The Critique of Political Economy- Chapter 2 part 1 notes

the second installment of my notes on the book:

Chapter 2: Money or Simple Circulation.

Marx tells us that the confusion about money will disappear once we look at the evolution of money. Does he mean the historical evolution or a logical evolution? Marx says that it is crucial to understand the particular forms of Money and their interrelations. This is difficult because all bourgeois relations are money relations. In order to get to the heart of money, and its relation to the mode of production, Marx will only deal, in this book, with the forms of money that arise directly from commodity production. He will not deal with credit money. This is also his approach in Capital.

1. Measure of Value.

Gold becomes the measure of value because all commodities measure their value in gold. These exchange values with gold are prices. Price is the form of appearance of exchange value in circulation.  There is an equalization between the labor in gold and the labor in all other commodities. Of course, like any other commodity, the labor that goes into gold can vary with changes in the productivity of gold producers.

Prices are commodities transformed into gold in imagination. Prices measure the abstract labor contained in commodities, while their use-values correspond to the specific concrete labors that formed them.

The difference between exchange value and price (notice he doesn’t say “value and exchange value”… though I assume this is what he means) is super-important. This is the kernel of the storms that rock capitalist production… the source of uncertainty and crisis. Whether or not exchange value equals price is a matter of chance. The flip side of the necessity for alienating the commodity from the worker is the possibility of the non-alienation of the commodity.

Standard of price: The standard of price is the particular unit of gold that is used to measure value. Measure of value and standard of price are not the same!!! The measure of value is a measure of the abstract labor time contained in a commodity. The standard of price is a unit of weight (pound, etc.). It is similar to the difference between distance and a foot. A foot is a unit of measurement. Distance is the thing to be measured in feet.

Historically there was a process by which the same unit of measurement (the pound for instance) came to represent a smaller and smaller amount of gold. This seems insane but it happened all the time. A piece of gold was stamped as a pound. In circulation it lost some of its weight (through people shaving off parts and through wear and tear.) Now we see the importance of the state in establishing the value of the money of account. Money of account is the specific legal unit of account (pound, franc, etc.)

In order for money of account to exist, gold only needs to exist in the mind. Tokens of the money of account can circulate.

Now’s the part that fucks up your brain: The mint price of gold is the price of gold measured in the unit of account. But money has no price!

B. Theories of the unit of measure of Money

The purpose of this section is to critique previous theories of the unit of measure. Marx makes important points about the logical and practical relation between the unit of measure and the measure of value. He also discusses the problem with utopian labor-money schemes.

Marx first begins with the theory of the ideal unit of measure of money. This theory holds that since the unit names of money (pound, dollar, franc, etc.) are what is used to measure value that these units don’t represent quantities of gold, but instead directly measure ideal “atoms” of value. Thus value seems to have an abstract, independent, ideal form. (But this is impossible since we only can see value through exchange value. Value does have some independent abstract essence to measure without reference to an exchange value.)

Marx’s critique might seem like a nitpicky one but he immediately moves to a real-world example. During the reign of England’s William III silver coins were becoming debased. This meant that the market price for silver rose above its mint price. Why? The mint price is the amount of silver a coin says it represents. The market price is the actual amount of coins one receives for selling an ounce of silver bullion. Since the coins were debased it took more coins to buy an ounce of silver. In Marx’s example an ounce of silver bullion was minted into 5s 2d (5 shillings 2 pennies) but after debasement an ounce of silver bullion could be sold for 6s 3d! Eventually there was a re-coining of silver coins so that each silver coin was worth less silver than originally.

Now comes the interesting part: Lowndes, Biritish secretary to the treasury, declared that the reason for the rise in market price above mint price was not the debasement of the currency. Rather the rise in market price was a sign that silver had become more valuable (because it was measured in more units of the unit of measure!) The unit of measure represented ideal atoms of value and hence the rise in market price could only mean a rise in value! The upshot os this bullshit theory was that the British state could argue that it should pay back its debts in devalued currency!

This sort of problematic thinking directly relates to questions of inconvertible paper money. Marx says that regardless of civil law, the economic law is that paper gets its value from gold. Or, perhaps to put it better, paper’s ability to measure value is derived from gold’s place as a measure of value. The theorists of inconvertible paper money, Marx says, take refuge in this notion of an ‘ideal unit of measure’, as if worthless scraps of paper can represent ideal atoms of value directly, without measuring value through commodity exchange.

The same problem applies to Gray’s utopian labor money schemes. Gray advocated a system whereby all inequalities in exchange could be eliminated through a system whereby each commodity was automatically stamped with a price directly corresponding to the labor that went into it. Gray thought that the labor in all commodities could be directly social, without having to move through the process of exchanging against a money commodity, and all of the divergences of price and value and corresponding adjustments that take place in capitalism. Marx critiques this idea at length in other places, but here he points out that labor will not become directly social just because a bank or state declares it. The indirectly social nature of capitalist labor comes from commodity production not from a problem with the measure of value. If labor were directly social then there would be no need for gold or commodity production. But this is not the society that Gray is imagining.

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-Price- a draft script

This is a draft of the script for my next video “Value and Price”. Any feedback is helpful. The footnotes have yet to be numerically linked to the main text.

Intro

There is a lot of confusion over Marx’s theory of value and price. Let’s take care of that. [Obviously I'm just skimming the surface here, but I suspect that what my audience wants is a broad concept of the main points.]

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. At noon today a hot dog that took 20 minutes to make might sell for the same price as a bowel of soup that took an hour to make. Ack! Is this non-identity of value and price the end of Marx and the end of all radical politics?

I hope not. The reason we have two concepts, value and price, is because they are not the same. 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 knew all of these things then there would be no need to have value or price or a market for that matter. We could just plan everything on a computer.

But we don’t have a planned economy. What division of labor and what level of productivity are necessary for the division of labor to reproduce itself each day? Nobody knows.  When capitalist hire workers and buy inputs they don’t know what sort of profit they will make. And when we go to the store we don’t know how much labor has gone into the things we buy. 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 meant that individual workers must strive to work at the average level of productivity. This is Socially Necessary Labor Time (see my video ‘Socially Necessary Labor Time’). When we say that labor is ‘apportioned’ we are talking about the division of labor, that is, deciding how much labor should be apportioned to what tasks. 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. 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 that almost everything else falls into place. Value is created in production by human labor. It takes the form of commodities with definite values that 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

If value is created in production then the value of a commodity is the socially necessary labor time that goes into it. But we can’t see this labor time when we look at the commodity. All we see are the exchange values that occur when this commodity trades with other commodities. We can only see the social relations between producers through these exchange values. When the commodity exchanges for money then we see a special form of its exchange-value: price. Price is the form of appearance of value. It is the way we see value at work in the real world.

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.

Money

When we say that price is the ‘form of appearance’ of value we mean that the value of a commodity is not stamped on its side for the world to see. 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. As such money represents value in the abstract. It is a measure 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.

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 demand 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.

If supply and demand were in balance then price would equal value. This is why it is meaningless to try to form a theory of price just by relying on demand and supply. If demand and supply were to actually balance for all commodities we would need some external factor to explain the exchange ratios between commodities. For this reason Marx often abstracts away from demand and supply imbalances when making his analysis of value.

Side Note on Marx’s Method

In fact Marx often asks us to assume, for the purpose of illustration, that value=price. This is not because he thinks that, on the average, or in the long run, value always equals price. It’s because the divergence of value from price has no bearing on any of his main conclusions about the qualitative aspects of value: that the origin of profit is the exploitation of labor, that capitalism is unstable and prone to crisis, etc. By isolating the fluctuations of price and value he can put our attention on the class relation between capital and labor in the workplace, instead of letting us get distracted by the distribution of value through market fluctuations.

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.

3 components of value

The value of a commodity is divided into 3 components:
constant capital (c)- is the value of the past labor that went into the production of any inputs.
The other two components of value are new value created by the worker.
variable capital (v)- is the wage paid to the worker
surplus value (s)- is the surplus labor the worker performs for the capitalist above the value of their wage.

The line between V and S is the site of class struggle as capitalists try to get as much surplus labor out of workers at a given wage. That’s why it’s called ‘variable capital’. The value of non-labor inputs are called constant because they can’t create any more value once they are bought. They pass their value directly into the value of the final commodity.

C+V represent the cost of production to the capitalist. Marx calls this the ‘cost-price’. Capitalists must at least recoup the value of their cost-price if they are to continue production each period. If they didn’t at least recoup their cost price they would not have money to pay workers or buy inputs.

But capitalists also must have an incentive to invest. They also require profit. But the profit they get from selling their commodities is not always equal to the surplus value they produce. Previously we said that value is created in production but that the seller can gain more or less value depending on the fluctuation of price. Now we can also say that surplus value is created in production but the capitalist can gain more or less profit than depending on the price of the commodity. 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. The deviation of individual capitalists’ profit and surplus value is thus a necessary part of capitalist competition. However the total amount of surplus value produced is always equal to the total amount of profit received. As with price and value, surplus value can only be created in production even though it is redistributed in exchange.

Prices of Production

The most notable case of surplus value being redistributed in exchange is Marx’s theory of Prices of Production. Before explaining that we first have to take a brief detour to talk about average profit rates. 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. As money flows into a high-profit sector, the supply of these commodities rise and their prices fall. Those high-profits start to erode. The opposite happens with low-profit sectors. Of course this doesn’t mean that all sectors of the economy always have the same average profit rate. This is only a tendency, one hindered by barriers to entry, monopoly, etc.

