Law of Value 10: Price and Value

[This is video 10 in my ongoing Law of Value series. It's a controversial topic... so, let's see what folks think of my attempt...]

Here’s a yo-yo. Let’s say it took an hour to make, parts and everything. And here’s a bag of high-fructose jelly beans. Let’s say they took 20 minutes to make. What if they both sold for $5, despite having different labor contents? Wouldn’t this be a big problem for Marx’s value theory?

When people get their panties in a bunch about price/value it’s over this issue of price and value not being the same all the time.  Ack! Is this non-identity of value and price the end of Marx and the end of all radical politics?

I hope not. After all, the reason we have two concepts, value and price, is because they are not the same. It is the relation between them that counts. It is the relation between them that explains the inner mechanisms of capitalist production and exchange. If value and price were the same we would automatically know how much labor went into a commodity and what level of output we needed to meet societies demand. But if we already knew all of these things then there would be no need to have value or price or even a market for that matter. We could just plan everything on a computer.

But we don’t have a planned economy. How many yo-yos and jelly beans should society produce? How much of society’s labor time should go in to each? Nobody knows! And when the capitalist buys plastic and string and hires yo-yo makers she doesn’t know how much profit she’ll make.  And when we go to the store we can’t see how much work went into our yo-yos and jelly beans! These decisions all must happen through the fluctuation of price signals. These fluctuations reflect back upon production to discipline and apportion labor.

Discipline and Apportion

When we say that labor is ‘disciplined’ we mean that Joe Shmoe on the jellybean assembly line is pushed to work at the average level of productivity. On the shop floor he is pushed by the speed of the machine and his boss. But the machine and his boss are being pushed by competition in the market to lower the Socially Necessary Labor Time it takes to make jellybeans. (see my video ‘Socially Necessary Labor Time’)

When we say that labor is ‘apportioned’ we are talking about how many people work at the jelly bean factory and how many work at the yo-yo factory, and so on. In other words, we are talking about the division of labor.

The division of labor and the SNLT determine what is produced, how much is produced and what the values between these commodities are.

But the unique thing about capitalism is that these decisions about disciplining and apportioning labor only happen after the labor has been performed. Price signals are judgements on past labor which then influence future labor (see my video Production and Exchange). As the products of labor leave production, enter circulation and then become inputs into future production we have a continual feedback loop of information.

Production and Exchange

This feedback loop could be confusing unless we remember this important principle:

‘value cannot be created in exchange’

Once you understand this almost everything else falls into place. Value is created in production by human labor. It takes the form of commodities with definite values. Commodities enter the market place where they acquire prices. Sometimes these prices are above their values. Sometimes below. These signals act back upon production to discipline and apportion labor. Thus the enormous, complex division of labor in a capitalist society is coordinated through the value relations between the commodities.

Because value cannot be created in exchange this means that the exchange of commodities is a zero-sum game. If some commodities sell above values then others must sell below. There can be no aggregate increase in value merely through the process of commodities changing owners. To have new value there must be new labor.

Unlike neoclassical theory where prices arise merely from the collision of subjective motivations of individuals bartering, totally abstracting away from the production process, the Marxist theory of of value and price directly links these phenomenon to the need for society to reproduce itself through a capitalist division of labor.

Value, Price and Money

Yo-yo’s don’t walk around with “1 hour of labor” written all over them. We only know the social value of a Yo-Yo through its money price. This is what we mean when we say that price is the ‘form of appearance’ of value. It is the visible, tangible form that value takes in the world. We only see the relations between laborers through the exchange ratios of commodities. Money is the god of all commodities. It is the one commodity that all other commodities measure their value in. Thus price is a very special type of exchange value. Prices represent values in the abstract. They are measures of abstract labor (See my video on Abstract Labor).

Thus when the price of a jellybean rises above its value this means that the jellybean commands more money than its value, that it commands more abstract labor in exchange than it required in production.

If value can’t be created in exchange this means that the total amount of value produced is always equal to the total prices of these commodities. But individual values and prices can and must diverge in order for the price mechanism to discipline and apportion labor.

Demand and Supply

One of the main reasons that prices deviate from values is the constant fluctuations of demand and supply. As capital revolutionizes the productivity of labor, values change, output and prices change, and demand and supply fluctuate. If demand for jellybeans is higher than supply then the prices of jellybeans rise above their values, they command more abstract labor in exchange, and this triggers a reapportioning of labor to bring supply in line with demand.

In the case of a monopoly or oligopoly supply is kept artificially low so that prices rise and the monopolists get extra profit.

If the supply and demand of yo-yos, jellybeans and all other commodities magically balanced, then prices would equal values. (That is, if we are abstracting from prices of production.) But if this was the case we wouldn’t have much need for price. We’d automatically know how much labor input went into anything we demanded and we could just organize everything on a computer without a market.

Side Note on Marx’s Method

Sometimes people think that profit comes from unequal exchange. This can be true for individuals but not for society as a whole because value cannot be created in exchange. One person’s loss is another’s gain. In order for there to be an aggregate increase in society’s profit there must be exploitation of workers for surplus value. In order to not confuse the individual profits than can occur from unequal exchange with the surplus value generate from exploiting workers Marx often suggests that we imagine that values=prices. This allows us to more easily see the origin of surplus value.

This does not mean that Marx actually thinks that prices always equal value, or even that they gravitate toward that state over the long run. In fact he says just the opposite: that demand and supply rarely meet and that prices and values are rarely the same.

Marx’s argument about surplus value, and all of his other conclusions as well, are totally valid whether or not values equal price. Sometimes people think that by pointing to value-price divergences they have somehow undermined the theory of surplus value. This is an error.

Review:

Before we move on we should review the main points thus far: Value can’t be created in exchange, only moved around. Money is the measure of value. If a commodity sells above its value this is the same as saying that it commands more labor in exchange than the labor that went into it.

Component Parts of Value

I haven’t been to a yo-yo factory but I picture an assembly line of people wrapping string around yo-yos. There’s probably another room where plastic gets poured into molds. But this isn’t all of the labor that goes into a yo-yo. Before any of this labor can commence materials much be purchased: string, plastic, molds, paint. And all of those inputs come from past labor processes elsewhere in the world. Every labor process has new active labor, which Marx calls “living labor”, and inputs from past labor, which Marx calls “dead labor”.

Dead labor cannot create value. The cost of purchasing inputs like string and plastic is passed onto the output prices of yo-yos, but no new value comes from this labor because it is already done laboring!

Living labor creates the new value. The worker creates the value of their wage so that the capitalist makes back their investment. The worker also performs surplus labor for the capitalist. This is surplus value.

At the beginning of the day the capitalist lays out money for inputs and wages. This is her cost of production. If she wants to continue to make yo-yos tomorrow she will need to make back enough money to buy inputs and wages tomorrow. Thus prices are inherently tied to the need for the system to reproduce itself. She also needs an incentive to invest: this is profit. Thus prices are inherently tied to the need for the capital to exploit labor.

The capitalist doesn’t lay out anything for surplus value. This she acquires from the worker for free. That’s why it’s called exploitation. But the profit capitalists get from selling their commodities is not always equal to the surplus value they produce. If the price of yo-yos rise above their value then when they are sold the capitalist’s profit is higher than the surplus value contained in the product! Surplus value has been transferred in exchange.

I started by saying that price and value were not equal because they were different concepts. Now we can add that surplus value and profit are not always equal because they represent different concepts as well. Surplus value can only be created in production but it can be redistributed in exchange.

If a capitalist’s profit is higher than the surplus value they create in production we call this “super-profit”. As we discussed in the video on SNLT, super-profits are the prime motivating force of a capitalist economy. They drive innovation and attract investment. They are a necessary part of capitalist competition.

Prices of Production

Now if you really want to talk about surplus value being redistributed in exchange then you have to talk about Prices of Production.

It starts with a puzzle:

Let’s say jellybeans take just a tiny bit of living labor compared to all the dead labor that goes into the inputs. You basically buy a lot of sugar, corn syrup and die, and and then you hire someone to push some buttons in factory while machines turn that sugar into bean shaped sugar. But let’s say that yo-yos take a lot more labor in comparison. You buy some plastic and string and then you have to hire people to make plastic molds, paint the yo-yos, and then let’s not forget how long it takes to wind up a yo-yo…. So the two industries have different proportions of living to dead labor.

Since the yo-yo factory has a higher proportion of living labor we can assume (assuming equal rates of exploitation) that the yo-yo factory must produce more surplus value than the jellybean factory. More workers means more value means more surplus value. We’d expect the yo-yo factory to be more profitable.

But there’s also this phenomenon called Average Profits.This is where the puzzle comes in. If capital is free to invest in any industry, free to move in search of the highest profits, this causes a tendency for profit rates to equalize. Jellybean makers start to invest in the yo-yo industry, cutting into their profit margins. Capital flows from one industry to the other. Supply and demand change. Prices change. Eventually, assuming the free flow of capital, jellybean makers and yo-yo makers enjoy the same rate of profit.

Now you see the puzzle. One industry produces more surplus value than the other, but they have the same rate of profit. HOW CAN THIS BE?

If we remember that value cannot be created in exchange, and that surplus value cannot be created in exchange, then we can easily solve the puzzle. First we note the following two principles:

1. Total prices equal total values.
2. Total surplus value equals total profit.

And the answer to our riddle is this: Surplus value is redistributed between capitalists to form an average rate of profit. That should seem simple enough since we’ve already discussed the redistribution of value in exchange.

How do capitalist’s redistribute surplus value? Do they send it to each other in the mail? No. Prices do this work of redistribution. The prices for some commodities fall, others rise, and thus capitalists gain and lose surplus value in exchange in a way that equalizes profit rates. In this way surplus value becomes less of the property of the individual capitalist and more the property of the capitalist class as whole, uniting the class in their common interest in the exploitation of labor.  These new prices, the prices which redistribute surplus value to form an average rate of profit, Marx calls “Prices of Production”.

Prices of production systematically deviate from values yet they are directly related to values. The total level of surplus value created determines the amount of value that can be redistributed to form these new prices of production. In addition, the tendency towards an average rate of profit is merely a tendency. Just as supply and demand fluctuate, never balancing, so do profit rates.

Another note on method.

So we see several different factors to keep in mind when discussing price.

If there is no equalization of profit rates and demand and supply are in balance then we can say that price=value.

If we assume a perfect equalization of profit rates and supply and demand are in balance then we can say that price=prices of production.

If we then let supply and demand fluctuate around these prices of production we get market prices.

Sometimes Marx just talks about value, sometime he talks about prices of production, and sometimes he talks about market price. These are three different levels of abstraction. Many mistakes have been make by people not paying attention to what level of abstraction is currently being discussed. Bohm-Bawerk, for instance, complained that in one place Marx said that value=price but in another place said that prices of production=price. He thought Marx was contradicting himself. But had Bohm-Bawerk been interested in actually reading Max a little more closely he might have realized that Marx’s analysis takes place on many levels of abstraction and that we must keep these levels in mind at all times if we want to understand what is going on.

We should also keep in mind that Marx’s central conclusions about exploitation, crisis and all of the other antagonisms of a capitalist society still hold whether we are talking about value, price of production or market price. Regardless of the level of abstraction, value cannot be created in exchange, and surplus value can only come from the exploitation of the working class.

Conclusion

We can only conclude that Marx gives a a quite robust and practical explanation of the way that commodity exchange regulates the reproduction of a capitalist division of labor and class relations. There is definitely a lot more to say on the topic, and a number of controversies to examine. On my WordPress blog you can find footnotes and references pointing you to more information and resources on this topic.

And now we can see how radically different Marx’s theory of price is from his Neoclassical critics. For neoclassical economics price is a reflection of equilibrium, of a state rest where all utilities are maximized. For Marx price formation is a ceaseless process of fluctuation that is part of a much larger process of value formation and distribution as capitalists compete to exploit workers better than their competitors, thus constantly revolutionizing the technological basis of society.

From Marx’s theory of price we can immediately move to a theory of capitalist crisis. Because the tendency toward an average profit rate redistributes value between industries there is no way to keep firms from investing more and more in machines and less and less in workers. In fact the race for super-profit compels capitalists to decrease socially necessary labor time by spending more on machines to make workers more efficient. This means while individual capitalists race to increase their own super-profit, that over time the average profit rate of the economy as a whole falls. The worker finds herself confronted with a greater and greater mass of machinery, while the capitalist class finds itself getting a lower and lower rate of return on larger and larger investments. The time is right for a crisis!

Footnotes: Actually this is more like a glossary of terms and topics:

Value: Marx’s terms have an elastic quality. In different places they stretch or constrict to contain more or less content.  This is because Marx understands things (and processes) only relationally. Things only have meaning in how they relate to other things. Value is a particularly elastic term because it sits at the very center of capitalist social relations. Sometimes when Marx says “value” he is talking about the exchange value of commodities, sometimes he is talking about the labor that goes into a commodity, sometimes he is talking about the form of social relations unique to a capitalist society. Understanding value theory requires that we are aware of what particular aspect of value is being referred to in a specific context. See Bertell Ollman’s “Dance of the Dialectic” for more on the elasticity of Marx’s terms.

Quality-Quantity: Value theory has both qualitative and quantitative dimensions. It’s a theory of social relations. In contrast to predecessors who treated categories like capital and labor only at the level of content, Marx was concerned with the form of these things took in a market society. In such a society they take the form of value relations and these involve certain laws, imply certain social relations, fetishism, etc…. These are all the qualitative aspects of value theory, in many ways the most crucial aspects of his theory to understand for formulating an understanding of the radical challenges of anti-capitalist politics.
But value theory also has a quantitative dimension, which comes to the foreground when we look at the value-price dimension. At times in the 20th century, due to the persistent myth that there was something internally inconsistent with the quantitative side of Marx’s value theory, Marxists have attempted to distance themselves from the quantitative aspects of value theory, instead developing approaches which attempted to side-step these quantitative aspects by focusing only on the qualitative aspects of the theory. This is no longer necessary, see my vid on TRansformation Problem.

Indirectly Social: Marx calls this unique way of organizing labor “indirectly social”. Rather than operating on some sort of plan where we decide how much labor should go into the production of various things our labor is distributed indirectly through the price signals of the market. We perform private labor. This labor is not social labor when we are performing it. It only becomes social after we finish working when the products of our labor meet in the market. Here in the market we find out if our labor has been socially useful and if it has been performed at the average level of efficiency. Isaac Rubin has a good discussion of Indirectly Social labor here.

Appropriation of Value: Bourgeois theory often confuses the appropriation of value with the creation of value in its idea of returns to factors of production. A bourgeois economist might argue that because the owner of land gets rent from their land that this means that the land has produced value. But in Marx’s system only human labor can produce value. The rent a landlord gets is an appropriation of value. The value is created elsewhere and the landlord appropriates it. (There’s a much more complex theory of rent, but that’s another topic.) Or we might hear that risk creates value. It could be that risky ventures require a greater potential reward to encourage risk. But there is a difference between making a big monetary reward on an investment (appropriating value) and actually creating value.

Money: Marx sees money as the embodiment of labor time in the abstract. He builds this theory directly from his theory of the commodity. Commodities have both a use-value and an exchange-value. The use-value is a specific dimension of the commodity particular to each object and their various uses. Exchange-value is a universal, abstract dimension of the commodity. It is the empty quantitative relations between a commodity and all other commodities. It is numbers, not qualities. This leads to the separation of use and exchange value. Use-value stays in the bodily form of the commodity while exchange-value separates itself from the commodity in the form of money. Money becomes the commodity that all other commodities measure themselves against. As such it is the universal measure of value and the universal measure of abstract labor. While Marx’s theory of money is robust and historical enough to allow for the evolution of non-commodity forms of money, at the abstract level he roots his analysis of Money in the money commodity (usually gold). Money gets its value from the fact that it is a product of labor. Money itself is a commodity with a use-value and an exchange value. But because its use as money becomes its purpose in measuring the value of other commodities this leads money to have some rather unique qualities. I will delve more deeply into the topic of money in a future video in this series. The best thing to read on Money is Marx’s “Critique of Political Economy“.

Equalities: Marx famously held three equalities to be true for the economy as a whole: 1. total value equals total price; 2. total surplus value equals total profit; 3. total value rate of profit equals total money rate of profit. This is discussed in vol. 3 of Marx’s Capital Part 2.

Organic Composition: the ratio of constant to variable capital is called the organic composition of capital and is drawn as c/v. The higher the organic composition in society as a whole, the lower the rate of profit. This is discussed in vol. 3 of Marx’s Capital, chapter 8.

Prices of Production: If capitalists receive an average rate of profit regardless of the ratio of constant to variable capital, how do prices of production still regulate the division of labor? Prices of Production still allocate labor because wages and surplus value are still involved in the prices of commodities. But, yes this allocation doesn’t happen as smoothly as it would in a world with no average rate of profit. In fact we already know that there is a systematic tendency in capitalism for capitalists to replace workers with machines. This increases the productivity of the remaining workers, allowing capitalists to produce below the SNLT and thus gain super-profits in exchange. Prices of production allow capitalists to continue to automate production without being punished for producing at a lower individual rate of profit. But if firms are replacing more and more workers with machines then less and less surplus value is being produced relative to the cost of all those machines. This leads to a Falling Rate of Profit in the economy as a whole. This is why in vol. 3 of Kapital Marx immediately moves from the discussion of Prices of Production to the theory of the Falling Rate of Profit. The tendency of the rate of profit to fall can lead to crisis, like the one we are in now. The rate of profit is only restored once enough capital value (ie the costs of production: workers, inputs) has been destroyed or devalued. See my video on the Falling Rate of Profit or any of my coverage of Kliman.

Input and Outputs prices: There is debate amongst Marxists as to the proper way to theorize input and output prices under Prices of Production. In short, many argue that input prices should not be valued at their original actual cost to the capitalist, but instead by the price it would cost to replace those inputs. This is called the ‘reproduction price’ of inputs. The logic behind this is that if prices of inputs rise I need to sell my product for more if I am going to repeat production tomorrow. This leads to a static equilibrium procedure in which input prices are retroactively revalued to meet output prices. But this process of holding input and output prices equal leads to the transformation problem and the various partial solutions to this problem. In response the Temporal Single System Interpretation (TSSI) holds that input prices should not be revalued to equal output prices, but that, instead there should be a temporal process in which output prices become the input prices of the next period, not the one that has already passed. Rather than valuing inputs at their ‘reproduction prices’ the TSSI folk value them at their ‘pre-production reproduction price’. That is the reproduction price of the input before it enters production. (See Kliman’s ‘Reclaiming Marx’s Capital’ for more on this.)

Transformation Problem: In short: Marx showed how value is redistributed in exchange to form prices of production. To do this he set up a simple numerical example where inputs purchased at their values are transformed into prices of production. But in the real world, his critics cried, inputs would be purchased at prices of production, not values! Since input prices and output prices must be the same in equilibrium theory (see above Inputs and Output prices) then there was some fancy math involved in figuring this all out. The upshot: total prices and total values don’t equal each other anymore. Furthermore value and production price were severed into two separate systems and it wasn’t clear what the relation was between them. The Temporal Single System (TSSI) response is to say that output prices of production are the input production prices of the next period, not the previous one. This eliminates the mathematical inconsistency in the transformation and also keeps values and prices of production as part of the same system, rather than two separate systems whose relation is only metaphysically related. The book to read on this topic is Andrew Kliman’s “Reclaiming Marx’s Capital; Refuting the Myth of Inconsistency”. 

In my own awkward way I made a video on the subject several years back.

