After Law of Value 9: Abstract Labor I will conclude the trio of videos dealing with Marx’s method (not that I’ve conclusively said all there is to say on the topic, but all that I have to say for this series). The next 2 or 3 videos deal with the price-value relationship. I suspect that this will be of interest to many viewers as this is a topic full of confusion and varying interpretations. My plan is to stick as closely as possible to what I understand to be Marx’s take on the subject. For this reason I will draw somewhat on the Temporal Single System Interpretation’s literature on the topic, especially some essays by Alan Freeman and the book Frontiers of Political Economy by Guglielmo Carchedi, as this is the school of thought that I think most coherently establishes the logical consistency and relevance of Marx’s value theory (though I don’t claim to have an exhaustive knowledge of the all of the different takes on this topic and their surrounding debates.) Of course Marx’s writing on the subject, especially vol. 3 of Capital will be in the forefront of my considerations as well.
But in preparation for the task of preparing the scripts for these videos I thought some preparatory explorations might be in order. Perhaps the first place to start would be to explore the rationale behind and relevance of Marx’s observation that value cannot be created in exchange.
Value cannot be created in exchange
In his Vol. 3 transformation procedure Marx holds that total value equals total price. (Despite the fact that prices and values diverge, the coherence and relevance of value theory is maintained by the equality of total value and total price, and total surplus value and total profit.) Bohm Bawerk, Marx’s famous Austrian detractor, argued that this assertion proved nothing. “… it is perfectly true that the total price paid for the entire national produce coincides exactly with with the total amount of value or labor incorporated in it. But this tautological declaration denotes no increase or true knowledge, neither does it serve as a special test of the correctness of the alleged law that commodities exchange in proportion to the labor embodied in them. For in this manner one might as well, or rather as unjustly, verify any other law one pleased- the law, for instance, that commodities exchange according to the measure of their specific gravity.” (Bohm Bawerk, “Karl Marx and the Close of His System” p 36 of the 1975 Sweezy edition) He goes on to give an example where individual commodities do not exchange at their specific weights but total weight equals total price, thereby apparently showing the tautological uselessness of Marx’s first equality.
Like much of Bohm-Bawerk’s critique, his reading of Marx here is inaccurate and simplistic. Yet his critique is a good jumping off point for clarifying what Marx is actually arguing. Marx’s theory of value does not require that goods trade in exact proportion to the labor time embodied in them. Neither does his theory require that prices fluctuate around a ‘center of gravity’ that is embodied labor times. Rather Marx argues that prices and values systematically deviate and that this poses no problem for any aspect of his theory of capitalism.
Marx’s claim that total price equals total value is not supposed to “serve as a special test of the correctness” of his value theory. Rather it is a logical conclusion of his observation in Volume 1 of Capital that value cannot be created in exchange. This observation flies in the face of everything that is sacred to the Austrian school. As Bohm-Bawerk writes, “Where equality and exact equilibrium obtain, no change is likely to occur to the disturb the balance. When, therefore, in the case of exchange, the matter terminates with a change of ownership of the commodities, it points rather to the existence of some inequality or preponderance which produces the alteration.” (ibid p. 68) In other words, people exchange things because of a subjective difference in their estimation of the value of goods. Exchange happens because of an inequality in subjective estimations in value. This leads to the bizarre notion of “subjective profit” which, more than anything else, makes it obvious that the entire idea of marginal utility comes from an attempt to impose the objective rational of the capitalist investor upon the the subjectivity of individual consumers.
Two points should be made in response to Bohm-Bawerk. First, despite the impressions that could be had from a naive reading of the first chapter of Vol. 1 of Capital, Marx does not believe that every exchange involves an equality of labor times. The very concept of socially necessary labor time (SNLT) implies inequalities in exchange between the social value of a commodity and the individual value (between the labor time considered socially necessary for its production and the labor time actually spent on its production.) The gap between social and private labor is the mechanism whereby value regulates private labor for social purposes. (2) Rather, Marx is claiming that value cannot be created in exchange. While there can always be inequalities in exchange, these cannot be the source of profit because no aggregate addition to the total value of society can be created just by moving commodities from one person’s hands to another’s.