If surplus value can only be created by human labor we would expect the highest profits to come from capitalists who hire the highest ratio of workers to machines. We would expect the lowest profits from capitalists who spend lots of money on machines and very little on workers. (This is the concept of the ‘organic composition of capital’: the higher the ratio of machines over workers the higher the organic composition of capital.) If capitalist A spends $75 on wages and only $25 on constant capital we would expect her to make more profit that Capitalist B who spends $25 on wages and $75 on constant capital. The more workers relative to machines the more surplus value is produced per dollar invested. Both capitalists invest $100 but one has a much higher profit rate than the other.

Assuming no barriers to the flow of capital we should see a tendency for profit rates to equalize, for capitalists to make the same return on investment for every $100 invested. How can this happen? If we keep in mind the fact that value and surplus value can only be created in production but can be redistributed via prices and money then the solution is already in front of us. Surplus value is redistributed between capitalists to form an average rate of profit.

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 raise, 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”. They are formed like this:

c+v+p

where p is the total surplus value created by the working class divided evenly between capitalists, or the average profit.

Criticisms

There are some common critiques of Marx’s concept of value and price. There is room here only to sketch out a few and give some brief rejoinders.

1. Q: If price is just cost price (c+v) plus average profit what is the point of talking about value at all? Why not just have a theory of price that says prices are the cost of production plus an average mark-up?

A: Such a strategy would not explain the relation of price to the disciplining and apportioning of labor by capital, the social relations which are coordinated by the price system. After all, cost-price represents a definite quantity of current and past labor. And the average profit is completely dependent on the amount of surplus labor extracted by the working class.
If we eliminate value as a category then we have no way of explaining money. Money, as the commodity which all other commodities measure their value in, is the embodiment of labor in the abstract. Without this real abstraction we have no way of comparing the relative worth of one commodity from the next. This is why neoclassical theory doesn’t really have a theory of money, but rather bases its system upon the notion of barter. Marx, by contrast, shows how the intrinsic value of the commodity can only find its expression in the money prices.

2, Q: If value rarely ever equals price, what is the point of value analysis? How can you prove that they aren’t two sets of numbers, labor times and prices, coexisting with no relation?

A: Attempts to prove or disprove Marx’s theory of value by finding instances of price-value divergence or identity will always fail. This is because the theory only makes sense if individual values and prices deviate. Value is a process, always in motion, and always in fluctuation. By analyzing value we can understand the violent social contradictions that create this dynamism and fluctuation.
Some Marxists like to think of values like long-run equilibrium prices. If demand and supply were in balance, technology didn’t change, and there was no equalization of the profit rate then yes, values would be long-run equilibrium prices. But these conditions never occur and so I don’t know how useful this concept is.

3. Q: The transformation problem
A: There is a long standing claim that Marx’s concept of the Production Price is mathematically incoherent. This charge is called “The Transformation Problem”. But the TP is actually not a problem for Marx at all. It only arises when his value-price theory is forced into a bull-shit Walrasian General Equilibrium framework where input and output prices always equal each other and prices never change or fluctuate. As we’ve seen change and fluctuation are the whole point for Marx so this so-called problem is not really a problem at all. For more on this see my video “What Transformation Problem?”

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. This in stark contrast with the neoclassical tradition which tells us nothing about the social relations of capitalism. Neoclassical economics’ main ideological purpose is to prove that markets lead to the optimum allocation of scarce resources. In order to meet this aim it must abstract away from capitalist productive relations, basing itself on a theory of barter. This means that money must be artificially injected into the model down the road since there is no role for value in the abstract. And when we get to Walrasian General Equilibrium price even loses its role. This is clearly not a science at all, but a sham set of elegant equations

Footnotes:

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 focussing 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.

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.

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.

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

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.

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.

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.

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.

Law of Value 3: Das MudPie

This is part 3 of my Law of Value series.

video 1:

video 2:

A Spectre haunts the face of Marxist theory: the spectre of the mudpie argument. It was this central conundrum that Marx devoted his momentous work “Das MudPie”. It has since haunted Marxist theorists of all persuasions. How can Marxists theory go on in light of this devastating theoretical problem?

Just Kidding…

If you spend any time reading about Marx’s theory of value on the internet you probably will come across some version of this asinine excuse for a critique called “the mudpie argument.” The basic style of the mudpie argument is similar to many advanced by those who know nothing about Marx’s theory of value: one constructs a ridiculous strawman argument that has nothing to do with Marx and then proceeds to knock it down with “devastating” brilliance, moral outrage, and a few clever asides about Stalinism. The MudPie argument goes something like this:

Marx claimed that labor is what gives all commodities value. But what if I make a mudpie? This is a product of labor yet nobody will buy it. It has no value. So Hah! Take that Karl Marx!

The problem with this argument is that Marx was very clear that labor has to be useful labor to create value. Yet he didn’t think that is was this usefulness that creates value. Labor has been doing useful things for millennia. All societies are made up of useful labor. Marx calls this useful labor that makes up a society “social labor”. The organization of this social labor differs from society to society. In a capitalist society this social labor is organized through the commodity exchange: the products of labor are assigned market values and the fluctuations of these values coordinate the social labor process. This is a way of organizing social labor unique to capitalism and it has all sorts of unique properties that other forms of social labor don’t have. The usefulness of labor is not what is specific to capitalism. Value is. Hence, usefulness is not what Marx interested in talking about. Value is.

In video 4 we will look at why usefulness can’t explain the amount of value a commodity has. For now we will look at this more fundamental question: What does it mean for useful labor to take the form of commodity exchanges?

What is a society?

The key difference between humans and animals, for Marx, is in the way they create their own worlds. Humans aren’t slaves to their own evolutionary destiny, repeating the same patterns of survival over and over for millennium.  Instead humans actively shape the world in which they live. There is a certain creative aspect to human labor in which we imagine the product of our work in our mind before we go about the work:

“But what distinguishes the worst architect from the best of bees is this, that the architect raises his structure in imagination before he erects it in reality.”
-Das Kapital, Karl Marx

This world which we create forms the structure of our lived experience: we live in, wear, eat and think about the products of our own creation. The structure of our social relations, from the way we relate in cultural and family groups, to the organization of production, to ideas about the world we live in, constitute a created universe powered by the creative power of human labor. Yet this world of our creation also acts back upon us. It structures both our desires and our means of attaining these desires. In much mainstream economic thinking human desires and the means of attaining them are treated as universal, timeless things. Marx says the opposite: What we desire and how we go about getting the things we desire changes as the organization of our society changes. In this sense, “Men make their own history, but they do not make it as they please” (The 18th Brumaire of Louis Bonaparte, Karl Marx)

In different times and different places this organization of human activity has been radically different. The level of technological development, the organization of production, the organization of classes, and the shared conceptions about the world have all changed radically over time. It is the organization of these different “modes of production” and the way the organization of production effects the other aspects of a society that was of interest to Marx. In essence Marx is asking what this organization of production can tell us about a society. [This mode of inquiry is called "historical materialism" because it is interested in the way the production of our own material conditions of existence has changed over time. It is different than theories of history that treat human society as a progressive evolution of disembodied ideas, or of abstract psychological states (bourgeois economics.) Ideas and psychology are important but they can't be understood apart from the basic organizational structure of the social relations of society.]

This means that Marx is not just interested in any labor. He is interested in “social labor”- labor that is part of this mode of production, labor that goes into the make-up of a society. Useless labor, like that of the mudpie maker, is not social labor. The first step then, in looking at a particular historical mode of production, is to ask how the private labor of an individual becomes social labor in that society.

If you were a medieval peasant working a plot of land with your family you would be laboring directly for your own use (or the use of the landlord.) There would be no mystery about whether the labor you were doing had use to your social group or whether the right amount of labor was being allocated to the right tasks. The private labor you did on your land would be “directly social.”

In a capitalist society we don’t produce things in order to use them ourselves. We produce things in order to exchange them in the market. We don’t care about the usefulness of the things we are producing. We only care about receiving money in exchange for our labor. We then use that money to enter the market and buy the things we need for our own personal use. The production of a commodity and the use of it are separated in space and time. They are separated by value. They are linked by value. In order for our private labors to become social they must first take the form of value.

This is a very different type of social labor than in pre-capitalist societies. Rather than being directly social, capitalist labor is indirectly social.  People don’t directly decide what to produce. Instead these decisions are made through the fluctuations of market signals, a constant back and forth of buyers and sellers. But these market signals aren’t some autonomous power. They are composed of the aggregate individual labors of millions of separated producers. This separation of production and consumption means that our labor has both an individual value and a social value. The individual value is the amount of work that actually goes into making something. The social value is the actual amount of value the commodity sells for when it enters the market.

Because producers are separated from each other by the market, because we have no collective control over production, we have no way of knowing, for sure, how much labor time society requires of us and what sort of labor it should be. We don’t know what the demand will be for our product. We don’t know how much of the product other producers are making. We have to guess these things. We only find out once the products of our labor meet the products of everyone else’s labor in the market. This means that the individual value, the amount of time an individual puts into making a commodity, and the social value, the amount of time society requires go into it, can differ.

If individual value and social value diverge what does this mean? Some people think that Marx held that individual value had to equal social value, that if I spend 15 hours making a sandwich then this has to be the value of the sandwich. But this is not at all what Marx argued. Marx wanted to show how individual values become social values in a market society. Unlike other forms of production in which we labor directly for use, in a capitalist society we labor to produce value. Yet society must still use the products of our labor. We can’t all make the same thing or all make useless things. Labor must be apportioned between the right tasks in the right proportions. Value is the mechanism that does this since value is the only connection between individual laborers. Marx sought to explain how value acted as a force for the regulation of individual labor, turning individual labor into social labor.

[The fact that social value differs from individual value is not a defect to Marx's analysis. It is the mechanism by which value asserts itself.  How else could labor be apportioned between tasks in a society where labor is only indirectly social? The very fact that we have a field called economics in the first place is because the transformation of private labor into social labor is a mysterious, invisible one, it's law-like properties hidden behind constant fluctuations of market prices.]

