THE THOUGHT OF KARL MARX PART EIGHT SECOND SEGMENT

[All right, all right, so I am terminally stupid. Scroll down and read Segment One first. Then look at the table. Then come back to this and read it. Next time I will get it right. aaarrrggghhh!]

You will notice that I have constructed the sector devoted to the production of devotional literature so that iron, corn, and theology books are required as input. You may wonder in what sense theology books can be required as input into the production of theology books. Let us just suppose that the writers of the new books in each cycle of production read and re-read the existing books so assiduously that they wear them out. Analytically speaking, what matters here is that none of the output of the books sector is required as input into any other sector but itself. [For those of a more formal turn of mind, the square matrix of unit input coefficients is semi-positive and partially decomposable, with one of the submatrices representing the sector of basic commodities and another representing the sector of luxury commodities, but we need not go into that.]

Now, let us get to it. According to Ricardo, the natural price, or value, of a commodity [which is to say, something reproducible, like corn or iron, not something non-reproducible, like land or an Old Master] is determined by the quantity of labor that is required, directly or indirectly, to produce it. By labor indirectly required Ricardo means the labor that was required to produce the non-labor inputs into its production. If we look at the Corn Sector in the little model above, we will see that 100 units of labor are required to produce 300 units of corn, so each unit of corn requires one-third of a unit of labor directly. But each unit of corn also requires 1/150 of a unit of corn, as seed presumably [I get this number by dividing the left hand side of the Corn Sector line through by 300, to find out what are called the "unit input requirements" of the Corn Sector.] Now, we have just seen that each unit of corn requires 1/3 of a unit of labor, so the corn that is used up in the production process of the Corn Sector must have required 1/450 of a unit of labor in the previous cycle of production. This labor is described by Ricardo as being "embodied" in the seed corn, and as being transferred to the output when the seed corn is used in the production process. The same sort of calculation shows that a unit of corn requires 4/75 of a unit of iron. Now, looking at the Iron Sector, we find that each unit of iron requires one unit of labor to be produced, so that means that the iron that goes into one unit of corn production must itself have required 4/75 of a unit of labor in the previous cycle of production. So, thus far, we see that a unit of corn requires 1/3 of a unit of labor directly, and (1/450 + 4/75) or 1/18 of a unit of labor indirectly -- 1/18 of a unit of embodied labor.

But wait, you will protest [and you will be right], in that previous cycle of production to which you have been alluding, corn and iron, as well as labor, were required to produce the corn and iron that are being used in this cycle, so there are some extra little bits of embodied labor carried over from an even earlier cycle, that must be added in. It doesn't take much mathematical imagination to see that we have here the makings of an infinite sum of bits of embodied labor. Two questions immediately present themselves: First, does this infinite sum converge on some finite quantity? and Second, if it does, what does it converge on? How much total labor, directly and indirectly, does it take to produce one unit of corn? Or, as we have learned to say, What is the Labor Value of Corn?

Well, it turns out that we have here a problem whose answer can be arrived at by setting up and solving a little system of simultaneous linear equations. The Table we have been working with gives us a great deal of information about the production of corn, iron, and theology books, but there are three quantities that it does not directly tell us about. namely, the Labor Values of corn, iron, and theology books. These are, as they say in elementary algebra classes, the unknowns [or, as Donald Rumsfeld would say, the known unknowns.] So, I am going to choose three symbols to stand for these unknowns. Let us let Lc stand for the labor value of corn, which is to say the total amount of labor directly and indirectly required for the production of one unit of corn. Li will stand for the labor value of iron, and Lb for the labor value of books. Three unknowns, three equations pretty easily arrived at. We can solve that baby! Tomorrow, I will show you the equations [back to the scanner -- ugh], tell you what the solution is [you are going to have to work out that bit of elementary math yourselves], and move on to the next step in the process of checking to see whether Ricardo's Labor Theory of Value is true.