Now Marx does often ask his readers to assume, for sake of argument, that value and price are identical for individual commodities. Why?…because this makes it easier for him to show that profit must come from the exploitation of wage labor, rather than from an inequality in exchange. If value can’t be created in exchange we must look to production and the exploitation of wage labor to explain profit. But this type of profit is different than the super-profit that comes from selling below the SNLT. Thus it makes sense to assume the sale of commodities at their SNLT in order to look at the source of profit proper, rather than super-profit. Sometimes people, like Bohm-Bawerk, claim that Marx holds price and value equal for the first two volumes of Capital, later dropping it for the 3rd volume. But the concept of SNLT, which entails sale above and below SNLT, occurs at the beginning of Vol. 1!
Secondly, the Austrian school’s concept of inequality being the prerequisite to exchange is highly problematic. It rests on a conflation of two different definitions of the term “value”: on one hand the subjective estimations made by individuals, on the other the real, concrete prices which commodities sell for in the market. Just because we make subjective judgements about our preferences for commodities doesn’t mean that these judgements are the same as or have any bearing on the market prices of commodities.
I question whether the concept of “subjective profit” so popular to Austrian thought has any usefulness. It seems like a bad analogy to the real, concrete profit of capitalists. Whereas capitalist profit can be easily measured, there is no measure of this so-called subjective profit that individuals supposedly get in exchange. Yes people buy things by their own free will. But on what basis can we say that this is a result of their preferring a commodity more than they prefer money? Money only has value because it can buy things. To say buying deodorant demonstrates that I prefer a $5 stick of deodorant more than I prefer $5 in cash seems to overlook the obvious fact that a commodity worth $5 has just exchanged for $5. I have exchanged one use-value for another yet the amount of economic value I have has not changed. While there has been a transfer of use values there has been no transfer or value. While the Austrian instinct is to follow the movement of these use-values, to conflate their circulation with the motor force of capitalism, Marx is more interested in the movement of value. Since value can’t be created in exchange, the motor of capitalism is the exploitation of wage-labor. This allows Marx’s gaze to focus on production, class, the movement of value… all of the things that the bourgeois economists try to abstract out of their theory.
We need look no further for an illustration of the problematic conflation of subjective value and real market prices than Ludwig Von Mises’ “Human Action”. P. 329: “Valuation is a value judgement expressive of a difference in value. Appraisement is the anticipation of an expected fact. It aims at establishing what prices will be paid on the open market for a particular commodity or what amount of money will be required for the purchase of a definite commodity.” and later:” “The valuations of a man buying and selling on the market must not disregard the structure of market prices; they depend on appraisement. In order to know the meaning of pr ice one must know the purchasing power of the amount of money concerned.” (Human Action, p.329, The Scholars Edition).
Here Mises clearly states that our subjective valuations are not the same as market prices and that market prices effect our subjective valuations. It is a logical conclusion from here to the fact that an exchange of $5 for a stick of deodorant with a $5 price tag is an exchange of equivalent values (value defined in this objective sense) regardless of what the personal valuations of individuals are regarding deodorant. Mises goes on to assert that these market prices are just the result of personal value judgement. But just because market prices are formed in the process of people making judgements does not mean that these judgments determine the exchange ratios between commodities. Regardless, once one acknowledges the fact that prices are an objective quantity one has to admit that value cannot be increased merely by trading two commodities with the same price. Whether or not there is a “subjective profit” (and I don’t think this can be proven or that it has any relevance ) has no bearing on the fact that value can’t be created in exchange.
On with the story…
If value can’t be created in exchange then this puts us quite far along in our path to understand the value price relation. The exchange process is one of measuring the value of commodities against each other. If a commodity is exchanged above or below its value then value is transfered from one person to another. This can be a source of profit for one person but it cannot increase the total amount of profit in society. Though Marx doesn’t use the term, sometimes one hears the words “super profit” used to describe this profit arising from unequal exchanges.