Levels of Abstraction: Marxists treat the levels of abstraction in value theory differently. This is often because of the strange way in which the transformation problem developed. The traditional interpretation of the transformation problem severs value and price of production into two separate systems whose relation has to be arbitrarily imposed mathematically. Value is seen as somehow determining prices of production, and then market prices are seen as fluctuations around these prices of production. The Temporal Single System Interpretation (TSSI) takes a different stance on the issue. It seems values being created in exchange but being sold at market prices. These market prices form the inputs into production and the outputs. Prices of production are tendential prices that market prices gravitate toward. Critics claim that the TSSI has erased important theoretical distinctions between value and price and just explained prices through past prices. But the TSSI claims that it has cut through the bullshit metaphysics and mapped out the practical way in which inputs and outputs relate in a temporal, fluctuating economy. Central to the TSSI’s understanding of these levels of abstraction is Marx’s statement that price is the form of appearance of value (or more specifically in chapter 3 of Vol 1 “Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.”). Thus value cannot exist in some separate metaphysical system, whispering into the ears of prices. Instead if appears as price and is transformed in exchange through the ways described above.

NeoClassical Economics: There are plenty of things to read if you are looking for a good critique of the neoclassical orthodoxy. The reason there are so many things to read is that orthodox economics is a huge religion, all smoke and mirrors, with little relevance to the real world. Viewers who know too much to be watching my videos in the first place will notice that in this video I throw Pierro Sraffa’s face into some of the group shots of bourgeois economists. Sraffa is not a neoclassical economist and is actually responsible for a number of quite useful critiques of the neoclassical orthodoxy (See Steve Keen’s “Debunking Economics” for a good synopsis of the Sraffian critique”. So it is technically wrong for me to group Sraffa in this category. On the other hand the Sraffians still maintain that there is an internal inconsistency in Marx’s transformation procedure because they insist on modelling value and price through general equilibrium analysis. Many 20th century Marxists also have been influenced by the Sraffian critique of Marx. For a good critique of some of the problems with this approach see Alan Freeman’s great essay “The Psychopathology of Walrasian Marxism”. That Freeman paper appeared in an excellent, and prohibitively expensive, volume of essays, many of which contain good critiques of equilibrium economics. I also enjoy Mark Linder’s “Anti-Samuelson” as well as Simon Clarke’s “Marx, Marginalism and Sociology” which I’ve written about here.

Suggested Reading on Value and Price:

Kapital. vol. 3 Karl Marx. specifically chapter 10

Value, Price of Production and Market Price by Alan Freeman- a  very short paper that lays out the main issues quite well and succinctly

Frontiers of Political Economy by Guglielmo Carchedi is a pretty solid exposition of the value price relation from a TSSI perspective.

Marx’s Theory of Price and Its Modern Rivals by Nicholas Howard is a recently published book on the topic which takes an alternative position than the one I’ve put forward here (at least on a few points). Howard takes a different view of input prices and the transformation problem than the TSSI folk and the TSSI and ‘New Interpretation’ are the subject of critique in the book. The book also has a fairly thorough critique of neoclassical, Keynesian, and Sraffian price theories.

Essays in Marx’s Theory of Value by II Rubin, though much of the book is devoted to more qualitative aspects of value theory, does get into the issues of price of production and market price. Rubin’s approach still seems mired in an equilibrium framework to me, though I think the book is great on the whole.

Value and Price Q&A

I have been looking forward to finally putting together a script for a video on Value and Price. As a preparation for that task I’ve written the following: an attempted summary of my understanding the topic. The text is peppered with paraphrases of questions that I have been asked by readers/viewers recently (and some I made up). I find these questions help focus the text and make the direction of inquiry relevant. There is a lot here. I wanted to get everything down so that I can then figure out how to distill it all into a video script. Please let me know what you think of the material, especially if there are unanswered questions or problematic formulations.

Q: Mudpies take labor to produce but they don’t have any value. Therefore everything Karl Marx wrote is a pile of shit. Why do you read that shit?

A: So the first thing we must do is to rid our mind of everything we’ve been told about Marx and the “labor theory of value” (a term Max never used.) The fundamental misconception that must be eliminated if we are to understand the value-price relation is the misconception that Marx thought that labor time and price were the same thing. Stumbling through the blogs and chat rooms one comes across this fallacy again and again. Marx did not think that every product of labor is magically imbued with a price tag equivalent of that labor. In fact, Marx was interested in explaining the opposite phenomenon, the phenomenon where labor sometimes produces nothing of value, sometimes produces a commodity that sells at its value, and sometimes produces a commodity that sells at more than its value. It is the “non-identity” of value and price that is of interest to Marx.

Often times in Capital Marx asks his readers to assume that price=value for this or that commodity so that he can more clearly discuss topics like exploitation and surplus value. Sometimes readers have misinterpreted this to mean that Marx thinks that value always equals price, or that Marx has some notion of long-run equilibrium price where value fluctuates around price. But this is not the case. In many places in Capital Marx states, as a matter of fact, that value and price rarely equal each other and that if they do it is only a manner of chance, an accident. These comments fly in the face of the common value=price misrepresentation of Marx.

Q: If there are so many exceptions where labor time deviates from price what is Marx’s point?
A: Such deviations are no exceptions. They are the phenomena to be explained. When we punch our time-card in the morning and go about our day’s work how do we know that the product of our labor will find a social use? How do we know that our labor will be efficient enough to compete with the workers in other firms? We don’t know these things for certain. We only find out after we have finished working, when the product of our labor enters the market to be compared with the products of everyone else’s labor.

Marx calls this unique way of organizing labor “indirectly social”. Rather than operating on some sort of plan where we decide how much labor should go into the production of various things our labor is distributed indirectly through the price signals of the market. We perform private labor. This labor is not social labor when we are performing it. It only becomes social after we finish working when the products of our labor meet in the market. Here in the market we find out if our labor has been socially useful and if it has been performed at the average level of efficiency. If our private labor has been efficient and put toward a useful end our firm/boss/capitalist is rewarded for our effort. If our private labor has not been put toward a useful end or if we haven’t worked efficiently enough our firm/boss/capitalist is punished by the market. These price signals then act to change the distribution of labor in society. People are hired and fired. The labor process is redesigned to make it more efficient. People are replaced by machines. etc.

Obviously this process couldn’t take place if there wasn’t some relation between the labor time that went into commodities and the prices of these commodities. But equally obvious is the fact that this labor time cannot exactly equal the price of commodities. If it did then there could be no price signals to punish or reward firms. Firms that are producing useless things or not producing efficiently are punished by the market. Better firms are be rewarded. So the simple picture of Marx’s value theory that we are sometimes given, that the labor that goes into production is exactly equal to the prices of commodities cannot be correct. There must be more to it if we are to understand the distinct way in which labor is distributed in a capitalist society.

Q: What do you mean by “social labor”? Aren’t there lots of types of individual labors that are not social at all? What about Robinson Crusoe’s labor?

A: If I make a turkey sandwich for myself and eat it this is privately labor only. My labor does not become social unless I am doing it for someone else. Whenever the products of our labor are exchanged we have done social labor. The fact that we are exchanging products points to an underlying distribution of relations of production. The fact that I need something someone else has produced (the fact that I have not produced it myself) means that there is a developed division of labor in society. The very act of exchange implies that there is a social organization of labor in which the private labors of different people are already socially dependent on one another. If there wasn’t this social aspect to our labor there would be no reason to exchange the products of out labor.

The distribution of labor and the products of labor in our society is based on a prior distribution of means of production in the hands of the capitalist class, depriving the rest of society of their own means of subsistence. Deprived of means of production, the working class must enter the market to purchase their subsistence and enter the market to sell their labor power to the capitalist class. Thus, the distribution of labor takes the form of wage-labor and the distribution of the products of labor take the form of commodity exchange. It is the quantitative value relations between commodities in the market that act back upon production, regulating the social division of labor. But this regulation only happens after the labor has happened: We work, the products of our labor enter the market, and then price signals act back upon production. This gives our investigation unique aspects that differentiate it from other societies based on a different distribution of means of production.

Q: If value and price are not always equal then what exactly is value? Sometimes it seems like “value” means labor time. Sometimes it seems like it means “price”. What is it?

A: Marx’s terms have an elastic quality. In different places they stretch or constrict to contain more or less content.  This is because Marx understands things (and processes) only relationally. Things only have meaning in how they relate to other things. Depending upon the context we may want to refer to more or less aspects of the inter-related parts of value relations. Value is a particularly elastic term because it sits at the very center of capitalist social relations. Sometimes when Marx says “value” he is talking about the exchange value of commodities, sometimes he is talking about the labor that goes into a commodity, sometimes he is talking about the form of social relations unique to a capitalist society. Understanding value theory requires that we are aware of what particular aspect of value is being referred to in a specific context.

Value theory has both qualitative and quantitative dimensions. It’s a theory of social relations that take on a quantitative form. In contrast to predecessors who treated categories like capital and labor only at the level of content, Marx was concerned with the form social relations take in a market society. In a market society they take the form of value relations between commodities and these involve certain laws that regulate and constrain the social relations. These are all the qualitative aspects of value theory, in many ways the most crucial aspects of his theory to understand for formulating an understanding of the radical challenges of anti-capitalist politics.
But value theory also has a quantitative dimension which comes to the foreground when we look at the value-price dimension. At times in the 20th century, due to the persistent myth that there was something internally inconsistent with the quantitative side of Marx’s value theory, Marxists have attempted to distance themselves from the quantitative aspects of value theory, instead developing approaches which attempted to side-step these quantitative aspects by focussing only on the qualitative aspects of the theory. This is no longer necessary: see my video on Transformation Problem.
When it comes to the quantitative aspects of value theory we are primarily concerned with the distribution of labor and the products of this labor throughout society.

Q: So I understand that price signals are the only means of coordinating the division of labor in a market society, but how exactly does this work? It seems there must be some relation between labor and price for this to happen. But there also seem to be lots of other factors that effect price like consumer demand, monopoly, etc. So how is this all understood by Marx?

A: Ok. Let’s get into it. First we should review the concept of Socially Necessary Labor Time, and then see how this relates to demand and supply. Following this Q&A form I’ll break the topics into questions.

Q: What is Socially Necessary Labor Time?

A: I deal with this in my Socially Necessary Labor Time (SNLT) video (Law of Value 6). There we saw that the social value of a commodity is not the amount of time it takes any individual to make a commodity but the average amount of time it takes society to make it. If I take way too long to make a pie this doesn’t mean I can sell it for more than the average pie. The average productivity of society imposes this social value over my individual value. If I produce at less than the socially necessary labor time it means my individual value is less than the social value. This allows me to make a super-profit when I sell at the social value. I haven’t created this super-profit. It was transferred to me in exchange, by people paying me the social value of my pies and not their individual value.

Firms don’t know whether they are producing at the SNLT until they meet in the market to compare their products. But this doesn’t mean that value is being created in the market. All of the value creation has already happened by the time the firms come to market. In fact, if we had some sort of omnipotent information on the productivity of each firm, we could predict that outcome of that market process before the products actually came to market. But we don’t have that information because we live in a capitalist society, so we must use the market to figure it out.

Q: Is SNLT just measuring the value of commodities within one industry? How do we determine value between industries?

A: The SNLT refers to the labor time required to produce a particular type of commodity. Obviously a basketball can have different colors and name brands but its value is still determined by a comparison with all of the other brands and colors of basketballs. This SNLT is the exchange value which basketballs have with money. Since all other commodities measure their SNLT in money as well we can use money prices to compare the SNLT of different types of commodities (basketballs, cars, etc.)

Q: What does it mean to say that value is transferred in exchange?

A: If I sell my product at exactly its value then I have exchanged, say, a beer worth $5 for $5. There is been no net gain or loss of value for myself or the buyer. In Marx’s terms I have “realized” the value of the beer. I have transformed it into its value equivalent. But let’s say I am an inefficient beer brewer and I would need to sell my beer at $8 to realize its value even though the firms producing at the SNLT sell their beer for $5. This would cause me to lose value in the market. I would either have to sell my beer at the SNLT of $5 and take a hit of $3 every time I sold a beer, or I would have to keep my beer at $8 and settle for selling less of them. The opposite happens if I produce under the SNLT. This allows me to make a super-profit in the market.

This idea of value being transferred in exchange is crucial to understanding the price-value relation. There are two different types of value being discussed: the individual value, or the amount of time a private producer spent making something, and the social value, or the SNLT, or the actual amount of money a commodity is sold for in the market. All producers sell at the social value but some lose value in this process while others gain value.

With this understanding we can also begin to conceptualize other price-value deviations. Anytime price is greater than individual value the seller is gaining value in exchange. Anytime price is lower than individual value the seller is losing value.

Q: You seem to be using labor time and value interchangeably here. You say the individual value is the labor time the private producer took to make a commodity but you say the social value is the amount of money the commodity sells at. And then you say that we can compare the two quantities to see the winners and losers. How do we compare hours and dollars?

A: This is a super important question. To answer it fully would require an in-depth discussion of Marx’s theory of money, but for now we can cover the basics. Marx sees money as the embodiment of labor time in the abstract. He builds this theory directly from his theory of the commodity. Commodities have both a use-value and an exchange-value. The use-value is a specific dimension of the commodity particular to each object and their various uses. Exchange-value is a universal, abstract dimension of the commodity. It is the empty quantitative relations between a commodity and all other commodities. It is numbers, not qualities. This leads to the separation of use and exchange value. Use-value stays in the bodily form of the commodity while exchange-value separates itself from the commodity in the form of money. Money becomes the commodity that all other commodities measure themselves against. As such it is the universal measure of value and the universal measure of abstract labor.

Q: OK, but how much labor does it measure? How do we know the relation between an hour of work and an amount of money?

A: Marx begins his discussion of money with the money commodity. The labor that goes into the production of gold becomes the standard against which all other labors are compared. So if an ounce of gold takes one hour of labor to make, then an ounce of gold=1 hour of abstract labor. If a commodity sells for 5 ounces of gold then its social value is 5 hours of abstract labor.

Q: Does this means that Marx’s theory of value rests on the concept of commodity money?

A: You will find a wide divergence of answers to this question amongst contemporary Marxists. I tend to agree with Marx’s own comments on the issue when he says that even though money originates as a commodity, it does not always have to be a commodity to perform its various functions of measure of value, standard of price, unit of account, means of payment, etc. It can be replaced by mere tokens of value like pieces of paper. However, there are times, especially in a crisis, where there arises a need to revert to the commodity form of money. In these cases we see the people flocking to forms of money which have some commodity basis.

Q: If money is not necessarily a commodity then how do we know how much labor time it represents?

A: I like the modern formulation of “Monetary Expression of Labor Time” or MELT (in case you need more jargon in your life). MELT is not a term used by Marx but I believe you can find instances where he uses a similar procedure. To answer your question MELT is found by taking the total amount of commodity prices in a given period and dividing them by the total number of hours worked. If $1000 of commodities have circulated in a year and 1000 hours of work went into them then 1 hour of labor equals 1 dollar.

(MELT is sometimes critiqued for different reasons, not all of which I have studied, but to anticipate some criticism I think it is worth noting that MELT does not imply specific direction of causality between the amount of money in the economy and the amount of labor performed. This is crucial because sometimes it is debated that the value of commodities determines the amount of money in circulation (Marx often argues this) and sometimes it is argued that the amount of money in circulation determines the level of prices. MELT doesn’t say anything about what determines what. It is merely a device for measuring the relation of money to labor time (see this paper on the topic.) It is used by some Marxists to perform calculations and form empirical observations about things like profit rates.)

Q: Your discussion of SNLT makes it sound like the various levels of productivity in an industry determine the social value of a commodity, but doesn’t consumer demand have a role in this price formation as well? What if there is a rise in demand for the products of an industry? Doesn’t this increase the price, the social value, of a product above the SNLT?

A: I get variations of this question all of the time. The short answer is, “Yes. The level of demand effects the social value of the commodity.” But there is more to it than the short answer.

First, there is the basic supply and demand question. When demand rises faster than supply can rise to meet this demand then prices rise. The speed at which supply can adjust to this new level of demand depends on the particular structure of the industry. In some situations it is easy to increase production to new levels without adding to the unit cost of a commodity. In other situations increasing supply involves new investments in plant and equipment, redesigning the labor process, even moving the location of production. These sorts of “inelastic” situations can cause supply to take a period of time to adjust to demand.

But eventually, given no other barriers to investment, supply can adjust to demand. When this happens supply and demand “cancel each other out” as Marx would say, and they cease to explain anything. Once again only SNLT can explain the exchange values between commodities.

When demand causes prices to rise this does not mean that demand is creating value. It is merely causing one industry to appropriate value in exchange. In order for, say, basketballs to sell above their value, other commodities would have to sell for under their value. This is because there is only a given amount of value in the economy at any time since only a specific amount of labor has been performed. This value can be moved around in response to changes in demand, etc. but it can’t be created just through the process of exchange. For more on this topic see my blog post “Value Can’t Be Created In Exchange”.

Q: Does this mean that Marx has an equilibrium theory of price where demand and supply eventually meet in the long run, or where there are long-run fluctuations around an average equilibrium point?

A: Many times you will see Marx’s value theory characterized in this way. This would give it a parallel with bourgeois general equilibrium theory. If we abstract away from changes in productivity then we can imagine a model where demand and supply balance and the price equals the value of a commodity. But if we consider that one of the most consistent themes in Marx is the constant revolution in the value of commodities due to the constant changes in the productivity of labor, then we have to drop this notion of equilibrium. Changes in productivity are driven forward by the capitalist’s quest for surplus value. And these changes constantly create disturbances in the relation of supply to demand as prices change. Rather than equilibrium, Marx’s theory of value and price points towards a constant state of disequilibrium. I have found Alan Freeman’s essay on this subject “An Invasive Metaphor: The Concept of Center of Gravity in Economics” to be illuminating.

Q: Is SNLT based on mean productivity, modal productivity or median productivity?

A: Modal. In math, a you find the mode of a set of numbers by observing which numbers occur most frequently. Within an industry the force of competition over SNLT moves most firms toward a modal level of productivity. But at a given moment there are still some firms which have yet to catch up to this modal level while there are still others that are racing forward to produce under the modal level.

When supply and demand are in balance SNLT is set by this modal level of productivity. But what if demand rises quickly? Then the modal firms cannot produce enough meet demand and the less efficient firms find that their supply becomes crucial to meeting demand. Rather than selling at a loss they find that they now set the SNLT. This is a different way to see the change in price due to a change in demand. Rather than demand just randomly changing prices it selects between different existing levels of productivity.

Q: I’m confused about the prices of clothing. I can buy two shirts of identical quality, obviously made under the same conditions of production, but with substantially different prices depending on the brand name. How is this possible within the labor theory of value.

A: If value can be appropriated in exchange, if value and price can and do diverge all the time, then it is easy to understand the role of other factors that influence price. Monopolies constrain the ability of price to reapportion labor. They artificially bolster up prices, keeping labor from flowing into those industries to bring down prices. The degree of monopoly determines the degree of price-value divergence…

Many companies can mark-up their products above values because they have a monopoly on a certain brand/image. They spend a lot of time, money and labor to create a brand and this gives them exclusive use of this brand. This monopoly over a brand gives them the ability to mark-up prices without fear of being under-cut by competition.

Since value can’t be created in exchange, any time one firm or industry gains super-profit in the market, someone else is losing value.

Q: Why is art work so expensive? What determines the value of art work? What about antiques? Is this a case for the usefulness of Marginal Utility theory?

A: Art and antiques are not freely reproducible commodities. They do not respond to the laws of supply and demand because their supply cannot be altered, their supply does not respond to price signals. There can be no reapportioning of labor time because they can only be produced once. Therefore the only thing that can determine their price is demand relative to their limited supply.