THE THOUGHT OF KARL MARX PART EIGHT FIRST SEGMENT

WARNING: I will have to introduce some more tables, and also some little systems of equations, and I have not solved the problem of doing this gracefully in a blog. So I will scan the tables or equations and put them into the blog as pictures. My blog program insists on putting these scans at the beginning of the post rather than where I want them to be, so each time I need to insert one, I will close the blog post, post it, then create a separate post containing only the table or equations, post that, and then continue my text in yet another post. This is too stupid even to contemplate, but it is the only solution I can think of. My granddaughter is, alas, otherwise occupied. :)

We are now ready to engage with Ricardo's version of the Labor Theory of Natural Price [or Value], to see what it means, and to ascertain whether it is correct. For a variety of reasons, it is useful to change my original corn/iron model a bit by assuming that the surplus getters [capitalists, in this case] use a portion of the physical surplus to underwrite a sector devoted to the production of luxury goods. Technically, these are goods that require inputs of various sorts, but whose output is not required as input into either the corn or the iron sector. They are, in modern terminology, final goods. We could, of course, posit a sector devoted to the production of luxurious clothing or sporty cars or gourmet breakfast foods, but since we are explicating Ricardo, and therefore presumably analyzing the doings of stern, upright, seriously religious Protestant businessmen, I shall assume that the luxury good to which they choose to devote a portion of their surplus is theology books. By the way, some of you may be wondering why Corn Flakes and frozen Macaroni and Cheese dinners do not count as luxury goods, even though they, like theology books, are not used as inputs into any line of production, and thus are also final goods. The answer -- and it turns out to be super important, theoretically -- is that Corn Flakes and frozen Macaroni and Cheese dinners are wage goods -- i.e., things consumed by the labor producing sector, which is to say by the workers. Thus they do enter indirectly into the production of all the other sectors, because labor does. Way down the road, this is going to allow me to invoke a nifty theorem proved by John von Neumann to demonstrate exactly when Marx's sophisticated version of the Labor Theory of Value is true. I say this now just to keep up the spirits of the cognoscenti among you who may be yawning and wondering when I am going to get to the good stuff.

Here is the revised model:

TABLE

THE THOUGHT OF KARL MARX PART SEVEN

The theoretically most interesting and problematic of the doctrines of the Classical Political Economists is their explanation of how prices are determined in a laisser-faire capitalist economy. Why, you may wonder, is that so important a question? Well you may ask. I myself asked that same question of John Eatwell [currently Baron Eatwell and President of Queen's College, Cambridge], when as a young man in his thirties he taught a brilliant graduate course on Value Theory in the UMass Economics Department in the semester when I was first acquainting myself with economic theory. He was rather startled by the question, not anticipating that a total naif would be sitting in on his very advanced seminar, but the answer is quite simple. The two great questions of Classical Political Economy are, First, how is the annual social product [the "wealth of nations," in Smith's words] divided up among the three classes of society -- the landed aristocracy, the entrepreneurs, and the laboring class? and Second, what are the conditions of sustained economic growth? Growth and distribution are the alpha and omega of the classical school. It is what makes their theories, otherwise so out of date, interesting today. Now, in a laisser-faire money economy, the social product is apportioned to each class by the intermediation of money. Each class receives a share of the social product in the form of the money that it manages to lay its hands on. The landed aristocracy is paid a price for the use of its land -- we call it rent. The entrepreneurial class is paid a price for the use of its capital -- we call it profit. And the laboring class is paid a price for its laboring [or, as Marx will say, for the use of its Labor Power -- but that gets ahead of our story.] -- we call it wages. These prices -- rent, profits, and wages -- determine the distribution of the annual social product. The same processes of competition that determine the prices of corn and iron, cloth and coal, eggs and cattle fodder also determine rents, profits, and wages.