The fact that we discover the social value of our individual labor in the market creates the illusion that it is the market itself which is creating value. We bring the objects of our labor to market and there they are turned into money, making it seem like the subjective decisions between buyers and sellers are what create these money prices. This is what is being insinuated by the Mudpie argument: that it is the subjective valuation of the usefulness of a commodity that determines its value, not the labor that goes into it. Yet this is an illusion, a fetish created by the fact that our labor is indirectly social.

Yet contrary to what some vulgar economists want you to believe individuals are not free to buy and sell commodities at any price they want. This is because exchange is not just a fleeting, isolated contract between two individuals. Each exchange is part of a vast web of exchanges which unites the productive labors of society. [close-up of two people exchanging, zoom out to their other hands being exchanging with others (duplicate image), zoom out to reveal of vast network of the same images all linking hands..] This is what it means for an individual’s labor to become social. When this happens, society acts back upon the individual, disciplining their labor to make sure that they are doing socially useful labor at something near average productivity.

Thus the transition from individual value to social value isn’t a random one. It has law-like properties that govern the connection between the private laborers of millions of individuals and the aggregate social labor process. These law-like properties that link our private laborers to their social value is what Marx calls the “law of value.” There are two basic forces that govern the way individual values become social values:

1. The first is average productivity. Let’s say the average widget maker takes 1 hour to make a widget. This social average is the social value of the commodity: the amount of time society requires to make a widget. But I am old and slow. I take 3 hours. This is the individual value. My individual value is higher than the social value. But that doesn’t mean I can sell my widget for more. I must sell at the social average. Marx calls this “socially necessary labor time”. In this case the determination of social value is made not by my individual labor time, but by the average productivity of society. If the socially necessary labor time changes due to changes in productivity then the individual value and social value will change too.

2. The second factor is the interaction of supply and demand. Supply is determined by the total amount of labor that goes into making widgets and the productivity of that labor. But when we go to the widget factory to work we do not know how much labor as a whole society is devoting to making widgets. There could be a million other people making widgets or only a few. We only learn how much labor society has put into widget making when we enter the market and compare the products of our labor with the rest of society. If too much labor goes into widget making then there is an over-supply of widgets. Their social value falls below their individual value. [The private labor of widget makers counts as less social labor.] If not enough work has gone into widgets there is an under-supply and their social value rises above the individual value. [The private labor of widget makers counts as more social labor.] This fluctuation of social value around individual values is what allows labor to be apportioned.

But what of demand? Isn’t demand a random subjective element in the equation? As we will see later on the video on Supply and Demand, demand traces its power back to the labor process as well. Demand isn’t just an abstract psychological substance. It is a definite amount of purchasing power made of of worker’s wages and capitalist profits. Even the things demanded, be they inputs for the production process, or subsistence goods for maintaining the worker are needs generated by the structure of production. People’s demand for things change as the value of those things change. When the average productivity of widgets rises, their value falls and the demand for them rises because now they are cheaper. So rather than demand existing in some subjective vacuum, it is is always dependent on a preexisting world of values. But most important to the MudPie theory, demand doesn’t create the social value of a commodity. It only helps determine if labor has been apportioned to the right tasks. Labor is creating the value. Labor is doing the work. Demand tells us if this labor has been socially useful. But demand can’t create commodities, nor can it be separated from the web of social labor.

Conclusion

You might notice when you go to the grocery store that there isn’t a mudpie aisle filled with unsold mudpies. Though capitalist production involves this element of guessing, this uncertainty of transforming private labor into social labor, this doesn’t mean that production is totally random and absurdist. If exchange was random and sporadic then there would be no way for the division of labor to be coordinated. But exchange is not random and sporadic. It is constant. Every act of exchange links the buyer and seller in a complex network of buying and selling that connects all buyers and sellers everywhere. This constant interaction of production and exchange means that most of the time we have a pretty good idea of what social labor is. We don’t go around making mudpies, or bicycles with square wheels, or hip-hop polka records.

Sellers are constantly saying, “This is how much labor went into this commodity and so this is what we think it is worth”. Buyers are constantly saying, “Less labor should go here, more labor should go there.” The constant interaction of buyers and sellers apportions labor to the right tasks. This is only made possible by the fact that there is a correspondence between the labor that goes into something and its price. But this correspondence is loose, constantly fluctuating. The fluctuations are what allow labor to be reapportioned. As productivity changes values change.

Underlying these fluctuations of demand and supply lies a more basic observation about human society. We only have so much time as a society to devote to the production of our needs. If we are to have food, houses, clothes, DVD’s, and beer we are going to have to devote work to these things. Some things take a lot more labor to produce than others. They cost society more in terms of its expenditure of the total social labor. In a market society this cost isn’t decided by a committee, it’s decided by prices in the market. And this is what value is. Labor becomes social when its products obtain a price in the market. And these prices coordinate the social labor process.

More Conclusion:

What have we learned about value in this video. Value the way the social labor process is coordinated in a capitalist society. The relation between workers takes the form of relations between commodities in the market, each with a market value. Because producers are separated from each other in time and space this coordinating process is indirect, marked by fluctuations of individual values and social values. The thesis of the MudPie argument is that these deviations of individual from social value is some sort of flaw in Marx’s theory. But this display’s a profound ignorance of Marx’s theory of value. For Marx this divergence is one of the most important part of the theory of value. This divergence is the mechanism by which labor is apportioned in a society of atomized, isolated individuals competing in the market.

Suggested Reading:

Capital, vol. 1 Karl Marx

Essays in Marx’s Theory of Value, I.I. Rubin

Frontiers of Political Economy, Guglielmo Carchedi

The Law of Value 2: The Fetishism of Commodities

part 2 in the Law of Value series.

There are a lot of people that are really powerful in the world: Presidents, CEO’s, bankers, leaders of movements… But there is an object, a thing, that is more powerful than any of them. This object is money.

Money is really powerful. It makes people, societies, and countries do all sorts of things. The pursuit of money, as and end in itself, occupies many people’s lives and is the driving force of economic growth. And all over society money acts as a symbol of status, prestige and social power.

The funny thing about money is that it is just an object. Nowadays its not even a valuable object like gold. It’s just pieces of paper, or digits on a computer screen. It has all of this power and influence yet it needs no will, weapons, or words.

Why?

This phenomenon where objects have social power, in which things act as if they have a will of their own, is what Marx sought to unravel with his notion of “the fetishism of commodities.” When Marx talked about fetishism he wasn’t talking about whips and chains and leather outfits. He was talking about the way the relations between producers in a capitalist society take the form of relations between things.

The word “fetishism” originally was used to describe the practices of religions that attributed magical powers to objects like idols, or charms. If the Israelites of the Old Testament won a battle with the Philistines they attributed it to the powers of the ark of the covenant that they carried around. If they lost it was because they had pissed off the ark. Of course in reality it was their own actions that caused them to win or lose. Attributing their own powers to an object is fetishism. For Marx, money and commodities are much like this. We think that they have mystical powers, yet their powers really come from us, from our own creative labor.

Let’s take a look inside a workplace. It could be any workplace- a capitalist factory, a peasant commune, a family farm, whatever. Here the relations between different workers are direct. I make a widget and I hand it to the next person. If something needs to change about the labor process a manager brings the workers together and says, “Now we will organize things differently.” Whether it is a democratic or hierarchical form of organization it is an organization that happens directly between people.

Now let’s look outside the workplace at the market. In the market things are different. The organization of work, the division of labor, doesn’t happen through direct social relations between people. In the market the products of labor confront each other as commodities with values. These interactions between things act back upon production. They are what send signals to producers to change their labor, to produce more, produce less, go out of business, expand business, etc.

Coal miners, bakers, carpenters and chefs don’t directly relate to each other as workers. Instead the products of their labor, coal, bread, cabinets and pasta, meet in the market and are exchanged with one another. The material relations between people become social relations between things. When we look at coal, bread, cabinets and pasta we don’t see the work that created them. We just see commodities standing in relation of value to each other. A pile of coal’s value is worth so many loaves of bread. A cabinet’s value is worth so much pasta. The value, the social power of the object, appears to be a property of the object itself, not a result of the relation between workers.

[Money is the god of commodities. Through money all other commodities express their value. The amount of social labor that goes into a pencil becomes 20 cents. The portion of the social labor that goes into making a grand piano becomes 20 grand. As the god of commodities money becomes the ultimate expression of social power. It can be anything, buy anything, do anything. Yet money is just a scrap of paper, a pile of shiny rocks, a digit in a computer... It only has this power because it is an expression of social relations.]

We are atomized individuals wandering through a world of objects that we consume. When we buy a commodity we are just having an experience between ourselves and the commodity.  We are blind to the social relations behind these interactions. Even if we consciously know that there is a network of social relations being coordinated through this world of commodities, we have no way of experiencing these relations directly because… they are not direct relations. We can only have an isolated intellectual knowledge of these social relations, not a direct relation. Every economic relation is mediated by an object called a commodity.

This process whereby the social relations between people take the form of relations between things Marx calls “reification”. Reification helps explain why it is that in a capitalist society things appear to take on the characteristics of people. Inanimate objects spring to life endowed with a “value” that seems to come from the object itself. We say a book is worth 20 dollars, a sweater worth 25 dollars. But this value doesn’t come from the sweater itself. You can’t cut open the sweater and find $25 inside. This $25 is an expression of the relation between this sweater and all of the other commodities in the market. And these commodities are just the material forms of a social labor process coordinated through market exchange. It is because people organize their labor through the market that value exists.