If profit can’t come from exchange then we must look to production for it. There is one commodity that can produce more value than it costs to buy. This is labor power. Labor power is the only commodity whose cost of production (the cost of the means of subsistence) differs from the value it transfers to the final product. The amount of value created by the worker in production cannot be determined by looking at the wage. It can only be determined by looking at the total amount of work that has been done. This is the source of profit proper.
Marx’s theory of SNLT contains both types of profit, profit proper and super-profit. All capitalists in an industry exploit labor and thus make profit. But they also compete to outsell each other in the market by introducing new production techniques which allow them to produce under the SNLT. This allows them to appropriate value through exchange, hence making an additional super-profit on top of the profit proper.
The source of this super-profit is the surplus value created by workers in other firms. It works like this. All capitalists in an industry must at least cover their costs of production or else they will go out of business. So let’s assume all firms are at least making enough to cover costs. Now if the SNLT corresponds to the modal (not average) level of productivity in an industry this means there will probably be firms operating above, at, and below the SNLT. Firms operating above the SNLT will lose business and make less profit. Firms operating below the SNLT will get more business and realize more profit. The more efficient firms carve out a larger space for themselves in the market, squeezing out less efficient firms. They cut into the profits of competitors. Less efficient firms are not able to realize all of the surplus value they have created while more efficient firms realize more profit than just the surplus value their workers created.
If value can be transferred in exchange, and if this transfer of value comes through redistributing surplus value created in production, then we already have the tools needed to understand Marx’s theory of Prices of Production. Sometimes we are told the notion of prices of production involves some modification of Marx’s value theory. I do not believe this to be the case. All of the tools we need to understand prices of production are already present in the notion of SNLT, and all of these points flow logically from the observation that value can’t be created in exchange. (I will leave the topic of prices of production for a future post.)
The Fraternity of Capital
The fact that surplus-value is transferred in exchange allows Marx to theorize the interrelations between different factions of the capitalist class. The theory of prices of production demonstrates that the specific profit a capitalist accrues are not just the result of surplus value originating in their own workforce. Their profits also consists of surplus value transfered in exchange. Thus the capitalists class, as a whole, exploits the working class as a whole.
This however only covers the relation between different productive capitalists. There are also merchants, bankers and the state to consider. Merchants don’t create value but they siphon off value created in production by taking a cut of the Industrial capitalist’s profit in exchange for bringing the product to market. Bankers charge interest for loans to industrial capital. The state siphons off tax revenue. These interactions bind the different factions of the capitalist class in their united interest in the daily exploitation of wage labor. We see the cohesion of the class most strikingly in a crisis where the state must act as the arm of the collective capitalist class to preserve the institutions of wage labor at all costs.
Obviously individual capitalists compete against one another to get more of this super-profit then their competitors. Obviously there are times when some factions of the capitalist class have power over others. For instance, WalMart seems to have the ability to dictate profit margins and production techniques to producers. Or, to take another example, the banking class seems to have a dominant voice in the state’s attempt to mediate the current crisis. But, despite this competition, the one thing that is always constant, the one feature that makes the rest of this system possible, is the exploitation of wage labor.
1. For one, the use of the word “profit” is problematic because it too closely conflates capitalist investment activity with consumer behaviour. Capitalist investment is an objective, measurable process. Consumer behavior is not. Austrians argue that utility is ordinal. But capitalist profit is not ordinal. It is clearly delineated in objective quantities of money. Capitalist profit cannot emerge merely from exchange, as discussed above. Use of the word profit for both phenomenon is clearly an ideological device for obscuring the nature of capitalist profit.
Consumers don’t take their subjective profit and use it to reinvest in the creation of more profit. They don’t hire accountants to keep track of their subjective profits. The state can’t tax their profits. There is really no way that this concept of subjective profit has any relation to the real profit of capitalists.
2. Now SNLT is an average, a center, which pulls less efficient producers towards it, punishing less efficient producers, disciplining labor to achieve a social average. But this center point which labors are drawn to is also constantly in motion as the same process also rewards those who produce under the SNLT. This is why we can’t think of Marx’s theory of value as an equilibrium theory. The theory does not contain any final resting point at which supply and demand meet, and labor stops undergoing revolutions in productivity.