Confronted with this question, Adam Smith makes a series of brilliant conceptual moves that virtually define the discipline of economics ever after. [Aside: I have just re-read Chapter Two of my book, UNDERSTANDING MARX, in which I set forth Smith's innovative conceptual moves in some detail. If anyone is really interested in this subject, I strongly recommend looking at what I have written there. It is simply too detailed to reproduce here.]

He begins by observing that there is an ambiguity in the term "value," for sometimes we mean by the value of a good its usefulness to us in satisfying some want or enabling us to advance some undertaking. Water slakes our thirst. Cloth protects us from the elements. This aspect of any good Smith calls its "value in use," or, as we have learned to say, its use value. But goods may also be exchanged for other goods, and this aspect of them Smith calls their "value in exchange," or exchange value. When we consume some good, it is its use value that concerns us -- will this apple satisfy my hunger? Will that lump of coal burn well and provide warmth or energy to drive a machine? But in the marketplace, our concern is for the exchange value of a good. How many apples can I get in exchange for this bolt of cloth? How many bushels of corn for a ton of coal?

Drawing on the notion of nature as a system of universal laws -- an idea well-established in the late eighteenth century as a consequence of the manifest success of Newton and others in articulating that system in elegant mathematical form -- Smith suggests that society is a second nature, governed, as is physical nature, by universal laws. Instead of gravitation as the key to these laws, Smith offers the universal tendency of men to "truck and bargain" in the marketplace. [See David Hume's TREATISE OF HUMAN NATURE for a similar conceptual move -- in Hume's case, the principle of the association of ideas. Hume and Smith, of course, were good friends.]

We observe, Smith says, that in any given neighborhood or marketplace, there is a customary or usual price at which goods sell, and also a customary or usual wage paid to laborers, rent paid to land owners, and profit earned by entrepreneurs. These customary or usual prices may, of course, vary on a particular day as a consequence of momentary factors, such as a glut of corn one day or a scarcity of cloth the next. Smith, like Ricardo and Marx after him, was quite aware of what have come to be called the "laws of supply and demand," but he, as did they, considered these to be ephemera, not underlying determinants of the system of society. To those customary prices Smith gives the name "natural prices," calling the momentary fluctuations "market prices." The natural prices act, he says, like centers of gravity, drawing the fluctuating market prices to them [you see the influence of Newton.] From that day forward, one of the central tasks of Economics became the discovery of the determinants of natural price. Those of you who have studied economics will be familiar with the notion of natural price under its modern label, equilibrium price.

What then determines the natural price of a good in the market? Smith is actually rather confused about this question, and offers three answers without seeming to understand that they are different from, and in fact incompatible with, one another. One source of his confusion is his belief, which Ricardo shared, that in order to understand what happens when the relative prices [exchange ratios] of two goods change, one needs to find in the circle of exchanging goods one whose natural price never changes, so that any change can be traced to some alteration in the conditions under which the other good is produced. All of this is fascinating, but much too complex to go into here. [Once again, see my book.]

What matters is that Smith advances a seminal idea, on which all subsequent Classical Political Economy rests. The natural price of a good, Smith proposes, is determined by the amount of labor that is required to produce it.

Now, a small but important terminological matter. In the eighteenth and early nineteenth centuries, the term "value" was used interchangeably with "natural price." The value in exchange, or exchange value, of a good in the market was called either its natural price or its value. Thus, when Smith advanced the hypothesis that the natural price of a good is determined by the quantity of labor needed to produce it, he was offering a Labor Theory of Natural Price, or, what was to him the same thing, a Labor Theory of Value. That, just so you know, is the origin of this famous and controversial phrase.

In support of his hypothesis, Smith now sketches a little story in which is actually embodied a theorem in rational choice theory. Here is the entire passage, from Book I, Chapter 6 of WEALTH OF NATIONS.

"In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day's or one hour's labour.