I can imagine this might sound like a concession to the primacy of other factors in ultimately determining price. On the contrary I think this actually brings out the important defining characteristics of Marx’s value theory and shows its superiority to marginalism.

Marginalism makes sense of the economy by abstracting away from production. People form consumer preferences based on a pre-existing world of commodities. These preferences are then considered all we need to know to understand price. This abstraction is much like the market for art or antiques where the commodity already exists as a static supply and all that matters in terms of prices formation is the level of demand for one commodity relative to another. I have criticized marginalism in several previous posts so I will not go into that here (see “simon clarke: Marx Marginalism and Sociology”, “Subject/Object”, “Script for a video that may never be produced“, etc.)

But the majority of the commodities produced are reproducible. Their production is sensitive to changes in price. This sensitivity triggers all of the above mentioned rules of value. We could just as easily posit the opposite situation where the demand for a commodity is static and supply determines the price. (hmmm… example?)

Regardless, when one buys expensive antiques the seller is not making a killing because value has been created in exchange. There has just been a transfer of value in exchange. This value only exists in the first place because it was created in production. The money that buys the antiques exists within a society in which money is the measure of abstract labor. In this way the logic of commodity production subsumes/engulfs all other forms of interchange.

Q: What is this term super-profit you keep using?

A: Marx never actually used the term and it has been used a few different ways by different Marxists. I use it to mean the additional profit a firm can make by selling a commodity above its value. This is different than surplus-value which is the profit the capitalist makes by exploiting their workers. I’ll assume that the concept of exploitation is already understood but a brief summary on the relevant points is probably useful:

Since value can’t be created in exchange the only way to make a profit is to pay workers less than the value they create. Now super-profit can be made by some by selling above value, but not all firms can do this. There is no way to increase the aggregate (overall) profit just by buying and selling. Without the profit proper that comes from exploiting workers there would be no reason for capitalists to invest in the first place. Assuming exploitation is successful, all capitalists make a profit. Some make a super-profit in addition to this.

Q: But a commodity’s price isn’t just the value created by labor. There are also costs of production like machinery and raw materials.

A: Yes Marx considers the total value of the commodity to consist of three parts: wages, costs of inputs, surplus value, or has he calls them “variable capital”, “constant capital” and “surplus value”. Inputs, or “constant capital” are called “constant” because their value is fixed at the time or purchase. The capitalist must transfer their value into the price of the finished product or else take a loss. Constant capital is, of course, the product of previous labor processes and its value is entirely the product of labor and nothing else.

“Variable capital”, or wages, is the called “variable” in order to emphasize the grey line between surplus value and variable capital. You are paid to work a 40 hour week. How much of that time are you producing value equivalent to the value of your wage and how much of that time are you producing surplus value (profit) for your boss? It is hard to say. It is a matter of class struggle. Capitalist constantly strive to increase the amount of surplus they can squeeze from the worker.

Q: What about a fully automated factory? This produced no value at all yet still has an exchange value. What gives?

A: First, an automated factory still has costs which they must pass on to the consumer. These are the costs of raw materials and machines. These are constant capital, just like in a normal factory. The real question is where the profit comes from in an automated factory. Nobody would invest in an automated factory if all they could do was receive the cost of their investment back. People invest for profit. In an automated factory there can be no surplus value production. All profit must be appropriated in exchange ã la super-profit.

We live in a highly mechanized society. Machines do many tasks that people used to do. When people did them they created value. When machines do them they create no value. In some examples this makes intuitive sense. Take the jobs that computers do calculating and duplicating information. Where we used to have to pay someone to set type and manually print a book now we can just duplicate it with a click of a button. No labor is involved. Hence this task no longer produces exchange value.

But take a camera factory that replaces all of its workers with robots  When humans worked there the capitalist added up the costs of production (wages+other inputs) and added the average expected rate of profit to this figure to form the price. When robots replace the humans the capitalist uses the same logic: add up costs of production and add the average expected rate of profit. This makes it seem like the presence or lack of human labor has no bearing on the formation of price.

Sometimes Marxists have responded to this problem by appealing to specifically unique characteristics of human labor. They say, “well robots may be able to turn screws and pull levers but they will never be able to do X” (where X is usually something like “think creatively” to “perceive beauty”.) I think such a defense is really problematic. Given the incredibly fast development of cybernetics I think it is risky to base ones theory of value on some arbitrarily chosen essence of human labor. (I was surprised to hear this argument made recently in a debate on the OPE listserve… I expected better from professional marxists.)

What actually differentiates human labor from robot labor is quite simple: humans have the ability to refuse work. This element of choice makes their labor a social matter. The inter-relations of human labor are social relations. In order to make humans work they must be dependent on the market for their survival. Their lives must be caught up in the consumption and production of commodities. This consuming and producing involves choices, the measuring of choices against each other, seeking personal advantage. The distribution of this labor and consuming is organized through the value relations between commodities.

Now if all production in society were full automated there would be no need for exchange value. Society would just be one big factory where production was carried out according to one big equation. (I should probably explain this more fully.)

Conversely, if robots ever developed enough intelligence to refuse work then their labor would become a social relation like human labor and would be value creating.

Q: What was that thing you were saying about an average rate of profit?

A: Aha! Now we get down to the really interesting stuff. You are an investor. You notice the the profit rate in Industry A is higher than the profit rate in Industry B. You decide to invest in Industry A, as do other people. As more money flows into Industry A this cuts into profits. Why? Because there are more competitors producing more goods. The increased supply doesn’t mean more demand, just lower rates of return. The opposite happens in Industry B. Investment flows out of the industry, supplies lower relative to demand. This brings prices above values and profit rates rise. This process causes a tendency toward an average profit rate.

But this causes a conundrum. If profit is total price minus the total cost of production then we would expect profit rates to be higher in industries with lots of workers and little constant capital costs than in industries with fewer workers and lots of constant capital costs (machines, etc.) Why? Because price is c+v+s (constant capital+variable capital+surplus value). And the rate of profit is s/(v+c+). This means that the lower c is, the higher the rate of profit, given v stays the same. Remember only workers can produce surplus value. So we’d think that having lots of workers is good for profit and replacing workers with machines would be bad for profit. When you replace workers with machines you have high costs of production but you don’t produce much value. This was scene as a paradox to adherents to the ‘labor theory of value’  (LTV) prior to Marx because it conflicts with the notion of an average profit rate. The LTV predicts higher profits for low ratios of machines to workers, but we also know there is a tendency for profit rates to become the same between industries regardless of the particular mix of workers to machines. It seems like profit is just an average return on investment and has nothing to do with labor being a unique source of value. It seems like machines can create value and surplus value just as well as workers. This leads Sraffian economists like Steven Keen to argue that the LTV is wrong and that commodities can produce value on their own.

But we can already anticipate Marx’s response to this notion based on what we already know about the transfer of value in exchange. For Marx the tendency toward an average rate of profit involves some firms losing surplus value in exchange and others gaining it so that firms with a low ratio of machines to workers (c/v) make the same rate of profit as the firms with a high ratio. Some sell at prices below values. Some sell at prices above values. These new prices Marx calls “prices of production”.

Q: So rather than the social value of a commodity involving SNLT now the social value just comes from adding the average rate of profit to the cost of production? Have we just replaced labor values altogether with a different theory?

A: This has been one historic criticism of Marx’s theory of price. Bohm-Bawerk accused Marx of literally contradicting himself on the issue. But there is no contradiction. We have seen that even the elementary theory of SNLT involves the deviation of value from price and the redistribution of profit in through exchange. The same happens with the theory of prices of production.

But what of the more general charge that there is no necessary role for labor as the source of value in the theory of prices of production? Even though there is a systematic deviation of prices from value this deviation is still related to labor times. What is the average rate of profit? It is the individual rates of profit of each industry averaged together. The average rate of profit is still determined by the total amount of surplus value produced by the working class as a whole. Thus the capitalist class literally exploits the working class as whole, not just as individuals.

Marx famously held three equalities to be true for the economy as a whole:

1. total value equals total price
2. total surplus value equals total profit
3. total value rate of profit equals total money rate of profit

Bohm-Bawerk responded that these were just tautologies that prove nothing. But they are not meant to prove anything. They merely frame the contours of what value is. Value is not a phenomenon where every commodity is going to magically appear with an exact measure of its labor time. The economy is much to complex for that. Rather, price, though formed wholly of the substance of value, is always a refracted measure of value, reflecting at any moment a number of different determinations.

Q: What if there are barriers to an average rate of profit? Then do commodities trade at their values?

A: Some people argue that the tendency to an average rate of profit is weak, constrained by lots of barriers to entry in industries, and that therefore commodities can be considered at trading, within fluctuations, at their values, not their prices of production. I think this is failed reasoning. It doesn’t matter that the tendency toward an average rate of profit is a weak tendency. It still must fit into a theoretical framework. We can’t just ignore it on empirical grounds. And even if profit rates weren’t equalized perfectly between industries this doesn’t mean that the profits of automated industries would automatically plummet while the profits of labor intensive firms would shoot up. In the practical world of investment and pricing capitalists expect an average return on their investment relative to their cost of production.

Q: But you said that the point of price was to allocate labor. If prices of production obscure the difference between humans and machines then how can labor be allocated in any sane way?

A: Prices of Production still allocate labor because wages and surplus value are still involved in the prices of commodities. But, yes this allocation doesn’t happen as smoothly as it would in a world with no average rate of profit. In fact we already know that there is a systematic tendency in capitalism for capitalists to replace workers with machines. This increases the productivity of the remaining workers, allowing capitalists to produce below the SNLT and thus gain super-profits in exchange. Prices of production allow capitalists to continue to automate production without being punished for producing at a lower individual rate of profit.

But if firms are replacing more and more workers with machines then less and less surplus value is being produced relative to the cost of all those machines. This leads to a Falling Rate of Profit in the economy as a whole. This is why in vol. 3 of Kapital Marx immediately moves from the discussion of Prices of Production to the theory of the Falling Rate of Profit. The tendency of the rate of profit to fall can lead to crisis, like the one we are in now. The rate of profit is only restored once enough capital value (ie the costs of production: workers, inputs) has been destroyed or devalued. See my video on the Falling Rate of Profit or any of my coverage of Kliman.

Q; I heard/read about this thing called the Transformation Problem that means that Marx’s theory of prices of production is all messed up.

A: See my video on the Transformation Problem and/or the Math Supplement to the video.

Q: I heard about this Okishio Theorem which invalidates Marx’s theory of the tendency of the rate of profit to fall.

A: Read this: Okishio, an obituary, by Andrew Kliman

In summarizing I’d like to say something very important. I hope that I have just shown that Marx’s theory of value is entirely coherent and logically sound. There are no unexplained phenomena. There are no nasty little exceptions that destabilize his argument. We are often told about the existence of all sorts of persistent myths about how this or that exception ruins his value theory. The vast majority of these accusations consist of trying to find examples of instances where prices deviate from individual values, whether that be in Mud Pies, automated factories, prices of production, or antiques. I hope that I have demonstrated that these are misguided attacks.

Just because Marx’s value theory is consistent, rigorous, and holds up to the basic requirements of logic doesn’t mean that it is correct. There is still an argument to be had over whether his theory actually explains the way the world actually works. Sometimes people confuse the two issues.

Steven Keen, for instance, argues that Marx is wrong to say that only labor can produce value. He does this by pointing to a supposed logical mistake in Marx’s description of exploitation. Marx says that the use value of labor-power is that it can produce value. Workers produce more value than they cost. But Machines can do the same thing, Keen argues. Marx ignored that machines can produce more value than they create. If Keen wants to argue for a theory of machines creating value that’s fine, but he shouldn’t do so by acting like he’s found some brilliant little hole in Marx’s logical argument. Keen acts as if he wants Marx, in the discussion of exploitation, to furnish some knock-down proof that machines can’t create value. But by this point in the argument Marx has already established that only labor can crate value. He is merely explaining the logical implications of such a theory. Elaborating on implications of a premise need not prove the premise. I’d almost be willing to say that they can’t prove the premise because you have to assume a premise to elaborate on its implications.

I feel like Keen’s argument is an obnoxious attempt to imitate what seems to be a trend: one makes up nonexistent problems regarding the logical structure of Marx’s argument and then uses these “discoveries” as material for riffing on one’s own theory of capitalism which has no relation to Marx at all. Keen would be better off just debating premises, and the basic questions of what a value theory is and what it means to express social productive relations through commodity exchange rather than to go on a fools errand to find some flaw in Marx’s own structure of argument.

I also want to stress that absolutely none of the qualitative aspects of value theory are effected negatively by the deviation of value from profit. I also do not believe that Marx’s method of deriving labor as the content of value is effected at all by the derivation of value from profit. In many ways, these qualitative and methodological questions are the important ones to have.

Price theory is not the goal of Marxist economics. The important take away is that Marx’s price theory does not contain some poison that destabilizes the rest of his understanding of capitalist social relations.

Supply and Demand- script for a video that may never be made

[I have been considering revising some of my proposed plans for the Law of Value series. Below is a script I wrote a while ago for Law of Value 11: Supply and Demand. I am considering skipping this video and moving directly to the video on price. The reason: this script is mostly a take-down of neoclassical supply and demand curves and doesn't say that much about the law of value. But I feel that there are still some good points in this script, worth sharing with readers.]

People sometimes think the labor theory of value is an alternative theory of price to the notion of supply and demand. This is not so. All of the classical economists who subscribed to a labor theory of value discussed supply and demand. Yet they did not think that supply and demand, by themselves, were enough to account for value and price. Most of us today have a vague notion of supply and demand (from some high school economics course we slept through) that relates to the neoclassical picture of supply and demand curves intersecting to select an equilibrium price. It certainly is a nice, simple image that elegantly conveys its ideas of balance, rationality and equilibrium, but when we look at a little closer we will see that this image doesn’t actually represent reality or help explain much of anything about reality. This video will both explain the relation of supply and demand to the Law of Value and deconstruct the neoclassical notion of supply and demand curves and equilibrium price.

What is the relation of the law of value to supply and demand?

It’s actually quite simple: There is a finite amount of labor in society. Yet the possibilities that we could apply this labor to are endless. Do we spend our labor curing cancer or building bombs? Writing string quartets or digging for oil? Social demand, the total demand of society, decides how much of each commodity is needed. The productivity of labor in each industry limits the total amount of supply we have to meet these demands. But there isn’t a committee that makes this decision. This decision is made through the price mechanism. Prices of commodities reflect a definite amount of labor that went into their creation. Commodities acquire their value in production prior to exchange. The more labor that goes into something the more value it has. When the supply of a toothbrushes exceeds demand for toothbrushes this means that too much labor has gone into making toothbrushes. Toothbrush prices are depressed below their value and this triggers a change in toothbrush production: labor must be withdrawn from toothbrush factories and applied elsewhere. If demand for toothbrushes is higher than the supply this will raise toothbrush prices above their values. This triggers an inflow of labor. Behind this fluctuation of supply and demand lies the actual value of a commodity. That value is the amount of labor time that went into making the commodity.

Even though the fluctuation of price moves above or below the value this doesn’t mean that value is erased. What happens is that the maker of toothbrushes receives more or less value in exchange then they produce. There is a value transfer in exchange. If there is an excess demand for toothbrushes this causes the social value of toothbrushes to rise above their individual value. The labor that went into making toothbrushes counts as more social labor than it actually represents. This causes a reapportioning of labor in society.

This fluctuation is essential to the law of value. Value only exists through the blind fluctuations of the market.

The traditional demand and supply curves have problems. Let’s examine them.

Neoclassical demand curves make the market seem rational, just, and equal. Consumers appear to be choosing to buy at a price that maximizes their personal utilities and producers selling at a price that maximizes their profits. This equilibrium price appears as a state of balance and harmony. All deviations away from equilibrium are just temporary, unimportant fluctuations. Attempts to interfere with this equilibrium, to disturb the status quo, will always make society worse off. This is the ideological backdrop to the neoclassical picture of supply, demand and price. (Simon Clarke argues that the development of marginal utility theory happened at a time of growing social movements that called on states to regulate labor conditions, markets, etc. Economists were looking for ways of measuring the effect of government actions on market processes. Hence the evolution of a theory of self-equilibrating markets. See Clarke “Marx, Marginalism and Sociology”)

The thing is, equilibrium prices are the most rational form of allocation for capitalists seeking to maximize profits. But they are not so for workers. We notice that workers and labor are left entirely out of the curves. For the neoclassicist these curves just represent utility, subjective desire. There is no role for the productive process or class. As we’ll see later, this lack of a theory of production makes the neoclassical concept of price circular and meaningless.

Equilibrium prices also don’t exist. The economy is never in equilibrium and never will be. It is constantly moving, changing, growing and contracting. Disequilibrium, often violent, is the norm. The regularity of economic crisis should be enough to prove that disequilibrium isn’t a freak accident of external interference in the market, but something internal to the the market itself.  (Booms are also an instance of disequilibrium. The economy doesn’t stay still in a boom. It expands.)
The Demand Curve- a joke

This is a neoclassical demand curve. It tells us that as prices rise people will buy less and less of something. As prices fall they will buy more. That seems logical enough. The curve is derived from a table of preference rankings based on the idea of marginal utility: The more you buy of something the less value you put on the next unit. So if you’ve already bought 10 bananas the 11th one has less value to you. The 12th even less, and the 13th even less than that.  Let’s say I’m willing to buy 10 bananas but not 11. The value I put on the 10th banana, the banana at the margin of my preference scale, is the price I will pay for bananas. This is what the demand curve shows, that the more bananas I buy the less value they have to me. This too seems to make sense at first… if we set aside the fact that people don’t ever buy bananas one at a time.

But what about capitalists? Workers are not the only people that buy things. Capitalists’ demand is a huge part of the economy. During the boom phase of an economy capitalists’ demand increases the more they buy. The more inputs they buy, the more profit they make, the more production expands, the more their demand for inputs grows. They do the opposite of what is predicted by marginal utility.

Let’s say the equilibrium price for a banana is 10 cents. What does 10 cents mean? Neoclassical economics has no answer to this question. It just says that 10 cents is the equilibrium price in which everyone’s utility is maximized. The price of health care is so high that millions of Americans can’t afford it. For neoclassical economics this is an equilibrium price. They say those of us without health care have maximized our utility because we value the money we didn’t spend over the value of health care. But most of us don’t have that money in the first place. Clearly this is a meaningless concept of equilibrium and price. When prices rise rich people continue to buy the same amount of stuff. Some even buy more because of the status associated with expensive things (fur coats, fancy cars). When prices rise poor people buy less.

So we see that the diminishing demand for bananas isn’t just a function of having a diminishing utility for bananas. It’s a function of how much money we have to spend. And this is a function of income- a concept that relates directly to production. The income of workers corresponds to a definite amount of work at a definite wage. The income of capitalists corresponds to a definite amount of value appropriated from the working class. And both of these relate back to labor. Without a theory of labor and the value it creates in a capitalist economy the idea of demand is meaningless.

Without this reference to labor the neoclassical theory of price becomes circular. Again, what does it mean to say that bananas are 10 cents? It means nothing at all unless we realize that the price of bananas reflects the relation of bananas to all other commodities. If bananas are 10 cents, apples are 12 cents, and oranges are 25 cents, then we can see the meaning of price. Price reflects quantitative relations between commodities. If the price of bananas rises to 10 dollars a banana people will buy apples and oranges instead. This will change the price of apples and oranges. But if the price of all fruit is rising this will effect the demand for bananas differently. We can only understand price and value in this relational way, as a relation of the value of one thing to another. Yet the demand curve can only be drawn by holding the prices of all other commodities as constant. If we are drawing a demand curve for bananas we must assume that prices are held constant for other replacement goods like apples and oranges. But this means that we must take for granted that which we are trying to explain. We must assume price in order to explain it. There is no way to escape from this circularity without referring to something outside of price. This something is labor.