The illusion that value comes from the commodity itself and not from the social relations behind it is a “fetish”. A capitalist society is full of such illusions. Money appears to have god-like qualities, yet this is only so because it is an object which is used to express the value of all other commodities. Profit appears to spring out of exchange itself, yet Marx worked hard to explain how profit actually originates in production through the unequal relations between capital and labor in the workplace. Rent appears to grow out of the soil, yet Marx was adamant that rent actually comes from the appropriation of value created by labor. We see these fetishistic ideas in modern day mainstream economic theory in the idea that value comes from the subjective experience between a consumer and a commodity, and that capital creates value by itself.

Yet the theory of commodity fetishism isn’t just a theory of illusion. It’s not that the entire world is an illusion, reality existing somewhere far below the surface, always out of sight. The illusion is real. Commodities really do have value. Money really does have social power. Individual people really are powerless and material structures really do have social power. There is not a real world of production existing below the surface in which the relations between producers are direct. Relations between producers are only indirect, only coordinated through the mystifying world of commodities.

Conclusion:

The theory of commodity fetishism is central to Marx’s theory of value and it’s one of the things that sharply distinguishes him from his predecessors. Adam Smith and David Ricardo both held that prices were explained by labor time. But Marx’s value theory is much more than a theory of price. It is a theory of the way the social relations between people take on material forms that then act back upon and shape these social relations. Labor takes the form of value embodied in commodities. Money price becomes the universal expression of this value. The pursuit of money as an end itself dominates society. Means of production become capital. Money, commodities and capital, as representatives of social value, become independent forces in their own right out of the control of society. The law of value is the law of these forces. Attempts to exert some control over these forces through monopoly or the state always become enmeshed in the social antagonisms of value.

Suggested Reading:

Das Capital vol 1. by Karl Marx: The theory of commodity fetishism is laid out in the end of chapter one.

Essays in Marx’s Theory of Value by Issac Rubin. This is a great book about many aspects in Marx’s value theory. In many ways this video series is intended to be a modern take his book. The opening chapters are about commodity fetishism.

Also see the beginning of this article from Endnotes about value-form theory.

Value, Crisis and Marx’s Order of Operations- final draft

I significantly rushed through portions of this paper and omitted sections in my talk at the Rethinking Marxism conference. I have also added more material since posting the draft of the paper the week before the conference. So if you find my talk of interest you might want to read this later version.

Crisis, Value and Marx’s “Order of Operations”

Brendan Cooney
kapitalism101.wordpress.com

Abstract:
An economic crisis manifests itself in many different forms simultaneously: stock market crashes, housing market crashes, over capacity, unemployment, etc. For every aspect of the crisis there is some theorist who mistakes this surface appearance for the inner mechanism of crisis. But a proper analysis of crisis needs to have some reason for selecting some phenomena as causes and others as effects. There must be a proper ordering of the relations between different economic factors in order for our analysis to avoid being arbitrary and piecemeal. Marx gives us a very clear, though complex, ordering of these relations. This paper will attempt to critique credit-centered and underconsumptionist theories of crisis from the perspective of Marx’s “order of operations”. It will close with some brief remarks about the Falling Rate of Profit.

The Prophet Elijah

Marx was not averse to using all sorts of biblical analogies to illustrate his points and so neither should we be averse to appropriating from “the good book” when it suits our purposes.

The prophet Elijah is having a bad day because everybody wants to kill him. He goes into the desert looking for Yahweh, walks for 40 days and 40 nights, crawls into a cave and waits there for Yahweh to appear to him. The Bible says, “A mighty hurricane shattered the mountain and split the rocks before Yahweh. But Yahweh was not in the hurricane. And after the hurricane, an earthquake. But Yahweh was not in the earthquake. And after the earthquake, a fire. But Yahweh, was not in the fire.” Finally Elijah hears a light murmuring sound, goes out of the cave and encounters Yahweh himself who reveals a prophecy to him. (1)

And why do I bring up this old-testament acid-trip? Because it is a great distillation of early human ontology. We know from the old-testament that “God created all heaven and earth,” that he “Laveth the thirsty land…” that biblical man interpreted the phenomenological world around him as having a common, divine creator. Yet here, in the book of Kings, we get this crucial ontological distinction: God may create hurricanes, earthquakes and fires but God is not in the hurricane, earthquake and fire. To mistake one of these forms of appearance for God himself would be the most gauche of religious fetishism.

Now, perhaps, you see where I am going with my analogy. Here in 2009, peering out from our caves at a world of destruction and crisis raging all around us we too must remember this same lesson. “There was a great crisis in the housing market. But the fundamental social antagonism of capital was not in the housing market. After the housing bubble there was a collapse of the financial system, but the fundamental social antagonism of capital was not in the financial system. After the collapse of the financial system overcapacity, overproduction and underconsumption were revealed, but the fundamental social antagonism of capital was not in overcapacity, overproduction or underconsumption.”

The prophet Elijah had a luxury that we do not have. After the forms of appearance pass by, the creator himself appears before Elijah. (The old testament could even be read as a history of humans trying to see God in this pure form through trances, drugs, divination, etc. and learning to live with this lack of direct revelation.) But Marx’s fundamental starting point is the idea that in a capitalist society we don’t see these antagonisms in some pure form. They can only be expressed through various forms of appearance: through money, commodities and capital. A crisis is the closest we come to seeing these social antagonisms laid bare, yet here in this current crisis its obvious how easy it still is to mistake credit bubbles and the like for root causes. For our present purposes there are two lessons to learn from Marx’s fetishism argument. 1. We cannot expect to witness the social antagonisms in their pure form. Thus we must avoid mistaking a form of appearance for the thing in itself. (2)  2. We mustn’t err too far in the opposite direction. We cannot dismiss this world of appearance as a completely uninteresting world of illusion. The manner in which these social antagonisms are expressed are crucial to our understanding of them. I think that in some of the erroneous theories of crisis I talk about here there is still a kernel of truth. Here I want to extract what is important about the phenomenal forms of the expression of crisis as well as to critique those theories which dwell too long on the phenomenal form without identifying the root causes of crisis.

order of operations

Peering out of our caves in 2009 we are confronted with a variety of phenomenon, all which express the social antagonisms of capital: housing bubble, predatory banks, decline of the dollar, competition, competitive devaluation, excess capacity, stagnant wages, etc. How do we discover what is fundamental about these? What is the relation of all of these different phenomenon to each other? Marx gives us a logical structure with which to understand the inter-relations of these phenomenon. It is not like a mess of billiard balls all colliding with one another with equal force and mass. It is not like that obnoxious string-of-causes so popular in postmodern theory, “race, class, gender, sexual-orientation, ethnicity, religion…”, where all things are given equal weight and no attempt is made to actually understand the relations between different elements. There is a priority of relations in Marx. The question is always, “What proceeds what logically?” (3) So, for instance, we can’t understand the relations between capitalists until we first understand what it means to be a capitalist in the first place. Thus the labor-capital relation logically proceeds the relations between capitalists. This is why Marx said that one of the two most important discoveries of Capital was his treatment of surplus value independent of its division between different factions of the capitalist class.(4) The other important point involves the relation of the labor-capital relation to the value relation. The labor-capital relation presupposes commodity production, the sale of the products of labor in the marketplace which forms the law of value. Since all of the interactions between actors in a capitalist society take the form of commodity exchange, the law of value is the fundamental relation.

Errors can be made here. This “order of operations” is not an historical ordering. For instance, we know that money existed before capital. Yet with the historical appearance of capital money becomes subservient to capital. Usury becomes transformed into a credit system which serves capital’s needs. Fred Moseley might be reproached here for claiming that “this is not a Marx crisis but a Minsky crisis”, as if the various historical phenomenal forms of crisis somehow erased this subservience of money to capital. (5)

We could mention other instances of confusion of historical with logical ordering. Engels himself (as well as other great Marxists like Hilferding and Mandel) insisted that the law of value existed historically in the form of simple commodity production prior to capitalist production. I sympathize with Rubin’s critique of this notion. (6) The primacy of the law of value can be understood purely as a logical primacy, not an historical precedent. Clearly we need to understand the history of trade in an analysis of the evolution of capital. But this doesn’t mean that the law of value functioned in some pure form, that commodities traded at their socially necessary labor time, prior to capitalist social relations.

In the same way that this order of operations is not historical, it also isn’t a simple logic of cause-and-effect. It’s not that value causes capitalism and capitalism causes relations between capitalists. The operation of the law of value can only take hold once capital has cleared away barriers to free exchange. The law of value is dialectically wedded to the laws of capital. We cannot have C-M-C without M-C-M. These two things, the value relation and the labor-capital relation, both merely inversions of one another, subjugate all other forces to their power. As much as we may make powerful insights into the ruthless antagonisms expressed in various parts of the economy they can only be forms of appearance of the basic antagonisms of capital.

Credit theories

With this being said we are already half-way done critiquing the credit-centered theories of crisis of Duncan Foley, Fred Moseley and the host of bourgeois pundits who also take this route. (7) (At the Rethinking Marxism conference I jokingly called these “stock-jock theories” of crisis: that stock jocks flapping their wings on Wall Street cause factories to close in Shanghai.) What does it mean to say there is a credit bubble? It means that the size of the paper-symbols of value that are floating around on Wall Street have grown larger than the actual amount of real value produced in the economy. But why did so much investment flow into speculative investments instead of flowing into the production of real profits in the “real economy”? And why couldn’t enough value be created to realize the value of this bubble? Why must assets be written down? Obviously theories of finance always beg other questions about the production of real value. Thus we can’t understand investments and bubbles in the financial world without a theory of capital accumulation.

This is why credit/finance/financial theories of crisis rely on theoretical attempts to uncouple the financial system from capital. It is argued that developments in the world of finance have created an independent internal logic which can create a crisis independent of the logic of capital. Some credit-crisis theorists, in an effort to clearly separate theories of capital from theoreis of credit, even argue that capital is not in a crisis. This is Moseley’s approach. It is beyond the scope of this paper to critique these theories of “uncoupling”. Rather I want to make it clear how they relate to the structure of Marx’s argument.