And there it is! The Labor Theory of Value, in its first appearance on the world stage. It won't do in the form in which he presents it, of course, and Smith knows that. Indeed, in the very first phrase of the first sentence, he indicates why it won't do. This simple theory may hold for situations in which there is no accumulation of stock [hence no tools, farm animals, or other inputs into production] and no appropriation of land [hence no rent charged for the use of the land], but in the real world, all economic activity relies upon both "the accumulation of stock" and the "appropriation of land."

Just so we are clear, let me spell out the problem, even at the risk of being a trifle tedious. Suppose the deer hunters use bows and arrows to hunt the deer, while the beaver hunters use beaver traps to catch the beaver. [Bows and arrows and beaver traps are "stock."] Now, it takes labor to make a bow and arrows and also to make a beaver trap. Clearly, in deciding in what ratios they will exchange the deer for the beavers, both groups of hunters need to take into account that labor as well as the actual labor of hunting or checking the traps. It might be, for example, that beaver traps take only a few moments to make, but really can be used only once [the beavers wreck them trying to escape], whereas bows and arrows take many days to make, but can be re-used for years. In some way or other, this indirectly required labor will have to be taken account of if the two groups of hunters are to succeed in making rational decisions when they enter into bargaining with one another.

Smith pretty much gave up on this problem, and there things stood for forty-one years. Enter David Ricardo, arguably one of the three or four greatest economists of all time. The solution to the problem, Ricardo proposed, is to think of the stock -- the tools, raw materials, etc. used in the process of production -- as though they had embodied in them the labor that had been expended at an earlier time in making them or gathering them. When workers use those tools and machines as they worked up the raw materials into the finished products ready to be sold in the marketplace, we can think of them as transferring that embodied labor, along with their own labor, to the finished product. Thus, the natural price, or value, of the end product is really determined by the sum of the labor directly required in the production process and by the labor indirectly required in earlier periods of production. The sum -- of embodied labor and direct labor -- is the true determinant of natural price or value. This in a nutshell is Ricardo's version of the Labor Theory of Value, and it is, as we shall see, a dramatic advance on Smith's hypothesis, even though it is still not quite right.

At this point, I am going to stop, because in the next Part, I must incorporate some little systems of equations into the text, and despite the helpful suggestions of a number of you, I have not quite figured out how to do that. Also, I must lecture this afternoon to my graduate seminar, and I think I ought at least to make a show of preparing for my lecture. See you all tomorrow, if I succeed in sorting out the technical details of incorporating equations into the text.

THE THOUGHT OF KARL MARX PART SIX

Who gets the surplus?

In virtually every known society, the surplus is appropriated -- taken -- by some relatively small subset of the population, with the result that the members of that subset live better than the rest of the members of the society. We know these appropriators as kings, princes, oligarchs, pharaohs, priests, generals, landed aristocrats, tyrants -- and as entrepreneurs, merchants, advertising executives, lawyers, professors, and elected politicians. Almost always, the appropriators trick out their appropriations with justifications, rationales [or rationalizations] designed to persuade those from whom the surplus is taken of the rightness of the appropriation. The surplus getters suggest that they are bigger, stronger, more handsome, more charismatic, smarter, more productive, blessed by the Gods, sanctified by immemorial tradition, chosen by a vote of the people, riding the wave of history. And for the most part, those from whom the surplus has been taken -- the expropriated -- accept these rationales, sometimes grudgingly, quite often willingly or even enthusiastically.

The surplus comes in many forms. It is extra grain harvested from the fields, over and above what is needed to keep alive those who grow and harvest the grain. It is cloaks and mantles over and above what is needed to shelter from the weather those who shear the sheep, card and spin the wool, and weave the cloth for the cloaks and mantles. Sometimes it takes the form of swords made from iron that would otherwise provide additional plowshares or in the form of spears that could better serve as pruning hooks. [A little biblical reference there, for those of a religious turn of mind.]