….. when picking on neoclassical economics it can be hard to find a stopping point. But there’s one more thing about the demand curve that has to be mentioned.

Neoclassical economics draws the demand and supply curves as mirror images of one another in this way conflating the motives of consumers and capitalists.  This allows economists to claim that just as capitalists seek to sell at a price which maximizes their profits consumers buy at a price that maximizes their utility, giving them a “consumer surplus”. Yet unlike capitalist profit, which is a real objective magnitude measured in money, this consumer surplus can’t be found anywhere in the real world. It exists only in the minds of economists. A surplus of money is a clearly objective phenomenon. Psychological satisfaction is not an objective thing. It can’t be measured in any numerical amounts, and there clearly can be no such thing as a surplus of subjective satisfaction over an objective amount of money spent. That’s like having a surplus of love over bananas. Such logical mistakes abound in marginal utility, reducing its theories to circularity and meaninglessness.

Supply

Since the supply of a commodity is determined by the amount of labor that goes into making it and the productivity of that labor we’d think that labor would be at the center of the neoclassical conception of supply. Yet, somehow it is able to completely remove this from the analysis.

Here’s a neoclassical supply curve. It’s the opposite of the demand curve. It predicts that as prices per unit rise capitalists will produce more of a commodity thus making more profit. Yet as production increases the cost of production can also increase. Therefore at a certain point the returns on additional production start to shrink.

This all seems to make sense. But because the supply curve focuses on individual unit prices and not total price it misses out on something very important. The most important strategy for capitalists to increase profits is to increase the efficiency of production. This allows them to sell more commodities at a lower price, increasing profits by out-competing rivals. If we were to draw a curve based on this fact, supply would actually rise with shrinking prices, just like the demand curve! But of course neoclassical economics wants to abstract away from the way that changes in labor productivity alter the value of commodities.

Because of its obsession with equilibrium the supply curve also assumes equal productivity throughout an industry. But as we’ve seen capitalists are constantly competing to lower the socially necessary labor time. This means that they are constantly investing in new equipment to increase efficiency. Investments in long-term fixed capital like factories create all sorts of inequality between different firms in terms of the level of productivity. So rather than one level of productivity throughout an industry we have several.

We could think of this as a series of smaller supply curves. At the left of each curve is a price below which a firm can’t make a profit at all and will go of business. To the right is a supply which is beyond the firms capacity to produce, at which additional production will be too costly. Demand determines which one of these firms will set the market price. If demand equals supply then the average productivity, the socially necessary labor time will be the price. But if demand is above supply then the least efficient firm will set the price and the other firms will receive a super-profit. If demand is below supply then only the most efficient firm can make a profit. The others will be forced out of business.

Rather then demand creating price, demand is selecting from amongst pre-existing prices based on the productivity of labor. This is the actual way in which demand and supply interact.

Equilibrium: If it ever happened it would be meaningless

Neoclassical economics assumes that the intersection of demand and supply creates an equilibrium price. This equilibrium is so powerful that any deviation from it is unimportant. Yet, in reality, demand and supply never meet. There is always a constant shifting between the two. For the neoclassicist these fluctuations are fluctuations around a center of gravity called equilibrium. Equilibrium is the average and this is why the fluctuations are unimportant.  But what is ignored is that this “center of gravity” is constantly moving. As demand and supply fluctuate they change where the center is and this is why they never settle on equilibrium. Rather than tending toward equilibrium, the economy is in a constant state of disequilibrium as the interaction of supply and demand constantly change the productivity of labor.

If supply and demand ever did meet they would cancel each other out and be meaningless. If the economy was in a perfect state of equilibrium with supply and demand for all commodities in perfect balance this would tell us nothing about why some commodities are worth more than others. Fluctuations in supply and demand can tell us why the same commodity has a different price at different times, but supply and demand can not explain the relation of one equilibrium price to another.

What creates supply and demand?

By now that should be obvious. Supply is created by labor. Now, labor is not the only “factor of production”, yet it is the only one that we have control over as a society, and thus the one that can be the basis of social value. (This is why animals don’t create value. They may do work and create products but they don’t produce value because value is a social relation between people, not a measure of physical products. Animals don’t enter the market looking to buy commodities. Nor do robots- yet.) The sun, water and land are crucial for agricultural production. Yet these factors are pre-existing gifts of nature. If we are to try to exert control over them so that we can ration them differently through irrigation, improvements in fertility, or greenhouses, these improvements will require labor.

Demand is also created by labor. Demand is a certain amount of value in the market in the form of wages and profits looking to buy things. And those things we buy are also conditioned by the structure of production. Capitalists’ demand is given by what sort of inputs are needed for production. Workers’ demand are based on the level of productivity in society: what sort of commodities are available and at what cost. We can do better than the neoclassical idea of demand as some sort of magically independent force that shapes the direction of society. Demand itself is shaped by the structure of society.

Conclusion

If we were to take all of these problems with the neoclassical conception of demand and supply we could boil them all down to one thing: they try to explain demand and supply with utility instead of value. By relying on the subjective dimension neoclassical economics deprives itself of the ability to describe actually existing social relations and mires itself in endless circularity, always needing to assume prices in order to explain them. Because production is left out of the picture the motives of capitalists and workers are conflated, subsumed under the vague heading of ‘consumer choice’. Temporal motion and change are excluded from the picture giving capitalist social relations a timeless, universal character.

But neoclassical economics must do this in order to avoid discussing the organization of production in a capitalist society. It must paint the existing order of things as the natural result of people’s free choices and desires rather than of an unequal social order based on private ownership of the means of production and the exploitation of wage labor. In short, it must abandon the concept of value. This is what classifies it as ideology and renders it meaningless.

When we add labor back into the picture we get a very different picture of things. We see that behind both demand and supply there exists a labor process and that this labor process is a dynamic one, constantly in disequilibrium. We can still use the idea of demand and supply curves but they come out looking very different than the neoclassical curves.

Suggested Reading:

Anti-Samuelson by Marc Linder - a thorough critique, in two volumes, of Paul Samuelson’s classic neoclassical econ textbook.

‘Demand, Supply and Market Prices’ by Paulo Giussani from the book “Marx and Non-Equilibrium Economics”

‘Non-Equilibrium Market Prices’ by Guglielmo Carchedi, also from “Marx and Non-Equilibrium Economics”

(Marx and Non-Equilibrium Economics is one of those prohibitively expensive academic books, the fault of the publisher’s not the writers. Let me know if you are interested in the above essays and I can look into making them available…)

Simon Clarke “Marx, Marginalism and Sociology”)

The Failure of Capitalist Production- Interview With Andrew Kliman

 

In late January of 2012 I interviewed Andrew Kliman about his new book on the economic crisis, “The Failure of Capitalist Production.” I am still working on getting a good method of recording Skype interviews so the audio is a bit scratchy, but still useable.

It’s a great interview, full of insights and challenging ideas.

The book can be found here.

Are Corporations People? Is Romney?

Watching Democracy Now on Friday Jan 6th I saw another sad exchange on the topic of “corporate personhood”, the strange legalistic side-track that seems to have galvanized so much of the passions of Occupiers. Two days earlier Mark Provost of Occupy NH confronted Mitt Romney regarding Romney’s now famous defense of the idea that corporations are people. Provost prefaces his question by pointing out the growing disparities between the rich and the poor in America, alluding to some connection between this and corporate personhood.

What fascinates me is Mitt Romney’s response, which recapitulates an old argument from Adam Smith, and Provost’s complete inability to articulate a response to this argument. Romney responds with a simple question, “Where do you think corporate profits go?” Provost responds by arguing that profits could be hoarded or they could go to the 1%.

Romney had apparently been waiting for this question for a long time. He responds with a well-scripted, tight argument: “Corporations are collections of people that are trying to have good jobs for themselves and promote the future.” Profits go to shareholders, “some of which may be the 1%” (notice that he is perfectly comfortable embracing the 1% lingo) but also to people with pensions. Profits also go into growing businesses which creates new jobs. All the money always goes to people. “The money goes to hire people or to shareholders, and so they’re made up of people. So somehow thinking that there’s something else out there that we can just grab money from and get taxes from that doesn’t involve people- well they’re still people!”

Adam Smith made this exact same argument a couple centuries earlier. The argument is that the prices of commodities, or the total value in society, all resolve themselves back to wages. If you trace the price of a commodity back to all of the costs that went into its production all of these eventually end up at wages paid to workers. Now, you may ask where profit comes from then, since profit is, by definition, money you made above your cost of production. Profit, says Smith, is going to be spent on future wages. The greater the profit, the more jobs we can create in the future. So, for Smith, profit and capitalism are good news for workers. All value eventually resolves itself to wages paid to workers.

I can’t help but point out here that Adam Smith didn’t need to live in an age of “corporate personhood” to make this argument. This is because the basic logic of capital remains the same regardless of the specific legalese within which capital may find itself enmeshed at various times in history.

But back to Mark Provost…. Provost doesn’t get a chance to respond to Romney until he appears on Democracy Now two days later. Provost says that he doesn’t understand how Romney’s argument really related to his question which was meant to be a question about the growing disparity of wealth in the country, which he somehow, vaguely, sees related to corporate personhood. On Democracy Now he merely manages to mumble something about corporations needing to pay more taxes but he fails to try to take on Romney’s argument that corporations are just collections of people and that all corporate profits eventually go to job creation. He just repeats that there is growing wealth disparity in this country.

Then the discussion on Democracy Now immediately turns to a discussion of tactics: Are mic-checks still a legitimate way of interrupting public speeches? What are Occupy’s plans for the NH primary? This discussion takes up the majority of the interview. This is to be expected for a movement that is focused primarily on protest tactics and not on theory.

Now, if we take Provost’s comments and try to formulate them into a coherent argument it seems that they would be this: Corporations aren’t people because not all of the profit made by them goes to the workers. He defends this position by pointing to empirical data about wealth disparity, not by providing a theoretical counter-argument to Romney. Where does this profit go? Apparently, for Provost, they go to the personal consumption of CEO’s and shareholders, and to “deferred investment”.

Now, if there was no deferred investment (say, we were in a boom phase of the economy and profits were being channeled into growing businesses) and this money was instead plowed into production, and if wages were higher and CEO salaries were lower (say, because of a resurgent labor movement), then it seems that Provost would be forced to agree with Romney that corporations are just collections of people. Provost hasn’t actually shown that capital contains “something outside” of people. By focusing on wealth distribution and deferred investment he makes it sound like the problem is just the distribution of wealth between people within the corporation.

But I think that the beef with corporate personhood goes deeper than this. I think that what people are really upset about is not the legalistic framework of corporations. It is that we are intuitively aware that there is a greater, dominant force in society, something that is beyond relations between people. There is an autonomous, cold, calculating, impersonal nature to capital that follows its own rules. We work to enrich it more than we work to enrich the CEO’s that serve it. When Romney claims that there is nothing to see here, when he makes his “pay no attention to the man behind the curtain” argument that there is nothing “outside” of people in the corporation, we have two choices: 1. We agree with him that capitalism resolves itself to workers producing value for themselves and thus give up a real anti-capitalist project; or 2. We can try to identify what exactly this “something outside” is.

Something Outside

I couldn’t help but beat my head against a copy of Vol. 2 of Kapital and moan disconsolately as I watched the broadcast of Democracy Now. Marx tackles this very argument of Smith’s in Vol. 2 of Kapital. He shows that there is a rather significant part of capitalist production that does not resolve itself to wages, that does not go to serve workers at all. It does not exist to enrich the capitalist. It is merely self-perpetuating accumulation of capital for its own sake. This is the real nightmare of capitalist production, a greater nightmare than wealth disparity or deferred investment. Marx’s argument is a long, complex argument which eventually exposes a very crucial insight about the nature of capitalist production, one that is quite relevant for contemporary debates over crisis theory. I attempt to summarize it here.

Building a model of the interrelated investments that make up a capitalist economy Marx divides production into two departments. Department 1 (D1) produces means of production. Department 2 (D2) produces consumer commodities.

Let’s take a look at D2 first. The capitalists of D2 spend their money on wages and non-labor inputs like machines and raw materials. Marx calls these non-labor inputs ‘constant capital’. From the perspective of D2 it looks like Romney and Smith are correct. The wages of D2 obviously go to workers and the money spent on constant capital seems like it should all go to the workers of D1. (Yes some of the money they pay to D1 also goes to the capitalists as profit. But if this profit is spent as revenue for the consumption goods of capitalists then it just goes to the workers of D2 who make these consumption goods. And if the money is used to plow back into production then it goes to hire more workers…. or so it seems thus far.)

But when we ask the same questions about D1 things look different. Obviously the money spent by D1 capitalists on wages goes to workers. But where does the money spent on constant capital go? It goes to other firms in D1. In other words, capitalists in D1 buy and sell constant capital from each other. This means that there is a portion of value in society that never actually ends up in the form of wages. It is constantly circulating within D1 in the form of constant capital (or money which has just been paid for constant capital and is about to be reinvested in constant capital.)

This is the “something out there” that Mitt Romney and Adam Smith don’t want you to know about. They are not hiding the 1% from you. They are hiding this. Why? Does this really destabilize Romney’s argument that what is good for corporations is good for people? Even if there is a small portion of value that never makes its way into wages isn’t it still true that growing corporations creates jobs and that most of this investment goes to into wages?

No.

Marx’s argument continues as he examines what is necessary for capitalism to grow, to expand the total amount of production each period. Through a series of complicated illustrations he shows that what must grow first, before anything else can grow, is this chunk of value that is not wages. By expanding the means of production capital can then expand the total size of production. But in order for this to happen money must be diverted away from consumption (away from consumer goods) and into the production of means of production. As capital grows the portion of the total value in society dedicated to the production of means of production grows at the expense of the portion dedicated to consumption goods.

Thus Romney is not correct that what is good for corporations is always good for people. What is good for capital is what is good for capital and this will always involve people getting the short end of the stick. When capital grows it may lead to some more employment (in certain conditions) but there will be a greater growth of capital value that never makes its way into wages.

Another way to put it is that as capital grows in the expansionary phase of an economic cycle it will need more workers. But the expansion of capital happens faster than the expansion of wages and worker’s consumption. This is because this expansion happens at the expense of workers. Oftentimes capitalists enrich themselves by siphoning off a lot of this expansion in the form of bonuses and dividends. But these bonuses and dividends are not the driving force of capital. The driving force of capital is expansion for the sake of expansion. Machines for the sake of machines. Money for the sake of money. The real entity that dominates the corporation is not a person. It a constantly growing chunk of value that takes the form of money and anonymous objects that have no purpose but to grow forever in a nihilistic quest to expand for the sake of expansion. I discuss this from a slightly different perspective in my latest video Subject/Object.

I am indebted to Andrew Kliman for helping me to understand the significance of Marx’s argument in the latter half of Vol. 2 of Kapital. Interested readers should keep in mind that Kliman is currently working on a study guide to all 3 volumes of Kapital that should be ready in the next year of so. Also of interest is a section of Kliman’s brand new book “The Failure of Capitalist Production” which discusses these reproduction schemas (the models of a capitalist economy broken up into D1 and D2). Kliman tracks the growth of D1 empirically over that last century showing that as capital grew D1 grew at the expense of D2. Kliman also draws some important conclusions from this, conclusions that I don’t have room for here but will summarize/bastardize in short: if D1 can grow on its own, creating its own demand for its product, then there is something wrong with theories of crisis that claim that capitalism goes into crisis because of a lack of consumer demand due to low wages. If D1 can create its own demand, and if it is the growth of D1 which causes capital to grow, then lowering wages should actually be good for the economy not bad for it. This means that politics of wealth distribution that claim we can have healthy capitalism if wages are higher are logically flawed. Low wages are good for capital. Capital is good for capital but it is bad for people. Capital is not people.

My girlfriend chides me that I am too quick to criticize and too slow to offer constructive advice. In the spirit of rectifying this character flaw, I offer the following advice for Mark Provost and all others who may care to debate Mitt Romney in the future on this topic. When Romney tells you that corporations are just made up of people you can respond by saying one of the following:

1. “Actually there is a huge and growing portion of the value of corporations that never ends up in the pockets of workers or the pockets of capitalists! It is money that stays in the form of factories, machines, etc. and just grows for its own sake. It grows at the expense of the worker. We work for it not the other way around.”

2. “Put down the Book of Mormon and read volume 2 of Marx’s Kapital.”

3. “If I wrote Volume 2 of Kapital on a gold tablet and buried it in the hills of New York would you take the time to read it?”

4. “Fuck you, clown.”

Law of Value 9: Abstract Labor, draft (parts A and B)

This is draft of my script for Abstract Labor, the 9th video in my Law of Value series. I always appreciate the comments, suggestions and criticism on these drafts. They really help me focus the scripts. This video has a different format. It is broken into two short parallel videos. Video A discusses the concept of ‘abstract labor’. Video B discusses the method of abstraction in Video A. It deals with the concept of abstraction and explains the way Marx uses the concept to capture the totality of capitalist social relations and destabilize his bourgeois opponents.

[everything in brackets is a note about possible visual images for video production]

(everything in parenthesis is something I’m considering cutting out and relegating to footnotes)

Law of Value 9A: Abstract Labor

Money can really fuck you up. It can make you lose your home. It can make you go to work. It can topple governments, cause wars, pave the jungles…

Of course it’s really nothing by itself: pieces of paper, digits in a computer… And of course money doesn’t literally take away homes, topple governments, cause wars or fuck you up. People do these things. Money then seems to have a strange power to compel people to do things. It has a certain social power.

What kind of social power does money have? It seems to have any social power we might want it to have. In a society in which social life is coordinated by market exchange money has the ability to buy any aspect of this social life, to compel any action, to coordinate any complex activity. The more money we have, the greater our ability to command this social power. This is a non-specific power. It is not tied to any particular activity, commodity or person. It is social power in the abstract. [word 'abstract' appears]

This abstract social power goes by another name: value. The subordination of society to the rule of value we call: The Law of Value.

[Title Sequence]

Value, then, is quite an abstract substance. It does not refer to any specific concrete thing. It is just value in the abstract, social power in the abstract. Our society is ruled by an abstraction. But it is certainly not true that all societies in all times were ruled by abstractions, by value. Only in a certain type of society is social life ruled by abstractions. This begs the question: “What sort of organization of society is necessary for the existence of value in the abstract?” [question appears on screen]

(We ask this question not for fun but because the answer will allow us to figure out how to create a society not ruled by the law of value.  There are several possible answers to this question but not all of them are complete answers. We will move through several answers, several perspectives, the incompleteness of each vantage point driving us to probe further into the social fabric of a capitalist society.)

Free Market

The existence of value implies the free exchange of things between people. Perhaps this is the essential feature of a society ruled by the law of value, by abstractions. In bourgeois theory this free exchange is often deemed all that is necessary to characterize the fundamental elements of our society. We are told that we live in a “free market society” (or that we should live in one), or a “free enterprise system”. Since this narrow picture seems only to show consenting individuals freely engaging in mutual agreements it is often used by apologists of the status quo to defend the system. After all, what is wrong with freely making mutual agreements with others? The positive aspects of this vantage point have influenced some anarchists that seek to build mutualists societies of freely exchanging individuals, as well as market socialists who want to cooperatize the workplace yet leave market exchange in tact.

But we need more than just the phenomenon of free exchange to explain the existence of value in the abstract. It is one thing for two isolated individuals to make one exchange [this could be any image of two isolated people exchanging something... dudes in a desert, etc. I would change the text to fit the image]. But it is quite another thing in a society organized through exchange where we can observe regular, predictable exchange ratios between commodities.