Yet the financial world is not entirely a realm of illusion. Real changes have taken place in the form of world money and these are important for Marxists to include in their analysis. In the 1970′s when Nixon took the dollar off the gold standard he severed the link between world money and its basis in real value. (There is actually a lot of debate about whether or not the US dollar has a de facto commodity basis. Is the dollar based on the value of oil? of the mass of commodities?) This liberated world money allowing it to become incredibly good at being a medium of circulation, of lubricating exchange. Problems in production and demand could all be easily papered over with a rapidly expanding flow of credit. Fortunes could be made just through the manipulation of currency exchange rates, bypassing the world of production altogether. Yet as world money became better and better at lubricating exchange it became worse and worse at measuring value. It has become increasingly unclear what the real value of a mortgage-backed security, a pension, or even a dollar is. (8)

This phenomenon is exactly what Marx was talking about in those difficult, highly abstract opening chapters to Kapital. When Marx says that the contradiction between a commodity’s use-value and value is resolved in the money form only for money to internalize this contradiction as a contradiction between the measure of value and the medium of exchange…. Marx is giving us the theoretical framework to understand real phenomenon like the current contradictory nature of world money. Yet these opening chapters on money are directly followed by the chapters on capital. This is because capital effectively resolves the problems of money. It constantly throws more and more value into the economy, subordinating all production and exchange to its rhythms. When credit is advanced, capital creates the value to pay back this loan.

In this sense leftist credit-based theories of the crisis make the same mistake that Austrian conspiracy crisis-theories do with their obsessive paranoia about central banking. They neglect to mention that the amazing powers of world money to lubricate exchange only come into conflict with money as a measure of value when capital is not able to generate enough value to pay back those loans. This is because money is absorbed into the circuit of capital and subordinated to the rhythm of capital. Financial bubbles do not arise because of some fluke in state regulation. They arise as an attempt to compensate for the contradictions of capital.

Underconsumption

Underconsumption theories have become very popular now-a-days amongst Marxists and non-Marxists. For those unfamiliar with the argument or with the term “underconsumptionist”, the idea is that the drive by capitalists to suppress wages ends up coming back to kick them in the butt because low-wages means there isn’t enough demand in the economy to buy back all the commodities workers are producing.

Underconsumption does appear to veer closer to Marx’s logic in that it stresses the antagonism between labor and capital. It also considers the process of reproduction as a whole. It acknowledges that crisis is not a question of just the financial sector but of the ability of the antagonistic social relations of capitalism to reproduce themselves through this same antagonistic logic. Yet for a lot of Marxists the term “underconsumptionist” has always been an insult directed at theories that claim capitalism can avoid crisis by raising wages a little bit. The critics claim that underconsumptionists unjustly privilege problems of exchange instead of looking to production for the true source of the social antagonisms of capital. In the debates between the underconsumptionists and the falling rate of profit theorists one can sometimes feel caught in a dialectical chicken and egg argument: which has primacy production or exchange?

Rather than providing a full-scale critique of the underconsumptionist position, I want to offer two points which I think help to situation problems of consumption/demand/realization within the logical structure of Marx’s argument.

Point 1: The difference between the potential for crisis and the “cause” of crisis.

I will use a slightly awkward and simplistic analogy to illustrate my point.

A bicycle has the potential to crash. It is narrow, hard to balance and is beset on all sides by the forces of gravity. Yet a bicycle has a means of overcoming this potential: a rider who propels the bike forward. This forward momentum overcomes the forces of gravity, actually using gravity to its own purpose in moving the bike forward. If the bike crashes we will see the forces of gravity kicking in, pulling it to the ground. Yet if it crashes we don’t say that the bike crashed because of gravity. We instead try to explain why the forward momentum of the rider failed to overcome gravity: ie. it was hit by a car, or hit a pothole, etc.

In Marx’s  understanding of the circulation of capital there is also a similar logical distinction between the possibility for a crisis and those forces that actually move capitalism into a crisis. The fact that production only becomes social in exchange, the fact that money must serve as a mediating link in the organization of the labor process means that the potential for crisis exists. Money separates production and exchange. It separates a purchase and a sale. It makes it theoretically possible that the social product might not be bought or that demand might not be met. Even with the evolution of money into credit, money can’t necessarily resolve all of the difficulties of exchange which require money to be thrown into and withdrawn from circulation to adjust to changing masses of commodities entering and exiting the market.

But as we have already seen, capital provides a forward momentum that overcomes these problems. Capital takes the potential instability of C-M-C and inverts it into M-C-M. If a crisis erupts it is because something has gone wrong with the capital’s ability to provide this forward motion. Yet, this crisis will appear as the separation of a purchase and sale. The circuit of capital will freeze in all of its stages and we will see unsold products, unused capital and unemployed workers. It will look like the problem is in the exchange of these things in the market. But just like we don’t say gravity is the cause of bike accidents, we also don’t say a separation of purchase and sale is the cause of crisis. The underconsumptionist gaze is too fixated on the market when the real determination of market phenomenon comes from production. (9)

Sometimes it is argued that that this idea of a “forward momentum” provided by capital which overcomes the potential for purchase and sale to create a crisis is a version of Say’s Law. (For a Marxist “them’s fightin’ words.” J.B Say had argued that sellers bring their own buyers to the market, that supplies are always sold, that the possibility of a general glut of commodities didn’t exist. Marx hated Say. Marx really hated Say. Marx really really hated Say. Really.) I think it is unfair to characterize my above argument as a version of Say’s Law. In fact the distinction is a really crucial one which gets to the heart of the underconsumptionist debate.

Products go unsold all the time in a capitalist society. This is the way supply and demand works. If there is a shortage of goods prices and profits rise and capital rushes in. If there is a glut of commodities in a sector prices and profits fall and capital rushes out. This is the mechanism whereby labor is reapportioned. This is the mechanism by which prices coordinate the division of labor. The labor theory of value requires that there be constant disproportions, unsold commodities, reallocation of labor between sectors, etc. if price is to serve its role of reallocating labor. As productivity changes, as demand changes, the disproportions of the market constantly fluctuate to reapportion labor. But labor is reapportioned. It continues to move in and out of sectors in search of the highest profit for capital. This is part of the “forward motion” of capital which overcomes the possibility that the separation of purchase and sale can create a crisis.

The underconsumptionst must therefore always argue that there is an absolute limit to how much capital can flow out of the consumer goods sector. If wages are falling and there is therefore less and less demand for consumer goods, then capital will constantly flow into the producer goods sector- the sector which produces machines and other inputs for other capitalists. Critics of underconsumption argue that producer goods sector can continue to grow and grow, furnishing all of the demand needed for accumulation to move forward. Capitalists can sell to each other as the consumer goods sector shrinks.

Underconsumptionists respond by arguing that there is some absolute limit to how much the consumer goods sector can shrink. Sometimes it is even argued that all production is ultimately production for consumer goods. This usually gets underconsumptionists in trouble for falling for the bourgeois idea that demand, not capital accumulation, drives the economy. But isn’t there a limit to how small the consumer goods sector can shrink? I actually think there is, but that the limit is not set by problems of demand. Imagine an economy in which there were no consumer goods and therefore no workers. Production is totally automated. requiring no workers, and capitalists produce for each other. In such a hypothetical world there would be no law of value and exchange would breakdown. But the lack of consumer demand would not be the problem. It would be the lack of labor which forms the basis of value. This leads naturally to my second theoretical point…

Point 2: The difference between the total value and the distribution of value in the determination of prices and profit.

When productivity rises why do the prices of individual commodities fall? Because less labor is contained in them. But what is the mechanism which actually forces these prices to fall? There is only so much value in the economy at a given time with which to purchase the mass of use-values created. Capitalists are not free to set any price they like. They are constrained by the amount of value in the form of purchasing power which they confront in the market. (10) When the products of labor meet in the market, when the commodities that make up the entire social product are exchanged with each other, the social relations between producers take on the form of relative prices between their products. In this way the total amount of value constrains the total price. The process of exchange, of realization, is essential to establishing prices and profits. That’s why as productivity increases prices must fall. When these falling prices correspond to a rising cost of production then we get a falling rate of profit.

But underconsumption theory does not focus on the total value, or the cost of producing this value. Instead it focuses on the distribution of value between workers and capitalists. The distribution of value between wages and profits does effect the profit rate in the sense that less wages mean higher profits. But the distribution of purchasing power between wages and profits does nothing to alter the total amount of value that acts as a constraint on prices and profits. This distribution of consumptive power could effect the prices of commodities in the consumer goods sector, but not the profit rate. If wages fall then there is less value in the economy with which to buy back consumer goods (that is, if the capitalist cannot absorb these goods.) This could cause consumer goods to go unsold or for prices to fall below their value as capitalists compete to sell off this excess of commodities. But this can’t actually cause the profit rate to fall. This is because the unpaid labor of the worker costs the capitalist nothing. If $100 in lower wages means that $100 of toothbrushes aren’t sold to workers then the profit rate is exactly where it was before the wage cuts. (11) Furthermore, as pointed out above, a glut of toothbrushes would signal capital to leave this sector and move to another sector where potential profits are higher.

It is not the distribution of purchasing power between labor and capital which is crucial for crisis theory. It is the total mass of value, the total mass of surplus value and the cost of producing this surplus value. This, of course, is the theory of the falling rate of profit.

Falling Rate of Profit

The theory of the tendency of the falling rate of profit succeeds where these other theories fail. It correctly identifies the central dynamics of a capitalist society in the dialectical interrelation between value and capital, the mutual interdependence of C-M-C and M-C-M. Capital contains a contradiction: it incorporates the the body of the worker into its cold, machine-like logic. The worker becomes a commodity, embodying the contradiction of all commodities: that commodities are both use-values and exchange values. The contradiction of the commodity form becomes the contradiction of capital.