In some societies, the conditions of life of those who get the surplus are only slightly more comfortable than those from whom the surplus is taken, but in many societies, the differences are so great that after a while the two groups of people seem not even to be of the same species or from the same world. The producers of the surplus are short, thin, careworn, illiterate, and short lived. The surplus getters are tall, handsome, healthy, cheerful, well-educated, and long-lived. The surplus producers struggle to keep their children from starving to death. The surplus getters send their children to Ivy League schools and on to the Grand Tour of Europe. Life is good for the surplus getters; not so good for those who produce the surplus.

How do the surplus getters get the surplus?

In many ways. Sometimes, like the Vikings of early medieval Europe, they simply sail up the rivers of Western Europe from the coast each Fall and steal the harvest as the peasants reap it. Or they ride into town as the bandits of the Southwest did and take the harvest at the point of a gun. At first, this is, and is understood to be, simple theft. But as the bandits return, year after year, the peasants become accustomed to the raids, and in an effort to avoid bloodshed, prepare the harvest for the stealing. This is then called taxes. Eventually, one lone bandit rides into town, not even wearing a gun, to collect the money the peasants have managed to acquire by selling their crops. The state has arrived.

Sometimes the surplus getters hold the producers in bondage, forcing them to labor on the lands owned by the surplus getters. Instead of seizing the surplus after it has been produced, they forcibly command the labor of the producers, allowing to the producers only so much of the annual product as is needed to keep them alive and allow them to raise up their replacements when they wear out -- their children. This is known as slavery. The condition of the slaves is often very little different from that of the nominally free producers whose surplus is taken from them, or appropriated.

How do the surplus getters get the surplus in a capitalist society. in which all men are free [we pass over in silence for the moment the condition of women], and all exchanges in the marketplace voluntary and based on mutual self-interest? That there are surplus getters even in this "very Eden of the innate rights of man" [CAPITAL, last page of Chapter VI] is manifest, for cheek by jowl with the slums of Manchester, Liverpool, and London are great mansions in which live the getters of the capitalist surplus. But HOW they get it is a mystery that eludes even the greatest minds of the Classical tradition in Political Economy. It is to the solution of this great puzzle that Marx devotes much of Volumes One, Two, and Three of CAPITAL, and we shall return to this question shortly, for at its heart lies the secret of capitalism.

What do the surplus getters do with the surplus when they get it?

This is actually the question that exercised Smith and Ricardo the most. In their view, entrepreneurs used the surplus [in the form of profits] to expand the scope of production, reinvesting it in an expanded labor force, new machinery, more fields under cultivation, and so on. The landed aristocrats, by contrast, used their share of the surplus [which came to them in the form of rents] to employ crowds of liveried servants, give lavish balls, maintain gilded carriages, consuming the surplus unproductively. Smith in particular was worried that as the demand for grain pressed on the available land and rents rose, so much of the annual surplus would be transferred to these unproductive expenditures that growth would come to a halt and the dreaded "stationary state" would result. It is worth noting that the notion of class conflict was central to classical political economy, and was not in any way original with Marx.

A share of the social surplus in most societies is consumed buttressing, protecting, and rationalizing the privileged position of the surplus getters. Some of that share is used to support a substantial military and police force which is available to put down any dangerous protests from those who are being denied the fruits of their productive labors. Some supports priests and churches, in which the virtues of submission and the promise of plenty in the next life serve to dull the resentment of the expropriated producers. Some must be devoted to maintaining lawyers and judges who can be counted on to resolve all disputes in a manner favorable to the surplus getters' interests. And there is even a bit of this share left over to keep in comfortable unproductivity artists to provide amusements for the surplus getters and philosophers to explain why all is for the best in the best of all possible worlds.

The secret of the explosive power of capitalism, as Smith, Ricardo, and Marx well understood, is that it alone, among all the forms of economy and society that history reveals to us, relentlessly allocates as much as possible of the social surplus to reinvestment for the purpose of expanding yet further the magnitude of the surplus. "Accumulate! Accumulate! That is Moses and the Prophets to the capitalists," as Marx writes in one of many brilliant passages in volume I of CAPITAL.