A boat equals a thousand cigars. A book equals 4 pears. These are relations of value between things. In order for us to form predictable, reliable exchange ratios between things (in order for us to know how many boats to exchange for cigars) there must be some predictable knowledge of the supply of these things. And in order for exchange to continue everyday there must be a regularly recurring supply that we can predict to some degree. The force that constantly replenishes these supplies is, of course, human labor.

This brings us to a fuller picture of our society ruled by abstractions. Rather than just a society of free exchange, it is also a society in which this exchange is regulated by production. The production of commodities by people creates both the demand for and supply of these commodities. It determines (at one level of abstraction) the exchange ratios between these commodities.

At the same time the exchange of commodities is the means by which the division of labor is regulated. It is only the raising and lowering of prices that can apportion labor between different tasks. Thus we have a society in which exchange and production constantly regulate each other.  Behind the movement of commodity values in the market lies a parallel process of the movement of labor from one task to another. The social power of money, of value, lies in its ability to move about this labor.

Abstract Labor

If the social power of labor comes from its ability to measure and command labor, what kind of labor is this labor? Knitting? Building? Singing? [any examples suffice, depending on good images] It is any kind of labor. Labor in general. Abstract Labor.

We began by asking what sort of society makes the rule of abstractions possible, makes the law of value possible. After penetrating the surface appearance of market exchanges we found that it is a society in which the value relations between commodities are directly related to the labor that produces these commodities. And now we have seen that the abstractness of these value relations is paralleled by an equally abstract aspect of human labor, abstract labor. Does this answer our question as to what sort of society makes such abstractions possible?

No.

Marx is sometimes taken to task for his concept of abstract labor. “How is it possible,” some ask, “for Marx to theoretically equate all of these different sorts of labors? Manual and intellectual labor? Skilled and unskilled labor? etc?”  “Labor is never abstract,” they argue, “but is always a specific type labor.”

Marx’s reply is typical of Marx: We don’t have to theoretically equate all these different labors. Society does it for us. Society already treats all labor as an abstraction. For us as individuals our work seems very concrete and very important. But when we suddenly lose our job because of an economic crisis, when we see jobs move to other countries, when we see entire skill sets replaced by machines, we realize that our own livelihood means nothing to capitalism. For capitalism our work is just an abstract unit in a giant profit calculator. We are just another digit to be moved around. In this sense, though our work seems very specific and concrete to us, for capitalism it is completely abstract. All that matters is that it produces value.

If abstract labor is not a philosophical idea but a real phenomena, a real abstraction that is made by capitalism itself then that leads us to ask again: what sort of society makes this possible?

The answer is this:

People only become abstract units in the profit calculator of capitalism when they sell their work as a commodity in the market. A society ruled by the law of value requires wage labor.

[OWS sign that says "people are not commodities"] People are not commodities but their ability to work is. This is called “labor power”. How does the exchange of commodities apportion labor? This apportioning takes the form of the buying and selling of labor power. Wage-labor is the mechanism by which the “hidden hand of the market” moves labor inputs about.

We finally have an answer that seems adequate to our initial question: what sort of society makes possible the law of value, the subordination of society to the abstraction of value? We see that this abstraction of value is tied to the abstraction of labor. And this abstract labor relies on the existence of labor power as a commodity. When labor-power is a commodity then the specific uses of that labor become irrelevant to capital. All that is important is that profit can be produced by exploiting this labor. It doesn’t matter if this labor knits sweaters or makes guns. It doesn’t matter if we work 80 hour weeks or work dangerous jobs. It doesn’t matter when the mines collapse on us. It doesn’t matter when we are replaced by robots or when our jobs move somewhere else. It doesn’t matter when unemployment drives down our wages. Our work is just an input into the production of value, of social power. Capital is the expansion of this value, of this social power, for its own sake, not for any particular purpose.

Yet our answer to this question still points to other questions. What sort of society is necessary in order for wage-labor to be the dominant form of labor? We must have a society in which people don’t have access to their own means of production but instead must sell their labor power in the market in order to survive. This requires private property, a capitalist state to guard this property, and lots of drugs and smooth jazz to keep us passive.

So the institution of wage-labor which forms the foundation of the social power of the law of value require a whole host of political, institutional and social factors. In searching for an answer to our question we have encountered, rather than one simple answer, an assemblage of factors, like pieces in a complex puzzle.

Conclusion

We’ve heard demands to “end capitalism”, “end exploitation”, “end private property” and “abolish class”. That all sounds great. We don’t usually hear people talk about “abolishing Abstract Labor”. It certainly sounds like an obtuse philosophical demand. But, as we’ve seen, Abstract Labor is a very real thing, not just a philosophical idea.

When critiquing capitalism it can sometimes seem difficult to identify what it is we want to end- what exactly would be required to break with the capitalist mode of production. Different political positions on this issue come from different ways of seeing the way the complex array of pieces of capitalism fit together. (Here we’ve traced the abstract social power of money and value to wage-labor. But we’ve also seen that this wage-labor is dependent on a complex assemblage of social and political arrangements.)

For the market-socialist vision, it seems that all we need to do replace the class-relationships in the workplace with a cooperative workplace, leaving market exchange in tact. But such a cooperative society would still have wage labor, socially necessary labor time, value in the abstract, and abstract labor. Cooperatives would still be compelled by competition to produce surplus value in order to expand production and stay competitive. Production would still be for the sake of producing surplus value, and not for the sake of bettering society. It is probable that the most efficient and successful firms would be those with the least cooperative structure and the highest disciplining of labor.

For the 20th century communism of the USSR and China it was the seizure of state power by a vanguard of the working class, the nationalization of property, and the administration of  production by a plan that was thought to be sufficient to break with the capitalist mode of production. Yet the plans of the planners resembled the most despotic plans of the capitalist workplace. In order to compete in the world market planners found that they needed to extract the highest amount of surplus value from workers as possible. There was still wage labor, socially necessary labor time, surplus value and abstract labor. The same year the conveyor belt was introduced to Soviet Russia they revised their textbooks to claim that the law of value applied to socialism.

This means that if we are to be serious about anti-capitalist politics we have to be series about our analysis of capitalism. What is it we are really trying to do-away with? And what forms of organization can replace capitalism effectively?

Law of Value 9B: Abstraction

Jackson Pollock- Number 8

The word “abstract” can mean many different things. A painting is abstract if it doesn’t have any references to representational objects. An idea is abstract if it moves out of the realm of concrete examples and deals with general principles. When Marx talks about “abstract labor”, as we discussed in video 9, he is using the term in a unique way. For Marx the abstraction that is abstract labor is not one that happens in the minds of philosophers. It is one that happens in reality. It is a “real abstraction”.

This seems an interesting enough proposition to warrant this brief supplementary video on the topic of Abstraction.

To Abstract or Not to Abstract

What does it mean to abstract? We abstract all of the time. When we say “woman” we are not talking about any concrete specific woman. We are talking about women in general. Yet, there is no such thing as a woman in the abstract. We cannot meet her at a bar and buy her a drink. We can only experience concrete women, specific women.

To attempt to look at the complex totality that is a capitalist society only in its concreteness, only in the specific actions of trillions of individuals all happening at the same time, would be madness. We have to separate out the patterns, finding terms that can encompass a broad swath of concrete behaviors into general, abstract terms. Instead of talking about rice, tanks and DVD’s we have to talk about commodities. Instead of talking about carpentry, dentistry, and bicycle repair we must talk about labor.

When we use the word “abstract” we can mean the verb, the act of abstracting, or we can mean the noun, the concept which forms an abstraction.

There are many abstractions which we may choose to extract out of the complex totality of capitalism and label as the most important, fundamental defining abstractions. In forming our abstractions we have choices to make. The way we abstract and the way we piece together these abstractions determines what full picture of the totality we come up with.

An abstraction by itself will always be an incomplete picture of the totality. In the video on Abstract Labor we began with the abstract power of money. This did not seem adequate to explain capitalism. We were left wondering how there could exist this strange phenomenon of value in the abstract. There was something incomplete, lacking, in our abstraction. We looked to the sphere of exchange, where the exchange of commodities form value relations between commodities. We found that this perspective was still incomplete because it didn’t explain how we could have regularly recurring supplies of and demand for commodities. This led us to examine a labor process that was coordinated by exchange which gave us the idea of Abstract Labor.  But this too was an incomplete picture until we introduced the notion of wage-labor which explains how it is that labor can be come an abstract accounting unit in the profit calculator of capital. But wage-labor then implies a certain class relation, private property and a capitalist state. It was only when these political and institutional factors all came together that our initial abstract was grounded enough to give us an adequate answer to our initial question.

Hegel (Schlesinger 1831)

This movement from the abstract to the concrete is a key feature of Hegel’s dialectical method. Yet there is something quite distinctive to the way Marx uses this method: the way Marx’s abstractions are grounded in the real material practices of capitalism.

When we talked about the abstract term “woman” we noted that we cannot ever meet “woman in general”, but only specific women. However we can meet “value in general”. In fact, we carry it around with us everyday in our pocket. It is money. So the abstraction that is value is not a mental or philosophical one. It is a real one. This is why Marx begins his analysis of capitalism with an analysis of the value-form.

This also differentiates Marx’s method from bourgeois methods of understanding capitalism. For Austrian economists like von Mises it is the abstraction of free human action that is the foundational abstraction that frames the theory of capitalism. But we cannot ever see “human action” in the abstract. It is merely a philosophical device and thus appears as an arbitrary starting point for a philosophical system, begging the charge of being an ideologically motivated starting point.

Because abstract labor is a real abstraction this means that the theoretical system that we build out of it is not just a question of logically extrapolating principles and ideas in our heads from a given a starting point, like we would do in bourgeois philosophy. Rather, since the abstraction is a real one, we must proceed by trying to ground this abstraction in real social practice. It becomes an anthropological investigation. This is why, in video 9, the question that always propelled us forward in our analysis was “what sort of society makes this abstraction possible?” We had to uncover a complex system of social practices that allowed such an abstraction to emerge. Such an approach of grounding our analysis in real social practices keeps us from falling into the trap of fetishism.

Fetishism

We have talked about the fetishism of commodities in several videos, uncovering different aspects of the fetish along the way. In one sense the fetish is a bad abstraction. A fetish attaches the social power of the whole to an isolated, abstracted part of the whole. For instance, when we say “money is power” we are taking the social power of labor, as commanded by the value form, and attributing it to little pieces of paper. To treat money like it has some inherent social power is a fetish.

On the other hand, the social power of money doesn’t go away just because we have exposed the fetish with our fancy theories. Money really does have power because value is a real abstraction. This makes Marx’s fetish argument quite mysterious and tricky. It is one thing to make a bad abstraction and attribute the powers of the whole to one piece of the whole. It is quite another when this abstraction is a really existing phenomenon that can’t be changed by theory.

Depending on our vantage point we can argue two different points. One the one hand money and commodities are just objects and do not have any inherent social powers. They derive their value and social power from a specific organization of labor. On the other hand the social power of money and commodities is not an illusion. In a capitalist society they really do have value and social power. The fetish is real.

This strange phenomenon of commodity fetishism leads to all sorts of confusion when we think about capitalism. It can lead people to the conclusion that money has some inherent value, that capital creates its own surplus value without labor, and that exchange value comes from the material properties of commodities. We often call these ideas fetishes but it would be more correct to call them ideas generated by the fetishism of commodities.

Marx does not just dismiss such ideas. Instead he subjects them to the same sort of analysis that we have just discussed: he seeks to ground these ideas in real social practices. All of video 9 could be seen as a Marxist critique of the idea that money has some inherent value. Rather than dismissing the idea we acknowledge the fact that money does have power. We then show that this power is not a result of the material properties of money but a result of a specific sort of social organization of labor. Thus we can show that such an idea, the idea that money is power, is the result of a specific type of social relation. In this way Marx destabilized bourgeois theory. He takes bourgeois ideas and shows why they are possible.

Law of Value 8: Subject/Object

part 1:

part 2:

part 3:

part 4:

One of the more common objections raised to Marx’s theory of value, at least here in the theoretical void of cyberspace, is the objection posed by subjective value theory. Though these modern objections often take quite a crude, simplistic tone, they are echoes of a rather old debate, one that dates back to debates between Marxists and Austrian economists that took place in the late 1800′s and early 1900′s. Austrian thinkers like Bohn-Bawerk and Mises were staunch defenders of free markets and private property, seeing capitalism as the ultimate expression of human freedom. In response to the revolutionary challenge of Marx’s economic ideas they advanced an alternative view of economics in which economic value was not determined by human labor but by the subjective valuations of individuals.

The Austrians called their theory Subjective Value Theory (STV), also known as marginal utility theory, and they called Marx’s theory an Objective value theory. Marx himself never used this sort of language to describe his theory because such a simplistic dichotomy would have robbed his theory of much of its nuance and depth. Nevertheless, Marx’s defenders often accepted this dichotomy, advancing a staunch defense of Marx’s supposed “objective” theory of value. If we really want to understand Marx’s theory of value we need to dig a little deeper than this.

At first it may seem that this debate over value theory is purely an academic one, not so urgent an issue in these times of crisis and political upheaval. But value theory actually sits at the center of any theory of capitalism and is therefore extremely relevant if we are to understand this crisis of capitalism. The Subjective-objective debate is more than just an academic feud about how to theorize prices. It is a debate about two rival visions of the world, one deeply apologetic of capitalism and one radically critiquing it.

Though mainstream neo-classical econ has sought to distance itself from the  the particularly extreme capitalist apologetics of the Austrian school, both share a common origin in the theory of Marginal Utility. (1) This economic crisis has brought to light the utter bankruptcy of mainstream economics as its ideologues stutter and stumble in the face of an economic depression that doesn’t fit into their models, bringing into question its most foundational theories, like the theory of marginal utility. In this crisis it is important to understand the failures of the dominant ideology so that we know what we are fighting and how not to replicate those mistakes in our own movements. Therefore we will need to spend some time in this video laying out some of the fundamental failures of the subjective, or marginalist approach to economics.

The mantra of all ideologies is the phrase “that’s just the way things are.” Econ professors and right-wing pundits love to use this phrase. When factories close they tell us “that’s just the way things are”. When people are poor and live in degradation we are told that this is the way of the market and that nobody is to blame but the poor themselves. They can make this argument because their theory of the market is based on a theory of subjective value. If economic value is subjective, as the theory of Marginal Utility argues, then the marketplace is just a clearinghouse for our desires. It serves as a vast, unconscious, democratic network, adjusting needs and production with scarcity to provide the best possible organization of our competing subjectivities. The outcome of this market process can’t be critiqued because it is just the spontaneous result of our desires. There is nobody to blame if something goes wrong. Responsibility is dispersed between millions of individuals. The only thing we can critique, from the Austrian perspective, is those who try to interfere with this market process, like unions, social movements or the government.

If value is entirely subjective then we also can have no theory of exploitation. The division of the social product into wages of workers, profit of capitalists and rent to landlords is not explained by the power of these social classes. Instead it is seen as the result of purely technical factors, like the scarcity of inputs relative to the subjective decisions made by workers and capitalists as they enter into free contracts. Rather than a theory of classes, we have a theory of pure individuals, all seen as equals in the market. And since individuals have always had subjective values the subjectivists can argue that capitalism is the expression of universal human characteristics and not a particular historical form subject to change.

It certainly is true that when we go to the grocery store to spend our meagre wages we get to choose between Coke and Pepsi. But if this sort of choice is the ultimate horizon of human freedom then we really haven’t achieved much as a species. While subjectivists busy themselves with complex models of consumer behaviour as we choose between Coke and Pepsi, they miss the fact that these choices happen within the context of larger institutional arrangements which we have no choice over at all. It is these larger structures that Marx is interested in: private property, wage-labor, commodity exchange, and the law of value. For Marx the market is a place where blind economic laws dominate over us, where subjects are powerless and where objects like money and commodities are imbued with social powers. We are all hyper-aware of this fact today as we watch the most powerful people and states in the world flounder helplessly in the face of this economic crisis. The Law of Value commands, people obey.

a point of clarification:

Great confusion comes from the fact that the word “value” is used to mean different things. Some people think that because you and I make personal value judgements when we go shopping that these judgements must be the source of the value of commodities.  But the personal value judgements we make in our heads are not the same as the exchange values of commodities. Commodities have exchange values, the quantitative ratios in which they exchange with other commodities. People make value judgements, judgements which are not measurable or quantitative. Just because we use the same word, value, for both phenomenon doesn’t mean that they are the same thing or that there is any relation between the two at all. This relation has to be proven. Many logical mistakes are made by people who don’t distinguish between these two uses of the same word. Don’t be one of those people!

STV argues that we can understand exchange-ratios solely through a theory of the subjective, psychological motives of consumers. It’s attempt to do so is fatally flawed, shot through with unwarranted assumptions, shoddy abstractions and circular logic. Let’s take a look at some of these problems

The Subjectivist Vacuum, or, Pay No Attention to the Man Behind the Curtain

Welcome to Subjectivist Island. Here lives Eugene, our happy island barbarian. Everyday Eugene makes choices. He decides to spend his time building his teepee, catching fish, or practicing his backstroke. He likes the backstroke most of all, but after so many laps around the island he gets tired of it and starts to prefer catching fish or teepee building. Intent on maximizing his utility, Eugene gets out some paper and a pencil and makes himself a preference scale so that he can figure out the exact proportions to devote to all 3 activities each day. He cherishes this preference scale because it is the source of his freedom. It’s just like the preference scale you carry around in your pocket everyday….. you carry one don’t you? (2)

Ok, now setting aside the fact that most of us don’t carry around a preference scale in our pockets, there is a bigger problem: Subjectivists want you to believe that this little story about Eugene and Subjectivist Island is all that you need to know in order to understand the functioning of modern capitalist society. Funny then, that we had to abstract away all of capitalism, all society in fact, in order to arrive at our theory of preferences. Were we to think critically we might begin to suspect that there is something fishy going on with this abstraction. That fishy something is the stink of an ideological abstraction. We discussed such ideological abstractions in the last video, Law of Value 7, but let’s review a few points here.

The point of a dominant ideology is to make it seem like the present order of things is a universal order; that the status quo is the natural expression of things, unchangeable. How convenient then, for our bourgeois theorists, that our natural, universal man, Eugene, happens to contain the seed of modern capitalist society in all of his preferenc-ing and acting. It’s as if every choice made by every human since the dawn of time was just an expression of innate capitalist instincts, waiting to come into being in our modern society.

But it’s not enough just to point out the obvious ideological basis of subjectivist theory. We must also prove that this ideological abstraction is illegitimate. Let’s do that. It should only take a few minutes.

The parable of Subjectivist Island leads one to think that human desires are formed privately, independent of society. But this has never been the case. Desires are taught, socially constructed, and can’t be understood independently of society. How do subjectivists respond? They say “Yes desires may be constructed but this is out of the scope of economics so we don’t have to consider it.” In fact, this is how modern economics deals with all criticism- it ignores it and says it’s the topic of another discipline. How convenient! It’s like saying that we don’t have to consider the fact that the earth is round because that’s beyond the scope of flat-earth theory.

We can’t understand desire without also understanding the ways in which we go about attaining our desires. Here’s where the abstraction of Subjectivist Island breaks down. On the island Eugene attains his desires by directly acting to get the things he wants. But these are not the sort of choices we make in a capitalist society. In capitalism we have to sell our labor to someone else so we can make a wage that we can then spend on the things we want, but only after we’ve given most of our wage to the landlord, the mortgage company and the state. Subjective value theory has to prove that it can move this abstract model of choice from Subjectivist Island to a full-scale capitalist economy. It does this through the fantasy of barter.

