for inferior goods as well? What about other demand shifters?

Through this process, you can develop a refined list of learning outcomes based on the test you’ve written. Then, start working backward. If I decided, for example, that I want for students to “be able to explain the effects of changes in income on the demand for normal and inferior goods”, then I know that the original test question alone will NOT be sufficient. I may need to break it apart into a couple. If “explain” is the verb I want I’ll definitely need to change the responses, at the very least – I might even need to change from a multiple choice format to something else.

It’s a simple hack, really – but one that can be very time-consuming if done properly and completely. But, that’s what backward design IS. It’s going to be somewhat time-consuming precisely because it’s not slapdash. However, at the same time, it ends up saving you a lot of wasted time preparing to present material that doesn’t really matter, and lets you spend more time emphasizing and re-emphasizing what does matter.