There are of course books to be written on every one of the observations in the preceding paragraphs, and Marx wrote a good many of them himself. But in the interest of brevity, I shall concentrate here on one question among all those that have been raised or intimated, namely, How in a capitalist economy does it come about that entrepreneurs exit from the market ever richer? Exactly how is it that in a capitalist economy the annual surplus is appropriated by one class, the entrepreneurs, or capitalists?

To answer this question, Marx must wrestle with and finally solve a technical puzzle concerning the determinants of the prices of commodities in the marketplace that had baffled Smith and in the end stumped Ricardo.

In the next post, we shall begin our discussion of this famous puzzle, leading finally to Marx's version of that centerpiece of Classical Political Economy, the Labor Theory of Value.

MORE TROUBLE

Once again, I am being defeated by this damned blog. Is there anyone who can figure out how I can put a table into a blog so that it looks the way it ought to look? I cannot figure out why the blog does not accept hard spaces so that I can space things out appropriately. Rats!

THE THOUGHT OF KARL MARX PART FIVE

We come now to the heart of this tutorial, Marx's economic theories. It is worth noting that the subtitle of CAPITAL is "A Critique of Political Economy." Marx's work is as much a critique of previous economic theories as it is an analysis of the economic reality of capitalism. Karl Marx was, at one and the same time, the greatest of the classical political economists, bringing to completion more than a century of brilliant theorizing, and also the greatest critic of classical Political Economy, devastatingly exposing the inner contradictions and inadequacies of the classical tradition. In order to understand what he is talking about in CAPITAL, therefore, we must spend a little time tracing the evolution of classical Political Economy from its origins in France in the middle of the eighteenth century to the work of its greatest exponents, Adam Smith and David Ricardo, against whom and in continuation of whom, Marx wrote.

Political Economy begins with the effort of Turgot and Quesney to understand the French economy in the eighteenth century. These two theorists, who, with their fellows, have come to be referred to as the Physiocrats, conceived agriculture as central to the wealth of Old Regime France, so much so that they disparaged the productive efforts of artisans and craftsmen. Their great contribution to the field, and to subsequent theorists, was their recognition that the on-going productive economic activities of a nation must be conceptualized as an endless cyclical process of REPRODUCTION. The output of the nation at one point in time becomes the input of the productive process at a later point in time, so that there is a cycle of inputs and outputs, a cycle of reproduction. This season's harvest provides the seed corn for next season's planting. The iron ore dug from the mines this year becomes the shovels used to dig iron ore next year, and so on. [This is the origin of the title of Piero Sraffa's seminal little book, PRODUCTION OF COMMODITIES BY MEANS OF COMMODITIES.] There are, of course, some goods that are by their nature not reproducible -- old master paintings, for example, whose value lies not only in their beauty but also in their scarcity. Somewhat more importantly, one essential input into production -- land -- is not in general reproducible [although it is of course possible, on the margins, to carry out landfill operations that increase the available land, such as the project that created the ile St. Louis in the Seine in the middle of Paris.] This latter element in the process of production set for the classical theorists the problem of providing an adequate analysis of land rents, a problem that was solved by Ricardo in one of the most brilliant achievements of the classical school.

Although the Phsyiocrats did not themselves call attention to it, the concept of reproduction can be usefully applied even to that input into production on which we shall focus most of our attention, namely labor, for this generation's output of the production process [the children] becomes the next generation's inputs [the parents], thus justifying the use of the word "reproduction" to apply to that process as well. There is even a third sort of reproduction of which we shall have to take account eventually as our exposition goes forward, namely the reproduction of the social relationships and cultural institutions and ideological formations that constitute a society. But we are getting ahead of ourselves.

And now, a word of caution before we begin. This is a complex subject, and I have found it useful to proceed slowly when expounding it, starting with elementary concepts and postponing until later the introduction of the complexities and complications that are a part of the finished story. So please, before you write long comments asking why I have not mentioned these essential complexities, show a little patience. If you really want to know whether I am just ignorant of those complexities, then read my two books on Marx before you rush to comment. Thank you.