Let’s say Eugene, while back-stroking one day, discovers another island called Barter Island. Here lives Ludwig who cracks coconut all day. They decide to trade fish and coconuts, each one carefully measuring their utilities for fish and coconuts on their preference scales, calculating the precise exchange ratios to maximize their utilities, resulting in an exchange ratio between coconuts and fish. “Now,” says the subjectivist, “we have shown that our abstraction was legit and that we can explain exchange ratios purely through the science of preference scales.” If only it were that simple.

The first thing we might notice is that the exchanges on Barter Island can only take place because Eugene and Ludwig have different resource endowments. If they both had access to coconut and fish then there would be no reason to trade. In order for trade to continue in a sustained way, trade must reproduce these differences.

This means that in order for a capitalist market to work there must be the constant reproduction of a certain type of property relations in which people have to enter the market in order to get what they need to live. Specifically people must be deprived of their own means of production, forced to enter the market to sell their labor in order to buy the things they need. This property relation must be continually reproduced through exchange so that there is always scarcity and people are always dependent on the market.

Thus, we can see that something very sneaky has been done. Hmmm… what is it?  We were trying to form a theory of barter based solely on subjective preferences when all the sudden we realized we needed to assume a certain type of property relation in order to make any sense of it. Thus, abstracting away property relations and forming a theory of exchange without them is impossible and illegitimate.

Even more damning is the fact that capitalist societies don’t have anything to do with barter. People don’t produce to directly exchange products for other products. We produce in order to exchange things for money. Money is an intermediary in all economic activity. So it makes no sense to say we measure our subjective utility for coconuts against fish when exchanging. We measure everything against money. When you are in the supermarket calculating your preference scales with the Preference App on your iPhone you aren’t just considering your preferences for fish and coconuts in the abstract, as if on a desert island. You are also considering the market prices of these commodities. This market price already exists before you make your subjective value judgements.

But this is problematic. Subjective valuations were supposed to explain price, but now we have to assume the prior existence of prices in order to explain subjective value judgements. It seems we are stuck in a big messy circle.

And if we are exchanging everything for money then we must have a utility for money right? But money has no direct utility. It’s not even good for blowing your nose on. The value of money is what it will buy. And this is not set by our preferences but instead reflects the relation of money to all other commodities, reflecting the vast interpenetration of millions of markets all over the world. There is no such thing as a personal utility for money because money’s value is already established by forces beyond our control. (3)

And there are more difficulties presented to subjective value theory by the presence of money. On Barter Island Eugene and Ludwig had direct knowledge of what they were getting from each exchange. But in our world we don’t know exactly how much everything is going to exchange for ahead of time. When we sell a product in the market we don’t know exactly what products we will be able to buy with that income. There is a high degree of uncertainty. But with so much uncertainty how are we ever to form those nice, rational preference scales where we’ve perfectly calculated the exact utility relations of all commodities to each other? Well, we can’t!  (4)

It seems that every time we try to abstract away property relations and production relations they end up sneaking back into the picture. This is because it is absolutely illegitimate to try to explain capitalism without a theory of the social relations between people as they actively produce the world they live in. Luckily we have a better theory, that of Karl Marx.

In the Real World….

In the real world, outside of the fantasies of bourgeois economics, subjects and objects have no meaning apart from their relations to each other. There is no such thing as a subjective individual floating in a vacuum. We develop our subjectivity through our relation to the objective world we inhabit. And the objective world can’t be understood apart from the actions of societies of individuals who transform this world, bending it to their will, giving it meaning. Subjects and objects always exist in a relation, deriving their meaning from this relation.

On Subjectivist Island it seems like subjects form their value judgements through passive contemplation before they act on them; judging happens first and then action. In the real world we can only understand our subjective preferences once we understand the active process by which people relate to and transform the world. People work on nature. We chop trees and make houses. We build cars and dig up oil to power them. In transforming the objective world we also transform ourselves. The modes by which we work upon the world determine our views of the world, the sort of values, needs and desires we have in this world and the manner in which we pursue those desires. These different modes of producing have changed throughout history, each mode producing very different sorts of societies with very different value systems. These different modes of relating to and transforming the world Marx calls “modes of production”. (5)

Capitalism is not the first mode of production characterized by extreme inequality, war, exploitation and instability. These qualities are part of all class societies. What is unique about capitalism is the way this domination of one class over another takes the form of relations between commodities. This is due to a particularly unique subject-object relation in capitalism, something Marx refers to as “subject/object inversion”. We will return to this in a moment.

Subjects, Objects and their Prices

Objections to Marx’s theory of value often have to do with the way his theory of value relates to market prices. If value comes from the amount of labor that goes into producing things, then how do we explain the fact that a rise or fall in demand changes market prices? The fact that demand influences price makes it seem like subjective decisions influence value as much as labor time.

The value-price relation is not an easy one to enclose in neat, tidy definitions. The more we look at it the more complex the network of social relations that go into the formation of prices. I will deal with the value-price topic in more detail in a future video (Law of Value 11: Price), but a few remarks are in order here. We’ve actually covered this ground briefly before in Law of Value 3 where we talked about the way private labor becomes social labor. (6)

Private labor is the amount of labor an individual worker devotes to the production of a commodity. The goal of the worker is for her private labor to become social labor, that is, that her commodity be sold in the market and thus be equated with all the other commodities in the market, making her labor part of the total social labor of society. But this isn’t so easy. Because production is only coordinated through the fluctuation of market signals, it is always uncertain whether commodities will be sold, and whether private labor will become social labor.

As we’ve seen in previous videos, in order for private labor to become social it must produce at the socially necessary labor time. SNLT is a way in which the social level of productivity acts back upon the private labor of the individual, disciplining the individual to work at the social average. Individuals or firms that can’t work at the SNLT go out of business, like when American auto-workers lose their jobs due to competition with plants in other countries. Their labor is then reallocated to other areas where they can be more profitable, or they don’t work at all. As many of us know, losing a job and having to find new work is a long, hard, painful process. But these discomforts don’t matter to the market. The market treats all labor like digits in a calculator, anonymous units to be moved around in the search of profit. The gap between private labor and social labor is the mechanism by which labor is moved around and reapportioned through the blind forces of the market, in the absence of a social plan. (7)

Now all this should sound familiar. But what does this have to do with the relation between demand changes and price? The same process of reapportioning labor happens with changes in demand.  Just like the need to produce at the SNLT, society must also apportion the right amount of labor to produce the right amount of things so that markets don’t become over-saturated or under-stocked. If the supply of elevator music exceeds demand then some of this music will remain unsold and some of this private labor will not become social. Producers will be forced to move their labor elsewhere. This apportioning of labor happens through the fluctuation of price. [insert image of person thinking, though bubble creating a commodity, or a price sign or something] This does not mean that demand creates value. Demand hasn’t created anything. It has merely indicated, through price signals, that labor needs to be reallocated. This is how demand effects the distribution of social labor in a society coordinated through the fluctuations of prices. This distribution is only possible because there is a relation between prices and labor time.

A further examination of demand

So we can show that demand, rather than creating value, is part of the reallocation of labor that is implied in the gap between private and social labor. But we can also take the analysis further and show how demand itself is produced in capitalism. From the perspective of subjectivist island it seems like demand is the product of free, independent minds, viewing reality from some distant, objective standpoint. But in reality our subjectivity is a part of a mode of production. This is nowhere more apparent than in the capitalist mode of production. In capitalism the only type of demand that counts is “effective demand”, that is demand backed up by purchasing power. Consumer demand comes from wages paid to workers. That means we can’t understand demand without first understanding wage labor and exploitation.

The products which consumers buy with this money are not just the random result of psychological preferences. In fact, most of our money goes to the purchase of very basic things we need in order to keep us alive as workers so that we can produce more value for capitalism each day: rent, food, clothes. (8) These are needs and desires dictated to us by capitalism, for the purpose of perpetuating capitalism, not the abstract psychological preferences of isolated individuals. (9)

But the bulk of the demand in society comes not from consumers but from capitalists. You and I buy toothbrushes and pay rent. Capitalists buy factories, assembly lines, natural resources, and private armies. This demand has nothing to do with the personal preferences of capitalists. (10) It has to do with the technical requirements of production, the amount of inputs it takes to make a widget at the SNLT. Some people think that capitalists enter production only in order to meet the demands of consumers. This is a myth. The advertising industry is the best refutation of this myth. Capitalists produce in order to make a profit. Then they go looking for markets. Most of the time they have to create the market by convincing people there is a need for their product. But capitalist firms also sell to each other, totally bypassing the need to find consumer markets. (11.)

This all gives us a very different picture of the subject-object relation than we get in bourgeois economics. Rather than a free society of empowered individuals who are free to act upon their abstract desires and take full-responsibility for their lot in life, Marx’s critique of the capitalist mode of production reveals a world in which individuals are at the mercy of the coercive laws of the market. The sorts of superficial freedoms they have to choose between coke and pepsi pale in comparison to the disciplining of our lives to SNLT and the pursuit of profit.

Subject/Object inversion

[Mitt Romney quote about corporations being people]

There is a lot of talk in the Occupy Wall Street movement about ending “corporate personhood”. The problem with this demand is that the legal status of corporate personhood is just the icing on the cake. In a capitalist society corporations are much more like people than people are. Capital is the active subject and people its object. This is what Marx means by “subject/object inversion.” Rather than people being the active agents of the social order it is the “objective” logic of the market that dominates subjects. Blind economic laws rule and people obey. Money becomes more powerful than life. Corporations become people and exert more power in society than individuals or even social movements. While people run around in the street with signs begging the system to take notice of them, the cold-logic of capital becomes the active agent in society, using the body of the worker like a passive expendable commodity, subordinating societies, governments and even nature itself to the impersonal motives of profit.

The crazy thing is that this “objective” world is still just the product of our own creation. We actively reproduce it everyday. This is what makes Marx’s critique of capitalism so powerful: The world we live in, despite the incredibly disempowering structure of our current situation, is always only the result of our own actions and we do have the ability to collectively change it. But in order to exercise such collective power we must break with the capitalist mode of production.

conclusion:

In case you were wondering Subjectivist Island and Barter Island don’t exist. They are abstractions. Now every theory needs abstractions- we must sift through a world of data and identify the broad contours and important categories that define reality. Subjectivist and Barter Islands are “ideal abstractions”, that is, abstractions that exist only in the minds of philosophers.  Marx makes a different kind of abstraction, a “real abstraction”. A real abstraction is not made by philosophers arbitrarily leaving out parts of social reality. A real abstractions is made by reality itself.

In a capitalist society human labor becomes abstract. In the caste system of feudalism where people were born into certain types of work and there were strict divisions between castes there was no such thing as labor in general, or a worker in general. But in a capitalist society labor loses all of these specific features. Capital treats us like anonymous digits in a profit-calculator, moving us from place to place in the search for profit. Our labor becomes abstract labor. We become, not peasants, knights, or artisans, but workers in general. Marx’s theory of value is based on this real abstraction that is made by the mode of production itself, not the minds of philosophers.

This doesn’t mean that the perspective of marginalism comes from nowhere. Marginalism comes from a real existing standpoint within capitalism, the standpoint of the atomized individual contemplating commodities. This standpoint is real. We experience it everyday at the grocery store. But it is an incomplete perspective because it leaves out the entire world of social production that puts commodities on the shelves and money in our pockets. This perspective is the perspective of commodity fetishism, in which the social power of our own labor takes the form of inherent properties of objects. (12)

But in times of economic crisis we see cracks in the walls of this reality. Old ways of thinking lose their relevance. Crises are a time when the economic laws of capitalism are exposed not as eternal, universal laws as the bourgeois economists would want us to think, but as the particular laws of this time, laws that we might be able to overthrow. As the law of value breaks down, as people start to question the order of things, the capitalist state must enter the picture, replacing the failing law of value with the brutal law of the state. The charming, freedom-loving world of the market apologists is revealed for what it really is, an exploitative order based on violence. Like a schoolyard bully, a system is always the most violent when its weakness is exposed. When the law of value breaks down the politics begin. Subjects must become active. This can be the politics of the ruling class as it scrambles to reassert the status quo or it can be the politics of radical movements that posit the possibility for new social orders.

Footnotes:
1. Undoubtedly I will raise the ire of both neoclassicals and Austrians by treating the two camps as one for much of this video. Both schools of thought have their historic origin in the theory of marginal utility, though the way this theory has been treated and evolved in the two camps has diverged over time. This video deals with marginal utility on a very basic level, analyzing the types of abstractions needed to sustain a theory of marginal utility (namely extracting away production relations) and thus should serve as an appropriate starting point for a critique of either school of thought. There are many more critiques to be made of both camps.

2. Prior to his preference scale Eugene used utils to measure all the objects of his desire. These were basically little bits of his subjectivity that he kept in his pocket like gold coins. He exchanged them with himself every time he made a decision. At some point in the 20th century bourgeois economists decided that utils didn’t exist and replaced them with graded preference scales. These look sort of like a combination of a bar graph and an abacus and all of us carry them with us at all times and consult them before we engage in any human action. They are the primary instrument of our freedom but the government wants to take them away from us and make us slaves.

3. Austrians will be quick to point out that the ‘great’ Ludwig Von Mises provided a solution to this problem of the subjective value of money. He argued that since money was originally a commodity like gold that originally, in barter, people did have a subjective value for the particular uses of gold. Thus the original exchange value of gold was a result of these subjective valuations. Once gold became money, of course, its exchange value was altered by its role in the circulation of commodities. It became worth “what it could buy”. People formed their subjective estimations of gold based on this objective “what it could buy” measure. Yet the fact that we can trace a historic path from the original subjective valuations of the use of gold, to the subsequent layers/sequences of valuations that eventually arrived at the objective value of money seemed, to Mises, a solution to the problem. In Bukharin’s “Economic Theory of the Leisure Class”, in a footnote, he points out that this “solution” by Mises merely replaces an idiographic, historical description for a theory. It doesn’t matter if we can describe some historic process whereby a commodity becomes money. The value of money is not created or altered by subjective preferences for money.

4. The neo-Austrian response to this problem is to distance themselves from the neo-classical idea of the rational consumer and to stress the imperfect information of the consumer. Rather than consumers being super-rational beings that can calculate the relations between the objects of desire, the fallibility of human understanding is stressed and the market is seen as the ultimate informational clearing house which adjusts the imperfect desires of the multitude, smoothing them out, allocating resources in the most efficient and democratic way. Their language often takes on religious overtones here, stressing the inherent insufficiency of human judgement against the omnipotent, mysterious power of the market. The problem is that these magic moves of the hidden hand of the market are just asserted and never proven. Rather than actually proving that the market can do this Austrians prefer to stress that the only alternative is the State-Communist BogeyMan.

5. For Marx the subject-object relation is not just a matter of personal psychology, of people thinking about objects in the abstract. Instead it is based in the real, concrete working activity of people actively transforming the world. This is what is by “materialism.” Often people think that “materialism” means that individuals are unimportant, or history is predestined, but this is not what Marx means. He wants us to understand the specific ways in which subjects and objects relate through the real activity of social groups in their day-to-day activity, in their mode of production.

6. The first thing to note is that, just as the commodity passes through many different hands and fulfills different functions as it moves through the vast network of capitalist social relations, so too value takes many different forms. Different aspects of the value relation come in and out of focus depending on where we turn our gaze. Value can take the form of private labor, social labor, and market price. These three forms of value all act back upon each other, co-determining each other, just as all the various moments of production and exchange influence each other.  Market prices can fluctuate from day to day due the seemingly chaotic way information about prices is transmitted through markets. But through these fluctuations we can observe law-like regularities. etc.

7. And this is why the dream of running your own business and “being your own boss” is only possible in the cracks and interstices of capitalism, in those few paltry industries that it is not profitable for big firms to enter. The amount of resources a large firm has at its disposal make it quite difficult for the self-employed to work at a competitive socially necessary labor time.

8. A timely tangent: The consumption habits of the unemployed and underemployed are also largely dictated by capital. Being unemployed is expensive and time-consuming. One must drive to interviews, have a clean suit to look good for those interviews, send out tons of resumes, etc.

9. This is why we need a theory of distribution before a theory of price. The theory of marginal utility tries to explain price first, and then explain the distribution of the social product between classes afterwards. The most extreme version of this would be the price theory of Mises who argues that not even the cost of production enters into the formation of prices. For Mises, consumers determine prices through their valuations, then the revenue from the sale of the commodity is distributed amongst the factors of production according to the competitive bidding of capitalists. On the contrary, the classical economists before Marx formed their theory of price only after the distribution of the social product between classes… Thus the price of the commodity would be the wages paid to workers plus the profit of the capitalists plus the price of inputs (which go to other capitalists) plus any interest or rent owed to other parts of the capitalist class. Obviously a class analysis of society is only possible with the classical approach.

10. Nor does the capitalist production have anything to do with “corporate greed”. Please, Occupy Wall Street, stop using this ridiculous term. It doesn’t mean anything. There is no such thing as corporate greed. Corporations don’t have personalities. They aren’t greedy. Capitalism is the problem, not the subjectivities of capitalists.

11. Underconsumption theory, one of the more prominent radical theories of the current crisis, is based on idea that production is for consumption. Underconsumption theory argues that since all production is eventually for consumer consumption that a shortage of demand or purchasing power from consumers can cause an economic crisis. This neglects the role of capitalists in creating their own demand for products, not for the personal leisure of capitalists, but for productive consumption, as inputs in the production process.

12. See my video on commodity fetishism: Law of Value 2

Further Reading/Bibliography:

Marx, Marginalism and Sociology by Simon Clarke. This is available online, and I wrote about it recently on this blog.

From Political Economy to Economics by Fine and Milonakis. This is a great history of economic thought with a focus on methodology. It discusses the way economics has been narrowed from the broad social questions of classical economics to the narrow, mathematical abstractions of the modern neo-classical method.

Human Action- Ludwig von Mises. This book is ridiculous. Good for a bathroom read. And if you run out of toilet paper…

Economic Theory of the Leisure Class by Nikolai Bukharin. I have written about this book here.

Dialectical Phenomenology by Roslyn Bologh. This book was quite influential on my thinking about the subject-object relation and the concept of mode of production. It runs cheap on Amazon. It is a discussion of Marx’s method through a reading of the Grundrisse. I highly recommend it.

Disassembling Capital by Nicole Pepperel. This is available here. Pepperel’s blog Uncomfortable Science (formerly Rough Theory) is a fascinating read. She has a really fresh and deeply knowledgeable take on Marx.

further draft of subject-object

Perhaps it borders on narcissism to think that the world is interested in following the successive redrafting of the scripts to my videos. But I suppose there are worse things to clutter the internet with. I do always find feedback quite useful. This is the 2nd half of my Law of Value 8: Subject Object script, totally reworked. I posted the entire script last week but I decided that the second half, which deals with marx’s concept of subject/object inversion needed to be rewritten entirely.

My goals in this revision were:

1. Address the effect of demand on market prices and explain why we don’t need a subjective theory of value to explain this or why this is not a problem for marx’s theory of value.

2. Tie the point about “real abstraction” to the concept of subject/object inversion and fetishism.

3. re-order the flow of concepts to make things as succinct as possible and less academic sounding. This point still needs work.

Here it is:

Subject-Object, draft 4, second half:

In the Real World….

In the real world, outside of the fantasies of bourgeois economics, subjects and objects have no meaning apart from their relations to each other. There is no such thing as a subjective individual floating in a vacuum. We develop our subjectivity through our relation to the objective world we inhabit. And while the objective world can surely exist without subjects, it has no meaning for a social theory like economics except the meaning that people give it. Subjects and objects always exist in a relation, deriving their meaning from this relation.