Capital plays out this contradiction through the commodity form. It raises the social productivity of labor, thus increasing the mass of use-values produced and increasing the mass of use-values that the worker confronts on the shopfloor. But as it develops the social productivity of labor, the efficiency with which use-values are produced, it undermines its ability to produce surplus value- its own social basis. The production of use-value and exchange value come into conflict.

Thus the theory of the falling rate of profit properly situates Marx’s crisis theory within Marx’s larger historical analysis of the evolution of the forces and relations of production. Capital develops the forces of production beyond the point at which they can continue to support the relations of production. This is why Marx says that the FRP exposes the historical limit to capitalist social relations. (12) Of course capitalist crisis is cyclical. The falling rate of profit is not a theory of some terminal stage of crisis. But it does relate the theory of crisis to Marx’s larger project of identifying the historical nature of capitalism. Other crisis theories do not do this. (13) We will not see the emergence of some new historical form of derivatives that harkens the coming revolution. We will not see some new development of wages that paves the road for socialism. But in the evolution of the forces of production we can see the historical limits to capital. I think that these historical limits are worth thinking about when we analyze the evolution of value, especially now-a-days in the realm of information production. (14)

Footnotes:

(1) Bible. 1 Kings 19:11

(2) I haven’t read enough Autonomist Marxist literature to put forth a criticism of their ideas on crisis here. When surveying the autonomist literature I would keep this aspect of fetishism in mind. To what extent does the focus on the autonomy of the worker in autonomist thinking represent a desire to see the social antagonism of capital in some pure form, free from forms of appearance?

(3) This notion of logical priority is articulated well in I.I. Rubin’s “Essays on Marx’s Theory of Value”. This is a great book, with an extremely careful and detailed analysis of the logical structure of Marx’s argument.

(4) Marx and Engels, “Selected Correspondence”, from a letter from Marx to Engels, August 24th 1867. Marx writes, “The best points in my book are: 1) the two-fold character of labor, according to whether it is expressed in use-value or exchange value. (All understanding of the facts depend upon this.) It is emphasized immediately in the first chapter; 2) the treatment of surplus value independently of its particular forms as profit, interest, ground rent, etc.”

(5) See Fred Moseley’s piece June 08 in the journal International Socialism. http://www.isj.org.uk/?id=463; For a more detailed piece by Moseley see http://www.isreview.org/issues/64/feat-moseley.shtml
For more criticism of Moseley see Andrew Kliman’s “On the Roots of the Financial Crisis and some Proposed Solutions”

http://marxisthumanistinitiative.org/2009/04/17/on-the-roots-of-the-current-economic-crisis-and-some-proposed-solutions/

(6) See Hilferding’s “Response to Bohm-Bawerk” for the classic defense of this theory of the historical precedence of simple commodity production. Also see Ernest Mandel’s introduction to Vo. 1 of Capital. I am convinced by Rubin’ s criticism of this theory in “Essays on Marx’s Theory of Value.” Also see the brief criticism in David Harvey’s “Limits to Capital.”

(7) See Duncan Foley’s trippy graphs in his paper “The Anatomy of Financial and Economic Crisis”: http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/foleytheanatomyoffinancialandeconomiccrisis
While I have a deal of respect for a lot of the other theorists I critique in this paper, Foley’s paper does not garnish one iota of respect outside of the trippy graphs.

(8) See David McNally’s great 2008 paper on this subject: “From Financial Crisis to World Slump”

http://marxandthefinancialcrisisof2008.blogspot.com/2008/12/david-mcnally-from-financial-crisis-to.html

(9) Anwar Shaikh’s criticism of underconsumption as lacking a theory of the rate of accumulation is what I had in mind when constructing this argument. See his “And Introduction to the History of Crisis Theories” on his homepage: http://homepage.newschool.edu/~AShaikh/

Also useful is Harvey’s discussion of the way capital solves the effective demand problem at the end of chapter 3 of his “Limits to Capital.

(10) Here, actually, I feel ambivalent. Is it the total value or the total value in the form of purchasing power that sets the limit on prices? Is there a difference?

(11) see G. Carchedi “Return from the Grave”  http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/carchedireturnfromthegrave

(12) Das Kapital, Vol. 3. Chapter 15

(13) Much has already been written by falling rate of profit theorists about the problematic “solutions” recommended by proponents of erroneous crisis theories. The financial-centered theorists call for nationalization of finance or closer regulation. This makes sense because they see the problem emanating from a faction of the capitalist class, or from the money form, but not from capital and the value form. It thus seems logical from their perspective for the capitalist state to solve the problem. Rick Wolf, representing the underconsumption school, advocates a worker-owned factory, market-socialism type of society to replace capitalism. This makes sense coming from the perspective that the chief antagonism is in the distribution of wages and profits. Because the dialectical relation between C-M-C and M-C-M is not present in Wolfe’s theory there would be no reason for him to question commodity production0 to ask to what extent commodity production eventually reproduces the capital relation.

(14) Here is theoretical terrain that is in desperate need of more theorizing. Marx’s optimism for a post-capitalist future came from his analysis of the development of the forces of production under capitalism. He writes about the way in which the centralization of means of production leads to a truly social labor process, and how abstract labor creates a truly universal class. In our lifetime we have seen the stagnation and death of many industries whose ownership of the means of production have been eroded by the evolution of digital information technologies- technologies which have eliminated productive labor from the task of duplicating and distributing information. This has created an under-theorized collective commons of information creation that has struggled to find a stable commodity basis. The open-source software movement is perhaps the best example of this emerging terrain of conflict. Capital’s response is increasingly reactionary. Rather than establish a new basis in real value production it relies on narrow legal enclosures, threatening to turn the information age into a new period of primitive accumulation. But can capitalist production be anything but reactionary and parasitic in the realm of information production? What does this mean for theories of revolution? I don’t know. I am influenced by Tessa-Morris-Suzuki’s writing on this topic. See her essays in the book “Cutting Edge” edited by Jim Davis.

Falling Rate of Profit

The Falling Rate of Profit

The financial world is a mysterious one. It appears that through trading stock, advancing credit, or swapping currencies profit can appear out of thin air- that is, money can be turned into more money just by clicking some buttons on a computer or placing a call to a stockbroker. Indeed much of the confusion and mystique we attach to the dizzying world of finance comes from this illusion of money growing from money.

This is inherently abstract. To most of us, money is something we earn from performing concrete labor. And we use this money to buy real commodities- actual physical objects or services that represent labor done by other people out there in the economy. For us, money (M) is an abstract step of measuring value that exists between two very real concrete things: the labor we perform (C) and the labor of the commodities we buy (C). C-M-C

But for the capitalist, this realm of the concrete is not the goal. It is the abstract power of money that is important. To turn money into more money (M-M1) is the goal of capitalist production. For productive capitalists (capitalists that generate profit by selling commodities) the concrete labor process that creates commodities is an annoyance along the way to making a profit. They thus seek to minimize the time it takes to make a commodity so that they can turn their commodities back into money as quickly as possible.

For financial capitalists there is no annoying stage of concrete labor. They move their money to one place and it magically turns into more money. So why then, aren’t all capitalists in finance? Why do they bother producing commodities anyway?

The answer to that should be obvious. Without commodities and human labor to make them we couldn’t even have an economy. All value in the economy eventually relates back to the labor process. And though financial capitalists may never see a worker or set foot on a shop-floor, the profit they make is ultimately, in one way or another, dependent on the value produced by productive capitalists, whether through interest on loans, stock value, rent, etc.

But if we let financial capital carry on in its own mad way, turning money into more money through increasingly exuberant orgies of investment it is not hard to see how this can create temporary bubbles of speculation. Symbols of value- credit, mortgages, even money itself- can be traded back and forth assuming prices way above the actual value of the asset until the financial sector finds itself awash in ‘fictitious capital’. This is a fancy word for symbols of value that are divorced from any real value- any real connection to the labor process- in the way an actual commodity is.

But if you have your thinking cap on you might already see that we can’t blame crisis solely on financial capital. The monstrous bubbles of fictitious values it creates are only a problem if there isn’t enough value in the economy to back up all those symbols of value. We must also look to the productive side of the capitalist class and ask “why isn’t there enough value in the economy to back up all that fictitious value?” How come there aren’t enough wages to pay off those mortgages?  Why does the government have to go into debt in order to bailout investment firms and banks?

To answer these questions we need some theory about the rate of accumulation- the rate at which real value is produced in a capitalist society. The theory of the falling rate of profit is such a theory, and it is this theory that will be the topic of this video after many mentions and sneak-previews in other videos. The theory of the falling rate of profit argues that the basic way in which value is created in a capitalist society contains a basic contradiction which destabilizes accumulation. If not offset by some countervailing influence this will cause capitalism to go into crisis.

The basic argument is actually pretty simple. If capitalists see the concrete stage of commodity production (C) as an annoying step in between an initial investment (M) and profit (M1) it is in their interest to decrease the amount of time spent in this concrete stage while getting the most possible value out of it. This is basically what it means to increase efficiency. Workers produce more commodities per labor-hour, thus increasing the physical productivity relative to the initial investment.

The problem is that the more efficient capitalists are at producing commodities the less those commodities are worth. And this is simply because increased efficiency means less labor input per commodity and therefore less value, meanwhile more spending on labor-saving, efficient machines. So the very actions that capitalists take to generate more profit create a falling rate of profit.

This theory, that increased efficiency drives down the rate of profit has aspects that are both intuitively commonsensical and aspects that seem illogical. It makes intuitive sense that the more there is of a commodity the less it is worth. It doesn’t seem to make sense that capitalists would continue to behave in ways that drove down their own rate of profit. Let’s look more closely at this process and try to unravel the mystery.