In order to have before use a numerical example of the process of reproduction, I am now going to introduce a little model of a very elementary economy. Like all models, its construction requires a good deal of abstraction.

Let us begin by imagining an economy in which there are only two produced goods [or, if you prefer, two categories of produced goods], corn and iron [or agricultural goods and industrial goods]. Each good requires inputs of corn, iron, and labor [forget about land for the moment], and in each sector of production, the combination of these inputs results in a certain quantity of output of one good or the other. [In deference to Marx's brilliant analysis of the commodity, I am not yet referring to these goods as "commodities."] Since all of these theorists lived in the temperate zone of the Northern Hemisphere. they all assume an annual growing cycle, and we shall follow that tradition. Here is a simple numerical representation of the economy we are describing. I choose to treat the reproduction of labor on a par with the reproduction of corn and iron because that is the way Marx thought about it [as did Ricardo, by the way]. Sraffa's approach is different, although either way is convertible to the other easily enough. Call this System A:

Labor Input Corn Input Iron Input Output

Labor Sector 38 units 19 units 190 units

Corn Sector 100 units 2 units 16 units 300 units

Iron Sector 90 units 9 units 12 units 90 units

Total Input 190 units 49 units 47 units

A few preliminary observations about System A;

1. The size of the units is not indicated, but since this is supposed to be an annual cycle of reproduction, presumably they are pretty big [millions of tons of corn, or something like that.]

2. There is not the slightest indication of what technology of production is being used. Important though that obviously is, it is irrelevant for the purposes to which we are going to put this model. Following the Classical Political Economists, we assume that there is one and only one dominant technique used for the production of each good. If some entrepreneur introduces a new and more efficient technique, the pressure of competition pretty soon forces all the other entrepreneurs in that line to adopt it, and it becomes the new standard.

3. Notice [this is crucially important] that both corn and iron are required as inputs in each line of production.

4. I could make the model somewhat more elaborate, in an effort to do a better job of mimicking reality, but that would not change the theoretical analysis. It would just require us to use rather more sophisticated mathematics. I prefer the transparency of the simple model. In a more complex model, there might be hundreds of sectors of production, and in some of them [this too is crucial] some goods might not be used as inputs, but they might be used in the production of goods that were themselves used in the production process, and so we could say that they were indirectly required. In general, there will be a distinction [also crucial -- there is a lot of crucial stuff here] between those goods that are directly or indirectly required in every single line of production, and those goods that are not directly or indirectly required in every line of production. For reasons that will become clear, we shall call the first group of goods basic Goods, and the second group Luxury Goods. In System A, iron and corn are both Basic Goods.

5. This model is deliberately so simple that it even ignores fixed capital, which lasts through more than one cycle of production, and joint production, a situation in which a given technique of production has two or more salable outputs. As I said earlier, I am going to creep up on the more complicated cases.

Even the most cursory inspection of System A reveals that in each cycle of production, there is more output than is required for the next cycle's input -- 251 units of corn and 43 units of iron, to be precise. [The fact that there is, at this point, no extra labor produced is actually analytically important -- wait for it.] If we meditate on this fact for a bit, three questions should occur to us. All of Economics, Sociology, History, and Political Science is nothing more than attempts to answer these three questions.

The first question is: WHO GETS THE SURPLUS?

The second question is: HOW DO THE SURPLUS-GETTERS GET THE SURPLUS?

The third questions is: WHAT DO THE SURPLUS-GETTERS DO WITH THE SURPLUS WHEN THEY GET IT?

Tomorrow we shall begin answering these questions, in the course of which we shall hear about Natural Price, Productive and Unproductive Labor, Necessary Labor and Surplus Labor, Base, Superstructure, Ideology, The Labor Theory of Value, and other arcana. Stay tuned.