This relation is not just one of coexistence. It is an active process of by which subjects engage with the objective world, transforming it. People work on nature. We chop trees and make houses. We build cars and dig up oil to power them. In so doing we transform the objective world and also transform ourselves. The manner in which groups of people work on and transform the world around us has changed through history. These different modes of relating to and transforming the world Marx calls “modes of production”. (brief mode of production chart with Feudalism, Slaveocracy, Capitalism, Communism, etc. and some picture depicting S/O relation?) (footnote on materialism)

This productive activity doesn’t just transform and create the objective world around us. it also creates our subjectivity. It determines what sort of things we value, how we go about getting the things we desire and how we relate to other people. Different modes of production produce drastically different types of societies with different value systems, different ways of relating to our desires, and different social relations between people.

Every mode of production is limited in terms of the social results it can achieve. The capitalist mode of production, for instance, though quite good at producing lots of stuff, is unable to solve basic social problems like poverty, exploitation, war, and economic crisis within the parameters of the capitalist mode of production. This is because capitalism has a very interesting quality as a mode of production, a quality Marx calls “subject/object inversion”. We will return to this quality in a moment.

Subjects, Objects and their Prices (image of commodity and person, both with price tags)

Objections to Marx’s theory of value often have to do with the way his theory of value relates to market prices. If value comes from the amount of labor that goes into producing things, then how do we explain the fact that a rise or fall in demand  changes market prices? The fact that demand influences price makes it seem like subjective decisions influence value as much as labor time.

The value-price relation is not an easy one to enclose in neat, tidy definitions. The more we look at it the more complex the network of social relations that go into the formation of prices. I will deal with the value-price topic in more detail in a future video (Law of Value 11: Price), but a few remarks are in order here. We’ve actually covered this ground briefly before in Law of Value 3 where we talked about the way private labor becomes social labor. (footnote on price)

Private labor is the amount of labor an individual worker devotes to the production of a commodity. The goal of the worker is for her private labor to become social labor, that is, that her commodity be sold in the market and thus be equated with all the other commodities in the market, making her labor part of the total social labor of society. But this isn’t so easy. Because production is only coordinated through the fluctuation of market signals, it is always uncertain whether commodities will be sold, and whether private labor will become social labor.

As we’ve seen in previous videos, in order for private labor to become social it must produce at the socially necessary labor time. SNLT is a way in which the social level of productivity acts back upon the private labor of the individual, disciplining the individual to work at the social average. Individuals or firms that can’t work at the SNLT go out of business, like when American auto-workers lose their jobs due to competition with plants in other countries. Their labor is then reallocated to other areas where they can be more profitable, or they don’t work at all. As many of us know, losing a job and having to find new work is a long, hard, painful process. But these discomforts don’t matter to the market. The market treats all labor like digits in a calculator, anonymous units to be moved around in the search of profit.
(long footnote on self-employment)

In addition to producing at the average level of productivity, there also must be a demand for the products of labor if private labor is to become social. If too much private labor goes into the production of elevator music than there is demand for elevator music then some of this music will remain unsold and some of this private labor will not become social. Producers will be forced to move their labor elsewhere. But rather than this being an example of demand creating value, it is an example of how changes in demand effect the distribution of social labor. This is part of the phenomenon Marx is explaining in his theory of value: the labor of society is coordinated through the fluctuations of prices, a phenomenon only possible because there is a relation between prices and labor time.

Furthermore, demand itself can only be understood if we abandon the concept of the isolated individual and see demand as part of a huge social process whereby capitalist production reproduces itself. The only type of demand that counts in the market is “effective demand”, that is demand backed up by money. Consumer demand comes from wages paid to workers. The products which consumers buy with this money are not just the random result of psychological preferences. In fact, most of our money goes to the purchase of very basic things we need in order to keep us alive as workers so that we can produce more value for capitalism each day: rent, food, clothes. (footnote on consumption) These are needs and desires dictated to us by capitalism, for the purpose of perpetuating capitalism, not the abstract psychological preferences of isolated individuals.

The bulk of the demand in society comes not from consumers but from capitalists. You and I buy toothbrushes and pay rent. Capitalists buy factories, assembly lines, natural resources, and private armies. This demand has nothing to do with the personal preferences of capitalists. (corporate greed footnote) It has to do with the technical requirements of production, the amount of inputs it takes to make a widget at the SNLT. Some people think that capitalists enter production only in order to meet the demands of consumers. This is a myth. The advertising industry is the best refutation of this myth. Capitalists produce in order to make a profit. Then they go looking for markets. Most of the time they have to create the market by convincing people there is a need for their product. But capitalist firms also sell to each other, totally bypassing the need to find consumer markets. (footnote on undercon)

This all gives us a very different picture of the subject-object relation than we get in bourgeois economics. Rather than a free society of empowered individuals who are free to act upon their abstract desires and take full-responsibility for their lot in life, Marx’s critique of the capitalist mode of production reveals a world in which individuals are at the mercy of the coercive laws of the market. The sorts of superficial freedoms they have to choose between coke and pepsi pale in comparison disciplining of our lives to SNLT and the pursuit of profit. (images of clocks)

Subject/Object inversion

[Mitt Romney quote about corporations being people]

There is a lot of talk in the Occupy Wall Street movement about ending “corporate personhood”. The problem with this demand is that the legal status of corporate personhood is just the icing on the cake. In a capitalist society corporations are much more like people than people are. Capital is the active subject and people its object. This is what Marx means by “subject/object inversion.” Rather than people being the active agents of the social order it is the “objective” logic of the market that dominates the subjects. Blind economic laws rule and people obey. Money becomes more powerful than people. Corporations become people and exert more power in society than individuals or even social movements. While people run around in the street with signs begging the system to take notice of them, the cold-logic of capital becomes the active agent in society, using the body of the worker like a passive expendable commodity, subordinating societies, governments and even nature itself to the impersonal motives of profit.

The crazy thing is that this “objective” world is still just the product of our own creation. We actively reproduce it everyday. This is the core of what makes Marx’s critique of capitalism so powerful: The world we live in, despite the incredibly disempowering structure of our current situation, is always only the result of our own actions and we do have the ability to collectively change it. But in order to exercise such collective power we must break with the capitalist mode of production.

Now…. do you get any of that heavy stuff with marginalism?

conclusion:

In case you were wondering Subjectivist Island and Barter Island don’t exist. They are abstractions. Now every theory needs abstractions- we must sift through a world of data and identify the broad contours and important categories that define reality. Subjectivist and Barter Islands are “ideal abstractions”, that is, abstractions that exist only in the minds of philosophers. [footnote on praxeology] Marx makes a different kind of abstraction, a “real abstraction”. A real abstraction is not made by philosophers arbitrarily leaving out parts of social reality. A real abstractions is made by reality itself.

In a capitalist society human labor becomes abstract. In the caste system of feudalism where people were born into certain types of work and there were strict divisions between castes there was no such thing as labor in general, or a worker in general. But in a capitalist society labor loses all of these specific features. Capital treats us like anonymous digits in a profit-calculator, moving us from place to place in the search for profit. Our labor becomes abstract labor. We become, not peasants, knights, or artisans, but workers in general. Marx’s theory of value is based on this real abstraction that is made by the mode of production itself, not the minds of philosophers.

This doesn’t mean that the perspective of marginalism comes from nowhere. Marginalism comes from a real existing standpoint within capitalism, the standpoint of the atomized individual contemplating commodities. This standpoint is real. We experience it everyday at the grocery store. But it is an incomplete perspective because it leaves out the entire world of social production that puts commodities on the shelves and money in our pockets. This perspective is the perspective of commodity fetishism, in which the social power of our own labor takes the form of inherent properties of objects.

But in times of economic crisis we see cracks in the walls of this reality. Old ways of thinking lose their relevance. Crises are a time when the economic laws of capitalism are exposed not as eternal, universal laws as the bourgeois economists would want us to think, but as the particular laws of this time, laws that we might be able to overthrow. As the law of value breaks down, as people start to question the order of things, the capitalist state must enter the picture, replacing the failing law of value with the brutal law of the state. The charming, freedom-loving world of the market apologists (ron paul picture) is revealed for what it really is, an exploitative order based on violence.

Like a schoolyard bully, a system is always the most violent when its weakness is exposed. When the law of value breaks down the politics begin. Subjects must become active. This can be the politics of the ruling class as it scrambles to reassert the status quo or it can be the politics of radical movements that posit the possibility for new social orders.

Law of Value 8: Subject/Object -draft

This is a draft of my script for the 8th video in my Law of Value series (see link to the right). All comments and criticisms are extremely welcome… that’s why I post these scripts before going into production.

Subject/Object

One of the more common objections raised to Marx’s theory of value, at least here in the theoretical void of cyberspace, is the objection posed by subjective value theory. Though these modern objections often take quite a crude, simplistic tone, they are echoes of a rather old debate, one that dates back to debates between Marxists and Austrian economists that took place in the late 1800′s and early 1900′s. Austrian thinkers like Bohn-Bawerk and Mises were staunch defenders of free markets and private property, seeing capitalism as the ultimate expression of human freedom. In response to the revolutionary challenge of Marx’s economic ideas they advanced an alternative view of economics in which economic value was not determined by human labor but by the subjective valuations of individuals.

Eugene Bohm-Bawerk

The Austrians called their theory Subjective Value Theory (STV) and they called Marx’s theory an Objective value theory. Marx himself never used this sort of language to describe his theory because such a simplistic dichotomy would have robbed his theory of much of its nuance and depth. Nevertheless, Marx’s defenders often accepted this dichotomy, advancing a staunch defense of Marx’s supposed “objective” theory of value. If we really want to understand Marx’s theory of value we need to dig a little deeper.

At first it may seem that this debate over value theory is purely an academic one, not so urgent an issue in these times of crisis and political upheaval. But value theory actually sits at the center of any theory of capitalism and is therefore extremely relevant if we are to understand this crisis of capitalism. The Subjective-objective debate is more than just an academic feud about how to theorize prices. It is a debate about two rival visions of the world, one deeply apologetic of capitalism and one radically critiquing it.

Though mainstream neo-classical econ has sought to distance itself from the  the particularly extreme capitalist apologetics of the Austrian school, both share a common origin in the theory of Marginal Utility. This economic crisis has brought to light the utter bankruptcy of mainstream economics as its ideologues stutter and stumble in the face of an economic depression that doesn’t fit into their models. An economic crisis is also a time of political and ideological crisis. In an ideological crisis it is important to understand the failures of the dominant ideology so that we know what we are fighting and how not to replicate those mistakes in our own movements. Therefore we will need to spend some time in this video laying out some of the fundamental failures of the subjective approach to economics.

If economic value is subjective, as the theory of Marginal Utility argues, then the marketplace is just a clearinghouse for our desires. It serves as a vast, unconscious, democratic network, adjusting needs and production with scarcity to provide the best possible organization of our competing subjectivities. The outcome of this market process can’t be critiqued because it is just the spontaneous result of our desires. There is nobody to blame if something goes wrong. Responsibility is dispersed between millions of individuals. The only thing we can critique, from the Austrian perspective, is those who try to interfere with this market process.

If value is entirely subjective then we can have no theory of exploitation. The division of the social product into wages of workers, profit of capitalists and rent to landlords is not explained by the power of these social classes. Instead it is seen as the result of purely technical factors, like the scarcity of inputs relative to the subjective decisions made by workers and capitalists as they enter into free contracts. Rather than a theory of classes, we have a theory of pure individuals, all seen as equals in the market.

And since individuals have always had subjective values the subjectivists can argue that capitalism is the expression of universal human characteristics and not a particular historical form subject to change.

Marx would not disagree with the obvious fact that individuals make subjective choices in the market. But he would not be very interested by this fact since these choices happen within the context of larger institutional arrangements which we have no choices at all over. It is these larger structures which we don’t have choices over that Marx is interested in: Private Property, wage-labor, commodity exchange, and the law of value.

Individuals may have the power to choose coke over pepsi but this pales in comparison to our lack of freedom to chose what sort of world we want to live in, to chose meaningful occupations, to live in a world without poverty, injustice war or exploitation. In a capitalist society economic laws have power over people and governments and there is nothing we can do about it. We are all hyper-aware of this fact today as we watch the most powerful people and states in the world flounder helplessly in the face of this economic crisis. The Law of Value commands, people obey. For Marx the market is a place where blind economic laws dominate over us, where subjects are powerless and where objects like money and commodities are imbued with social powers.

a point of clarification:

The argument for a subjective theory of value may appear self-evident at first when we consider the obvious fact that everyone makes subjective value judgements when they go shopping, deciding which commodities we prefer over others. But the personal value judgements we make in our heads are not the same as the exchange values of commodities. Commodities have exchange values, the values they possess in relation to other commodities. Exchange value is most often expressed in money prices.

The discussion can get confusing if we forget that we are using the word “value” in two different ways. In the first sense we are talking about personal, subjective, psychological value judgements that are immeasurable and unquantifiable. In the second case we are talking about quantitative, measurable exchange ratios between commodities (so many apples exchange for so many pencils). Just because we use the word “value” for both things doesn’t mean they are the same.

STV argues that we can understand exchange-ratios solely through a theory of the subjective, psychological motives of consumers. It’s attempt to do so is fatally flawed, shot through with unwarranted assumptions, shoddy abstractions and circular logic. Let’s take a look at some of these problems

The Subjectivist Vacuum, or, Pay No Attention to the Man Behind the Curtain

Subjectivist Island

Welcome to Subjectivist Island. Here lives Eugene, our happy island barbarian. Everyday Eugene makes choices. He decides to spend his time building his teepee, catching fish, practicing his backstroke. He likes the backstroke most of all, but after so many laps around the island he gets tired of it and starts to prefer catching fish or teepee building. Intent on maximizing his utility, Eugene gets out some paper and a pencil and makes himself a preference scale so that he can figure out the exact proportions to devote to all 3 activities each day. He cherishes this preference scale because it is the source of his freedom. It’s just like the preference scale you carry around in your pocket everyday….. you carry one don’t you?

Ok, now setting aside the fact that most of us don’t carry around a preference scale in our pockets, there is a bigger problem: Subjectivist want you to believe that this little story about Eugene and Subjectivist Island is all that you need to know in order to understand the functioning of modern capitalist society. Funny then, that we had to abstract away all of capitalism, all society in fact, in order to arrive at our theory of preferences. Were we to think critically we might begin to suspect that there is something fishy going on with this abstraction.

That fishy something is the stink of an ideological abstraction. We discussed such ideological abstractions in the last video, Law of Value 7, but let’s review a few points here. The point of a dominant ideology is to make it seem like the present order of things is a universal order; that the status quo is the natural expression of things, unchangeable. How convenient then, for our bourgeois theorists, that our natural, universal man, Eugene, happens to contain the seed of modern capitalist society in all of his preferenc-ing and acting. It’s as if every choice made by every human since the dawn of time was just an expression of capitalist instincts, waiting to come into being in our modern society. (footnote re Hayek)

But it’s not enough just to point out the obvious ideological basis of subjectivist theory. We must also prove that this ideological abstraction is illegitimate. Let’s do that. It should only take a few minutes.

The parable of Subjectivist Island leads one to think that human desires are formed privately, independent of society. But this has never been the case. Desires are taught, socially constructed, and can’t be understood independently of society. How do subjectivists respond? They say “Yes desires may be constructed but this is out of the scope of economic so we don’t have to consider it.” In fact, this is how modern economics deals with all criticism- it ignores it and says it’s the topic of another discipline. How convenient! It’s like saying that we don’t have to consider the fact that the earth is round because that’s beyond the scope of flat-earth theory.

We can’t understand desire without also understanding the ways in which we go about attaining our desires. Here’s where the abstraction of Subjectivist Island breaks down. On the island Eugene attains his desires by directly acting to get the things he wants. But these are not the sort of choices we make in a capitalist society. Subjective value theory has to prove that it can move this abstract model of choice from Subjectivist Island to a full-scale capitalist economy.

It does this through the fantasy of barter. Let’s say Eugene, while back-stroking one day, discovers another island called Barter Island. Here lives Ludwig who cracks coconut all day. They decide to trade fish and coconuts, each one carefully measuring their utilities for fish and coconuts on their preference scales, calculating the precise exchange ratios to maximize their utilities, resulting in an exchange ratio between coconuts and fish.

“Now,” says the subjectivist, “we have shown that our abstraction was legit and that we can explain exchange ratios purely through the science of preference scales.” If only it were that simple.

The first thing we might notice is that the exchanges on Barter Island can only take place because Eugene and Ludwig have different resource endowments. If they both had access to coconut and fish then there would be no reason to trade. In order for trade to continue in a sustained way, trade must reproduce these differences. This means that in order for a capitalist market to work there must be the constant reproduction of a certain type of property relations in which people have to enter the market in order to get what they need to live. Specifically people must be deprived of their own means of production, forced to enter the market to sell their labor in order to buy the things they need. This property relation must be continually reproduced through exchange so that there is always scarcity and people are always dependent on the market.

Thus, we can see that something very sneaky has been done. Hmmm… what is it?  We were trying to form a theory of barter based solely on subjective preferences when all the sudden we realized we needed to assume a certain type of property relation in order to make any sense of it. Thus, abstracting away property relations and forming a theory of exchange without them is impossible and illegitimate.

Even more damning is the fact that capitalist societies don’t have anything to do with barter. People don’t produce to directly exchange products for other products. We produce in order to exchange things for money. Money is an intermediary in all economic activity. So it makes no sense to say we measure our subjective utility for coconuts against fish when exchanging. We measure everything against money. When you are in the supermarket calculating your preference scales with the Preference App on your iPhone you aren’t just considering your preferences for fish and coconuts in the abstract, as if on a desert island. You are also considering the market prices of these commodities. This market price already exists before you make your subjective value judgements. But this is problematic. Subjective valuations were supposed to explain price, but now we have to assume the prior existence of prices in order to explain subjective value judgements. It seems we are stuck in a big messy circle.

And if we are exchanging everything for money then we must have a utility for money right? But money has no direct utility. It’s not even good for blowing your nose on. The value of money is what it will buy. And this not set by our preferences but instead reflects the relation of money to all other commodities, reflecting the vast interpenetration of millions of markets all over the world. There is no such thing as a personal utility for money because money’s value is already established by forces beyond our control. (footnote on how weak Mises’s response to this is).

And there are more difficulties presented to subjective value theory by the presence of money. On Barter Island Eugene and Ludwig had direct knowledge of what they were getting from each exchange. But in our world we don’t know exactly how much everything is going to exchange for ahead of time. When we sell a product in the market we don’t know exactly what products we will be able to buy with that income. There is a high degree of uncertainty. But with so much uncertainty how are we ever to form those nice, rational preference scales where we’ve perfectly calculated the exact utility relations of all commodities to each other? Well, we can’t!

[The neo-Austrian response to this problem is to distance themselves from the neo-classical idea of the rational consumer and to stress the imperfect information of the consumer. Rather than consumers being super-rational beings that can calculate the relations between the objects of desire, the fallibility of human understanding is stressed and the market is seen as the ultimate informational clearing house which adjusts the imperfect desires of the multitude, smoothing them out, allocating resources in the most efficient and democratic way. Their language often takes on religious overtones here, stressing the inherent insufficiency of human judgement against the omnipotent, mysterious power of the market. The problem is that these magic moves of the hidden hand of the market are just asserted and never proven. Rather than actually proving that the market can do this Austrians prefer to stress that the only alternative is the State-Communist BogeyMan.]

It seems that every time we try to abstract away property relations and production relations they end up sneaking back into the picture. This is because it is absolutely illegitimate to try to explain capitalism without a theory of the social relations between people as they actively produce the world we are living in. Luckily we have a better theory, that of Karl Marx.