The expansion of value is the essence of capitalism. Capitalists exist to turn raw materials, tools and labor power into commodities of greater value, to sell them for money and then to start the process all over again the next day. Competition between capitalists creates a race to lower prices relative to rival capitalists. But if price were ever lowered below the actual value of a commodity capitalists couldn’t make a profit at all. The only way to lower the price of a commodity and thus out-compete a rival is to produce something more cheaply than a rival capitalist. How is this done? -By increasing the productivity of labor.

Remember, commodities’ values are equal to their socially-neccesary labor time- the amount of time it takes, in general, for a commodity to be produced under average conditions. Let’s say you are a capitalist who makes widgets and the average firm produces 10 widgets an hour per worker. But your firm only produces 5. In order to make the same amount of profit as your competitors you would have to sell your widgets at a higher price. But you can’t get away with charging more for your widgets because people will just go buy from someone else who can make them cheaper. You will be forced to get your workforce to achieve average productivity or else go out of business. You will be forced to achieve the socially necessary labor time.

Now, if you can get your workers to produce 15 widgets an hour then you are producing at under the socially necessary labor time. This means your can sell your widgets at slightly less than the average cost, outselling your rivals and getting more profit per widget than them. Whereas other firms’ widgets are worth one tenth of an hour of labor time (a worker makes 10 widgets an hour) your widgets are worth a fifteenth of an hour. But you can charge anywhere from and eleventh to a fifteenth and still undersell your rivals.

How do you achieve more efficient production? Obviously you can make your workers work harder. But you will encounter some opposition if you try to get them to work too hard. After all, workers are people with a certain level of tolerance for their own exploitation. We can assume that all of your rivals are making their workers work equally hard. Your only other option is technical innovation. If you invest in better machines, new machines, fancy computers, new conveyor belts, etc. you can make your workers more productive. And this is exactly what capitalists do all the time. This is the motor behind the dazzling technological dynamism of a capitalist society.

Once you’ve achieved a more efficient production system other capitalists are going to want to do the same. It is hard to keep technological advances secret for long. Once all of your competitors are producing 15 widgets an hour per worker the socially necessary labor time of a widget goes down. Now all widgets are worth only 1/15th of an hour. The value of the commodity has fallen, and with it the amount of profit that can be made from it. The actions of individuals competing to make a profit by producing at less than the socially necessary labor time, eventually lowers the socially necessary labor time itself, thus undermining the aggregate profit rate. (repeat this)

The rate of profit is the total profit over the total price of inputs: profit/inputs. We call the profit s for surplus value- the amount of additional value added by labor, over and above the money paid to workers for their wages. We divide the inputs into two categories: wages paid to workers, and expenditures on pre-produced commodities like machines, raw materials, factories, etc. At the time of buying one of these pre-produced commodities the capitalist pays a price representing the value of the commodity. This value is then transfered onto the final product, but no additional value can be transferred by a machine or raw material, so we call the value of these pre-produced commodities “constant” and denote them with “c”. Since the wages paid to workers are not representative of a specific amount of value that will be produced per worker, that is, since there is no way of knowing how much value a worker will produce, we call their value “variable” and denote this with “v”.

We can then translate profit/inputs into s/c+v. This is the standard equation for the rate of profit (though you will sometimes see it written as s/v/c/v.) From this equation it is easy to see that an increase in investment in either c or v must correspond to a rise in the amount of surplus value in order for the rate of profit to rise or stay the same. If s stays the same while c or v increases then the rate of profit will fall.

In our example of capitalists reducing the socially necessary labor time of widgets we saw that although some capitalists gained a temporary advantage over others through increased efficiency, ultimately the same amount of workers produced the same amount of value each hour. The value was just spread out over more widgets. In terms of our equation s/c+v this means that surplus value does not rise just because physical output rises.

What does rise is c. In order to increase the efficiency of output capitalists had to spend more on machines and raw materials. This means that the denominator in the equation is increasing. And this means a falling rate of profit.

So when people say “it doesn’t make sense that capitalists would invest in ways that drove down their rate of profit” you can now explain to them the following 3 points:

1. We see the price of commodities fall all of the time due to increased efficiency. Notice the plummeting price of digital technologies, once adjusted for inflation. This means that increased productivity does not mean increased value. The same amount of workers are producing the same amount of value. This value is just spread out over more, cheaper commodities. But for some “mysterious” reason capitalists keep racing to pump out more and more cheaper commodities, even though it ultimately undermines the rate of profit.

2. Capitalists’ decisions are not centrally coordinated decisions made for the long-term benefit of the capitalist class. They are totally anarchic, the result of thousands of individual capitalists all competing against one another for temporary, short-term market advantage. The immediate, on-the-ground pressure on an individual capitalist is to increase output per worker to achieve maximum possible efficiency without regard to the effect on aggregate values or market saturation.

3. Capitalist do not operate from a conscious labor theory of value. To them, increased physical output means increased profits. This confusion of physical output with value is referred to as “physicalism”. It is the same theoretical error that confuses many of the critics of the falling rate of profit like Nobuo Okishio and John Roemer. Both capitalists and their bourgeois theorists are stuck in a theoretical quagmire where they think the value of commodities stays the same regardless of how efficient the production process is, while it is quite obvious to any lay observer that the value of commodities is constantly decreasing with rising productivity.

There are however some counter-vailing tendencies against a falling rate of profit and it is to these counter-vailing tendencies that we will turn next.

Again, if you have your thinking cap on you may have noticed that this entire thesis of the falling rate of profit is predicated on one assumption: that capitalists will increase their investment in constant capital (c) relative to variable capital (v). The ratio of c to v (c/v) is usually called the “organic composition of capital” though sometimes you will hear it referred to as the “value composition of capital”. It should be clear by now that if the organic composition of capital rises that the rate of profit falls. But if the organic composition of capital shrinks- if v rises relative to c- this should counteract the tendency toward a falling rate of profit.

Indeed this was a major strategy in response to the crisis of the early 70′s in which the west found itself with an overaccumulation of constant capital in the form of large factories and other industrial infrastructure. By an increased use of subcontracting in the 3rd world firms were able to move production overseas to take advantage of cheaper, easily exploited labor. In many parts of  Asia and Latin America there was no need to increase efficiency via constant increases in technology because the labor force, displaced from their rural means of production through deregulation in trade, was so vulnerable and exploitable.

While such investment strategies stem the falling rate of profit, they do so by expanding capitalist social relations into new areas on the periphery of capital. In so doing they don’t resolve the contradictions implied in the falling rate of profit, they merely displace these contradictions in space by bringing more people and spaces into the system. In doing so all sorts of disequilibriums are created in the fabric of capitalist space. The eventual rise to economic power of some areas of the periphery has much to do with the current disequilibrium of international capitalist relations.

A second way of stemming the falling rate of profit has to do with decreasing the value of constant capital. If the race to improve efficiency is cheapening all commodities we can expect the costs of inputs like machines and raw materials to fall as well. This allows capitalists to increase the physical amount of technology they use without increasing the value of constant capital. Unlike the previous “fix” which displaced crisis in space, this “fix” is part of the internal logic of capital and, some argue, could very well be a permanent fix.

What should be added though is that many production technologies involve very large investments in fixed capital. Fixed capital is constant capital that is fixed in space like roads, bridges, damns, factories, skyscrapers, enormous machines, etc. An enormous investment in fixed capital commits the investor to the long term use of this fixed capital, preventing the capitalist from switching to new, cheaper constant capital. The turnover time of fixed capital investments can be several years to several decades, as the capitalist waits for the cost of a new building or road to pay itself off. Thus the “fix” provided by the falling value of constant capital is neutralized in the case of fixed capital investments. The longer an industry has been around, the more automated production tends to be, so there is a tendency toward increasing investments in fixed capital.

The problems of turnover time in fixed capital investments are often overcome through the credit system. By borrowing money for investments, or borrowing money in expectation of future revenues, capitalists can get the money they need now, instead of waiting decades for an investment to pay itself off. In this way the credit system creates a socially necessary turnover time which equalizes turnover time across industries allowing industries with massive fixed capital investments to stay competitive with more labor-intensive industries. This also means that the crisis of overproduction of constant capital and the subsequent falling rate of profit are displaced in time and transferred to the credit system.

And this takes us back to our starting point. If capital can make good on all of it’s credit- if it can turn all of its investments into real value, we are safe from crisis. But if capital can’t generate enough profit relative to its investments, if technological change destabilizes value creation in one way or another we get crisis in the form of bubbles of credit which can’t find value, massive factories which can’t make a profit, shelves of commodities that can’t be sold and masses of workers without jobs. The theory of the falling rate of profit provides a starting point for analyzing how all of these factors are inter-related. While there are countervailing tendencies away from a falling rate of profit, many of them are mere displacements of crisis which merely postpone crisis, bottling it up to breakout with increasing violence when it can no longer be contained. We must also remember that there is no centrally coordinating body in a capitalist society to manage investments in a way that stabilizes the rate of profit. We are almost ready to begin an analysis of the way these abstract forces have evolved historically to land us in our present state.

Bibliography:

Limits to Capital, by David Harvey

Reclaiming Marx’s Capital, by Andrew Kliman

Class, Crisis and the State, by Erik Olin Wright

An Introduction the History of Crisis Theory, by Anwar Shaikh (from U.S. Capitalism in Crisis)

Capitalist Equilibrium?

Part one:

Part two:

10 Step Program for Capitalist Equilibrium.

Ahhhh, capitalist equilibrium…. A world of free and voluntary exchange, perfect competition, the perfect allocation of resources to meet the demands of consumers, of maximum freedom for all individuals…

Or is it? In a world of drastic inequality and crisis we have to ask why the real world diverges so drastically from this picture of capitalist equilibrium. Are there external forces hindering capitalist equilibrium or are inequality and crisis actually the true face of capitalism?