Real Abstraction, or Why Karl Marx is Still Relevant

In case you were wondering Subjectivist Island and Barter Island don’t exist. They are abstractions. Now every theory needs abstractions- we must sift through a world of data and identify the broad contours and important categories that define reality. Subjectivist and Barter Islands are “ideal abstractions”, that is, abstractions that exist only in the minds of philosophers. [footnote on praxeology] Marx makes a different kind of abstraction, a “real abstraction”. A real abstraction is not made by philosophers arbitrarily leaving out parts of social reality. A real abstractions is made by reality itself.

In a capitalist society human labor becomes abstract. In the caste system of feudalism where people were born into certain types of work and there were strict divisions between castes there was no such thing as labor in general, or a worker in general. But in a capitalist society labor loses all of these specific features. People aren’t peasants, soldiers or guildsmen. They are just workers. We have “a job”. Our education prepares us for “work”, and we move between multiple jobs in a lifetime. Most of all, economic value is not tied to this work or that work but to labor in general. It is labor in the abstract that creates value, regardless of the specific nature of this work. We will discuss this more in Law of Value 9: Abstract Labor.

Outside of the ideal abstractions of philosophers, in the real world, subjects and objects have no meaning apart from their relations to each other. There is no such thing as a subjective individual floating in a vacuum. Subjects form their sense of self, their meaning, in relation to an objective world. While the objective world can surely exist without subjects, it has no meaning for social theory except the meaning that people give it. If people decide that gold is valuable then it is valuable. Subjects and objects derive their meanings from each other.

Furthermore, subjects and objects don’t derive these meanings by coexisting side-by-side. There is an active process of by which subjects engage with the objective world, transforming it. In other words, people work on nature. We chop trees and make houses. We build cars and dig up oil to power them. In so doing we transform the objective world and also transform ourselves. The subject-object relation is an active one. In different times and places the way we as subjects transform and relate to the objective world has varied. These different modes of relating to and transforming the world Marx calls “modes of production”. Modes of production are inherently social, defining the way large groups of people transform and relate to the material world. The capitalist mode of production is his primary topic of interest to Marx.

Notice that the subject-object relation, as we are talking about it here, is not just an ideal relation, based on our ideas about the world. It is based in real, concrete working activity of people actively transforming the world. This is what is meant when Marx talks about “materialism.” He wants to stress this real-world process of human activity as opposed to theories that dwell in ideas and psychology, like that of the subjectivist school that think we can understand capitalism just by an examination of the psychology of consumers. Often people think that “materialism” means that individuals are unimportant, or history is predestined, but this is not what Marx means. He wants us to understand the specific ways in which subjects and objects relate through the real activity of people in their day-to-day activity, in their mode of production.

A curious thing happens in the capitalist mode of production: the subject-object relation gets inverted. Objects take on social power and individuals are left powerless. Blind economic laws rule and people obey. All along subjects are still the active participants, the ones working and transforming nature into objects for human use. But somehow people cease to act for themselves and instead act for objects. Money becomes more powerful than people. Corporations become people and exert more power in society than individuals or even social movements. While people run around in the street with signs begging the system to take notice of them, the cold-logic of capital becomes the active agent in society, using the body of the worker like a passive expendable commodity, subordinating societies, governments and even nature itself to the impersonal motives of profit. Capital appears as the subject and the worker as its object. The subject-object relation is inverted.

Economic laws are another name for this subject-object inversion. Economic laws cause people to do things they don’t want to do. When capitalism crashes due to its inherent cycles of instability it compels capitalists to lay off workers and compels governments to impose austerity.

But crises are also a time of instability in the system, a time when the economic laws of capitalism are exposed not as eternal, universal laws as the bourgeois economists would want us to think, but as the particular laws of this time, laws that we might be able to overthrow. In a crisis, the order of the market breaks down and political will must move into the picture to assert some semblance of order. When the law of value breaks down the politics begin. Subjects must become active. This can be the politics of the ruling class as it scrambles to reassert the status quo or it can be the politics of radical movements that posit the possibility for new social orders.

Fetish.

[diagram of capitalist society, with all property relations, production relations, etc.]
This is a capitalist society in all of its complexity, all social relations subordinated to the imperative of profit.

[zoom into image of exchange within picture]
This is capitalism as depicted by subjective value theory, all social context abstracted from the picture. Bourgeois  economists, sitting in their offices, playing idle mental exercises argue that we can abstract away all of this, and still explain a capitalist society. But in doing so they run into all sorts of problems because their theory can’t explain any of the things it wants to explain without bringing questions of class, property, and exploitation back into the picture. It’s original abstraction is illegitimate. Yet this abstraction is understandable. After all, we live in a world of fetishized social relations. The relations between people appear as relations between individuals and commodities. It is the perspective of the isolated individual interacting with a world of commodities, not of commodities coordinating the relations between people.

But this fetishized perspective is not just a lie. It represents a particular vantage point within the larger phenomenon that is commodity fetishism. It’s not that the world of commodity exchange is all an illusion. The illusion is real. Commodities really do have social power. Corporations really are people in the sense that they have more social power than social movements. Capital becomes the subject and society its object.  There is a real subject-object inversion. But the other side of the coin is that capital’s power only comes from us, not from some divine, natural eternal essence. It rests only on a particular configuration of production relations. That means that capitalism is only sustainable to the extent to which we are willing to sustain it. Were the political will sufficient we could reconfigure our social relations in a more human way where people actively, consciously control our working activity as we shape the world in conscious ways. This is the task of radical politics, and this is the time for it.

Marginal Futility- Reflections on Simon Clarke’s “Marx, Marginalism and Modern Sociology”

Reflections on Simon Clarke’s “Marx, Marginalism and Modern Sociology”

I say “reflections” but this post is mostly a summary of parts of this great book by Simon Clarke. I read Clarke’s book “Marx’s Theory of Crisis” a year ago and found it an incredibly helpful history of the evolution of Marxist crisis theory. Both this and “Marx, Marginalism and Modern Sociology” are available in their pre-publication format for free on Clarke’s website, along with dozens of other books and publications of his . “Marx, Marginalism….” actually has two editions, a fact I only discovered after reading the first. The second is definitely an improvement, containing an entire chapter of critique of specific aspects of marginalist value and profit theory that are not in the first edition.

Simon Clarke

I post this summary/reflection as part of the “lead-up” to my next video, Law of Value 8:subject/object, which aims to address sum of the problems of the old debate over subjective and objective value that dates back 100+ years to early debates between Austrian economists and Marxists. This means that I am more interested in Clarke’s critique of marginalism than his critique of sociology. However the two critiques are related. It was the early marginalists’ desire to shrink the field of economics to theories of consumer preferences in their relation to price that excluded all sorts of important questions from the new “sciences”, questions that had previously been a part of political economy. Issues of social power, the molding of the individual by society, class, etc were excluded and taken up by the emerging field of sociology. Clarke’s book is about this process by which the unrealistic and obnoxious abstractions of marginalist thinkers bifurcated political economy into economics and sociology rendering both disciplines full of theoretical problems and lacking in the analytical tools to explain the real contradictions of capitalism.

Marx himself never read any of the founders of marginal utility theory and so we might feel that we cannot look to him for a critique of marginalism. However, Clarke is able to develop a strong marxist critique of marginalism based on Marx’s critique of the bourgeois economy that came before him. It is Clarke’s argument that both classical bourgeois economy and marginalism suffer from many of the same faults.

The essential fault is the attempt by both bourgeois theories to “naturalize” the social relations of capitalism. This the basic hallmark of any dominating ideology, to make the current state of affairs seem like the permanent, unchangeable, natural order of things. Bourgeois economics does this by claiming that capitalist-specfic categories like class, profit, capital, and wages, are just natural expressions of the technical division of labor.

Marx called this the Trinity Forumula: the idea that wages equalled labor’s contribution to the social product, that profit equalled the contribution of capital, and that rent was equal to the contribution of land to productivity.  Thus the distribution of the social product between wages, rent and profit seemed like natural, technical properties of commodities themselves and not social relations between classes.

Clarke argues that marginalism is making basically the same claim, and thus falls prey to the same problems of classical economics. It is not clear exactly which properties of commodities correspond to profit. Does profit come from money, capital or means of production? Is it due to abstinence of the capitalists, the supervisory work of the capitalist, the capitalist’s ingenuity, risk, or the time of production? Are wages related to the value of means of subsistence, the disutility of work or the productivity of labor? Is rent related to the scarcity of land or the marginal fertility of land?

Regardless of the ways in which bourgeois thinkers have answered these questions we can’t escape the fact that things can’t have social powers unless bestowed upon them by social relations. Thus it makes no sense to isolate these social relations from our analysis and try to relate all economic categories to purely technical properties of commodities/production. Marx calls this mistake the fetishism of commodities and Clarke’s critique, in the end, boils down to an accusation of fetishism. (1)

Marginalism’s scope of analysis

Despite their similarities, marginalism’s subjective approach to value came as a response to some inadequacies in classical economics. In classical political economy prices were only theorized after a consideration of distribution. Once the contribution of land, labor and capital were analyzed independently price was just the adding of up of these sums. Thus we can only understand markets and prices through an understanding of class, leaving the way open for more radical interpretations of the theory that might question this distribution. (2)

Marginalism responded by developing a theory of price that directly related price to the subjective valuations of individuals contemplating objects. All social phenomena were abstracted away. This narrowed scope achieved three things: 1. Class and distribution were spirited away, allowing marginalists to claim that such questions were outside the sphere of economics; 2. The obviously political nature of distribution could be reduced to purely technical explanations (marginal productivity, etc) thereby allowing marginalists to claim that they were engaged in pure, non-partisan theory; 3. It provided a naturalistic justification of capitalism.

Clarke argues that the early founders of marginalism were not wholly ideologically motivated by the need to establish a new theory of capitalist apologetics, but that by the 1890′s the marginalist ‘revolution’ had taken on a deep apologetic nature, playing a central role in the worker movements of the late 1800′s in debates between reformist and revolutionary factions. Also, this was a time of rapidly growing social movements for reform. Marginalists wanted to develop some science of economics that could measure the effects of state intervention on the economy. This brought together people of different political persuasions to the marginalist project.

The Irrationality of Marginalism

Marginalism can abstract away all of society from economic theory because of its claim that capitalism corresponds to a formal rationality rather than a substantive rationality. Formal rationality is a purely technical calculation of means and ends as opposed to substantive rationality which is oriented around values or higher aims. For instance, in Human Action Mises claims that the basis of economics is the natural quantitative relations between objects… so much input can produce so much output, etc. For marginalism any constraints  or limits to the system are purely technical, a result of natural scarcity in relation to our timeless wants, not social, and the market is the best mechanism for organizing these desires. This means that the marginalist model will fail if it can be proven that capitalist institutions have a ‘necessary substantive significance in subjecting individuals to social constraint’. In other words, if the limits and constraints of our society can be shown not the result of technical aspects like scarcity but rather the result of social institutions with particular values oriented toward the interests of certain groups of people (ie the capitalist class) than marginalism has not justification for its formal rationality, for its abstraction of society from economics, and the entire edifice of marginalism falls. It is not enough just to point to this abstraction as proof of the ideological nature of marginalism. We have to prove that it is an illegitimate abstraction. This is the common thread underlying all of Clarke’s specific critiques of different aspects of marginalism. (3)

Marginalists begin with the isolated individual making choices in a vacuum and erect all of their basic ideas upon some simple observations about these choices. As the model becomes increasingly complex, adding in more people, more commodities, money, the division of labor, private property, etc. it is claimed that all of their basic observations still hold. The expansion of the model is seen as just a formal matter. But Clarke argues that when we move from individual exchange to a system of exchange we are actually dealing with different phenomenon. In a market economy exchange is no longer and exchange for direct utility; in other words, we aren’t  measuring our actual utility for the commodity we give up with the utility for the commodity we buy. Money intercedes as a mediary. We exchange things against money. Use-values are exchanged for values which are socially determined. Any claim to the formal rationality of the individual’s behaviour becomes dependent upon the rationality of the system as a whole.

The existence of money demands that we immediately abandon the basic principles of marginal utility. In the simple barter models posed by marginalists both actors can fully judge the use-values of items they are trading. But when we are exchanging things for money we are not just trading two commodities in isolation. Money links each commodity to an entire of world of commodities. Now if it was possible to know the future values of all commodities then it would be possible to generalize the marginalist barter model into a theory of indirect exchange. But we don’t know the future values of things. These are entirely uncertain. In fact, If the values of all commodities were always known we wouldn’t need money because any commodity could serve as money. This compromises the entire marginalist model.

In other words, marginalism can only have a theory of indirect exchange (of commodities traded for money instead of commodities bartered with each other) is all parties have perfect information on prices. But if we make this assumption we can no longer explain competition (or money).

Clarke then goes on to summarize and critique various failed solutions to this problem by Walras, neo-Austrians, Marshall, and Keynes. I won’t go into them all, but I will mention the neo-Austrian take on this issue: The 2nd generation Austrians like Mises were worried that Walras’s awkward solution to this problem left the door open for arguments for a socialist planner, a person that would know all prices and therefore eliminate the need for market. They therefore rejected the general equilibrium approach that we today associate with neo-classical economics and developed a theory of markets as dynamic information systems. Rather than individuals requiring perfect information, rather than markets tending to a state of perfect equilibrium, the new-Austrians argued that individuals lack perfect information. Prices are what carry information and the market is the place where this information is “processed”, creating the most efficient clearing house of information. The problem with this argument is that the defense of the market relies merely on faith and assertions. Just because the market is an expression of individual preferences doesn’t mean that it is a realization of those preferences or that it is the best way to organize individual behaviours. Instead the neo-Austrian defense of the market is based more on critiques of bureaucracy and state-planning. (4)

Theories of Profit

Similar difficulties face marginalist theories of profit. The ideological defense of capitalist profit must establish that profit is a naturally occurring result of some technical aspect of production (the contribution to the product of machines or land, subjective preferences over time, etc.) and not the result of social relations of domination/exploitation. This is impossible because profit is a category of value not of physical quantities of products, thus capitalist profit always presupposes the existence of capitalist social relations. Yet the various marginalist theories of profit will maintain that wages, rent and profit are not qualitatively different categories based on different social relations to production. Instead marginalists will argue, as did the classical economists, that wages, rent and profit are a result of technical aspects of production. But not only is profit a value category and not a physical quantity category, profit is also determined by the general rate of profit which implies a society of capitalist production not isolated producers.

Time-preference theory, usually associated with Bohm-Bawerk, attempts to work dig its way out of this hole by explaining profit not through the physical/technical aspects of production but through the differences in subjective time preference between those who want things now (workers desire wages) and those who are willing to wait (capitalists who wait for their profit).

But here too we can’t really understand a period of production time without recourse to the very social features that time-preference theory wants to abstract away. A production period is dependent on the rate of profit and of wage rates, both social phenomena that can’t be reduced to time preferences. Clarke argues that concepts like ‘marginal productivity of capital’ and the ’roundaboutness of production’ have no meaning abstracted away from the social relations of capitalism since the aim of capitalist production is to produce value, not physical quantities. We can’t measure productivity or roundaboutness in non-value terms because without value we have no standard of unit that all of these diverse inputs and outputs can be reduced to. Also, what reason do we have for being so sure that time preference is always positive and not negative? Sometimes, in conditions of uncertainty for instance, we prefer to delay gratification. This absolute assertion that we prefer present goods over past goods seems an indefensible assertion. Even further, capitalist investment strategies have nothing to do with delaying gratification or measuring investments against consumption. Capitalists constantly invest in production in pursuit of profit for profit’s sake, compelled on by competition not their subjective preferences.

Sneaking in the Back Door

In abstracting away the social relations of capitalism marginalism must assume that these abstract individuals enter exchange with given needs and given resources. Where do these needs and resources come from? The marginalist answer is that this question is outside the sphere of economics- that it doesn’t matter to economic theory where these needs and resources come from. But what if our economic system actually reproduced these needs and resources? If we could show that capitalism produced the hedonistic consumer as well as the conditions of scarcity the consumer confronts then we could expose a disastrous feedback loop at the core of marginalism. It seems that when we just assume given needs and resources we are actually only pretending to abstract away from capitalist social relations. While on the surface marginalists appear to be talking about a universal individual in universal conditions, in actuality they are sneaking all of the social relations of capitalism in the back door. This is very similar to the Bukharin critique I mentioned a few weeks ago.

I like the way Clarke develop his proof this problem: Commodity exchange presupposes individuals with different needs and different resources because if everyone had the same stuff there would be no reason for exchange. Thus exchange presupposes differences. If exchange is systematic these differences must also be systematic. Thus the formal equality and freedom of exchange is founded on different resource endowments. This means that the content of exchange can’t be reduced to its form (free, juridically equal relations between people) but must be found outside of exchange in the realm of production and property.

Scarcity

Scarcity relates to the application of labor to produce for need. The basis of exchange is the sale of the products of this labor. Thus the need for a theory of value based on human labor, not subjective whims.

Different types of exchange presuppose different production and property relations. The simple commodity exchange (independent producers exchanging the product of their labor in the market) is a popular image in marginalist accounts of exchange (as well as market-anarchism fantasies) yet such a system of exchange has only existed within larger societies dominated by other social relations (ie feudalism, capitalism, state-capitalism/20th century communism). Capitalist exchange presupposes social relations between two social classes, one owning the means of production, the other nothing. As we’ve seen, Marginalism tries to treat all factors of production with the same theoretical tools of subjective preference theory. But the division of the social product into rent, profit and wages actually presupposes antagonistic social relations between classes and thus requires different theoretical ideas.

Marginalists would like to treat the unequal resource endowments of individuals as due to extra-economic factors, consigning these concerns to the fields of history and sociology. But these inequalities don’t just proceed exchange historically. They are actually reproduced by exchange. Capitalism generates a world in which individuals must maintain a certain standard of living in order to survive (try paying the bills without a phone, house, car, work clothes, haircuts, health-care, etc.) and must engage in wage-labor. And wage-labor actively reproduced the two social classes of capitalist and worker and their violently divergent relationships to the means of production. Without scarcity we couldn’t have wage labor. There would be no reason to work. Thus capitalism must constantly reproduce scarcity.

Don’t Take My Word For It, Read the Book (5)

This is just a cursory synopsis of some of Clarke’s book. If readers are looking for some good, solid critiques of marginal utility theory, Clarke’s book is a great way to start.

 

 

Footnotes:

(1) Well… fetishism is more than just wrong ideas about the economy. It’s also about the way social relations take the form of material things, how material things obtain social power and dominate subjects. My critique of the subjective-objective value debate will directly relate the concept of fetishism of reframing this debate.

(2) This is not the only defect of the classical economics that motivated the marginalists. Another important one, mentioned by Clarke, is the contradiction in Ricardo’s theory of value: the problem of how to account for different organic compositions of capital under conditions of average profits. See my video “what transformation problem?” for an explanation, or my summaries of vol. 3 of capital.

(3) Here I intended to make a brilliant comparison between Clarke and Bukharin’s critiques of marginalism, one that caught some subtle yet meaningful distinction… but I didn’t get around to it.

(4) I would add that a great many aspects of the neo-Austrian argument are heavily based on “faith” and religious-y thinking. The market is this all-powerful, all-knowing entity that we as mere individuals can’t ever comprehend. Attempts to understand the market, control it or influence it are seen as foolish and arrogant. The fallibility of human understanding is stressed against this omnipotence of the market. Given these religious parallels it makes sense that this theoretical tradition has resonated so strongly with culturally-conservative politics.

(5) To the best of my recollection this is the famous slogan from the 80′s television show Reading Rainbow.