Already with the present crisis we mostly hear the former argument in various forms: that the crisis comes from poor government regulation, corruption, or central bank interference, inflation…

Most amusing is the argument of the far libertarian right that claims US economy is actually a socialist economy because of the tax system, state spending and the central bank. Thus any crisis could never be a crisis of capitalism, but only socialism. With such logic it is difficult to make any claims about whether capitalism works, because according to this argument there never has been and there never will be some abstract pure form of capitalism in which there is no government, no coordination of banking, no corruption, etc. This bourgeois conception of capitalism as a self-regulating system of free and voluntary exchange is an abstraction. But it is not the abstraction itself which is the problem with the bourgeois argument.

It is precisely this same abstraction which Marxists use to build their theory of capitalist crisis. The theory that capitalism is inherently prone to violent crisis is not built upon a model of government regulation, central bank-led inflation, etc. It proceeds from the same basic abstraction that bourgeois economy proceeds from: a free and voluntary exchange of commodities among equals. Let us then, take a whirlwind, speed-tour of how the logic of crisis is built from this abstraction. In just 10 steps!

1. Yes, you can fool some people sometimes… you can rip people off… you can always find a sucker, but by and large, in a society with free exchange trade tends to be trade between commodities of equal value. Because if someone is trying to rip you off you can always go trade with someone else. This tends to equalize the exchange value between commodities. Yes, this is an abstraction which makes certain assumptions, but it is the inherent tendency within in exchange.

2. We can’t talk about an equality of exchange without some notion of value. It is logically impossible. Because the point of an economic analysis is to explain how all the productive activities of trillions of people are coordinated in one vast system, we use human labor as our notion of value. Again, this is an abstraction. Labor varies in intensity and expertise. But by and large, in the same way in which exchange creates an equivalence of value among heterogeneous commodities, exchange reduces work to a socially necessary abstract labor time. In other words, when commodities are exchanged this implies that an equal amount of work went into the making of them.

3. None of this would be possible without money. We don’t exchange commodities directly with other commodities (C-C). Money intervenes in this process (C-M-C). We need money to measure the amount of value, the amount of socially necessary abstract labor time, represented by a commodity. With money, this abstract notion of value becomes more concrete. With this concreteness comes all of the ways concrete, empirical reality varies around this abstract form. We get price fluctuations and imbalances. Supply and demand cause money prices to shift above and below the actual labor value of a commodity. But underneath this fluctuation lies an abstract equilibrium price and this price corresponds to the amount of abstract labor in a commodity. These fluctuations are not exceptions to the abstract model. They are part of the model, made possible with necessary introduction of M into C-M-C.

4. Money is really powerful. It is the only measure of value. It can be exchanged for any other commodity. It also makes this possible: We can change C-M-C into M-C-M. People can set their money in motion, buying commodities, and then sell these commodities to someone else for more money (M-C-M1)! They can use their money not just as a medium of exchange in the free and voluntary exchange of commodities. The goal, for some, becomes not attaining the things one needs, but getting more of the same thing: money. We call these people capitalists and we call this never ending cycle of M-C-M1 capitalism.

5. But now our model appears to contradict our basic starting point: equal exchange. How is M-C-M1 possible in a world of equal exchange? Some one has to get ripped off at some point. But if we assume that we can’t make a profit by fooling people through exchange we have to look somewhere other than exchange. Capitalists don’t just sell the same commodities they buy. They buy raw materials, partially finished commodities, machines and human labor. At the end of their production process they have new commodities of greater value than they began with. They sell these commodities for a profit. We could write this: M-C…C1-M1. What happens in this mysterious production process? Where does that extra value come from? It comes from the difference between the wages paid to workers and the value created by those workers. This difference between the value created by human labor and the wages paid to those laborers is called surplus-value. Surplus value takes its money form as profit.

In fancy talk we call this surplus “s”. We call the human labor power bought by wages “v” for variable capital. And we call the other commodities the capitalist buys “c” for constant capital. We call labor power variable because there is no way of knowing from the wage paid to a worker how much value they will produce each day. That is entirely up to how hard the capitalist can get them to work. In other words, the input in wages does not necessarily equal the output in value. We call all the other inputs (raw materials, machines, etc) constant capital because they can’t be made to work harder. Thus, if you will indulge me in a little simple algebra, the value of a commodity is worth: c+v+s while the capitalist only paid c+v to make it!

That’s a lot of information to jam into 5 steps, but if you’ve been watching many of my videos hopefully this all is review. At this stage we have an abstract model of a capitalist society: a model with two classes, capitalists and workers, one which benefits at the expense of the other. The model is constantly in motion as capitalists in competition seek new ways to increase the amount of surplus they extract from workers. This motion is responsible for much of the social antagonism in the world as well the incredible dynamism and innovation of a capitalist society.

Again, this model is an abstraction. In a real capitalist society there is a lot more complexity to this class map. But this is the way we proceed from the abstract to the concrete. We started with just the free and equal exchange of commodities and now we already have a theory of value and profit, a basic class structure and the beginnings of a model for the dynamics of motion in a society driven by the quest for profit. At each stage in the analysis, the model comes to resemble the real world more and more and at each stage we see how much variation is possible within the model, how many different types of capitalist worlds could emerge from the model.

The model doesn’t move from abstract to concrete merely by injecting real world phenomena randomly into the analysis (like crude libertarians who start with an abstract concept of freedom through free exchange and then throw the Federal Reserve into the analysis without building any sort of theoretical structure with which to understand the relation of central banking to the system of exchange.) Instead we will see features of the real world emerge from the constant expansion of the basic concept of free and voluntary commodity exchange.

Next we will look at the way this basic class antagonism between capitalists and workers creates disequilibrium in the systems of production and exchange. It doesn’t create this disequillibrium through political struggle- that would be more of a libertarian argument- that political interference with the market creates crisis. It destabilizes through the market and through production itself through a crisis we will eventually call “overaccumulation”.

Once we’ve abstracted from the details of the falling rate of profit argument towards a more general theory of capitalist overaccumulation, we can begin to examine the ways the crisis of overaccumulation moves through space, constantly displacing crisis in geographical space as capital is globalized. And then we can talk about the way crisis is displaced over time via the credit system. And once we’ve talked about space and time we can talk about the role of the state in displacing crisis.

Only then, once this theoretical structure is complete can we begin to look at the history of capitalist crisis: The way capitalism evolved through successive displacements of the overaccumulation problem via Keynsianism, globalization and credit bubbles.  In contrast, the mainstream media and also much of left media start the the analysis with a brief history of sub-prime mortgages as if that is a logical starting point!

Whether or not you learn this from one of my videos or a book or wherever…  it is imperative for us to understand the basic structure of this argument if we are to come up with ways of surviving this coming crisis. It may very well be far bigger and more devastating than we can imagine.

Part two of this video asks an important question: Could such a system achieve equilibrium? I will set our model in motion and discuss the way value is created, expanded and recreated on a mass scale. This will then lead to an explanation of what would be required for this abstract model of capitalism to achieve equilibrium.

Part 2

6. Capitalist are in competition with each other. In order to survive they have to make more profit than their competitors- which is another way of saying “extract as much surplus value from workers as they can.” Again, this is an abstraction. Some capitalist may be better or worse than others at this. The intensity of competition and the power of a labor movement can affect their ability to extract surplus value. But the drive to increase surplus value is the dominant tendency. One of the best ways of doing this is through technological innovation. By replacing some workers with machines a capitalist can increase the output per worker. Of course, once other capitalists adopt these innovations, the amount of socially necessary labor time in a commodity drops and the race to innovate begins all over again. Thus our model sees a cyclical rate of of unemployment and a constant race to innovate as related features of the same drive to increase surplus value.

7. This means that the total value of all the commodities in the economy is greater than the total amount of wages. This could create a system-wide problem if there wasn’t enough demand to buy back all of the products created by capital. This is the problem of underconsumption which I discussed in my last video (Consume!). At the end of that video we concluded that capitalists could escape the underconsumption problem with the right reinvestment strategies. That is, if capitalists reinvest their surplus in expanding production they can increase the general demand in society enough to keep demand in pace with supply. This creates a further imperative for capitalism to keep growing. If growth ever slows the whole system can go into crisis.

8. The question then is, what sort of investment strategies would create a system in equilibrium? How much of the surplus should be spent on wages? How much on constant capital? To make this more complicated, we have to realize that there are two general types of commodities. There are consumer goods, the stuff you and I buy in the store, and there is constant capital, all the tools, raw materials and machines that capitalist need to buy. This complicates our equilibrium model a little because now we have to take into account capitalists paying workers, workers buying from capitalists, capitalists buying consumer goods from capitalists, and capitalists buying constant capital from capitalists. To visualize all this we divide the capitalist class into two “departments”. Department 1 produces means of production (or c, constant capital) for the entire capitalist class. Department 2 produces consumer goods for both capitalists and workers. We can diagram this model of the economy thus:
Department one: c + v + s
Department two:  c + v+ s

This diagram shows the total value of all the commodities in both departments. Both departments’ commodities are the total of all constant and variable capital and surplus value. Department one makes constant capital for itself, but it’s workers and capitalists must turn to Department 2 for consumer goods. Department 2 produces consumer goods for all of the capitalists and workers, but it must turn to department 1 for constant capital. Capitalists have to decide how much of their surplus to devote to reinvesting in c+v and how much to spend on personal consumption. Their investment decisions determine the amount of supply and demand in the economy.

[An aside: Sometimes, in response to some of my videos about the labor theory of value, viewers countered that supply and demand are much better and explaining price than labor times. Here, in this video, I am explaining the way this model leads us to an explanation of the way supply and demand are created in the first place. It took us sometime to get to this point because we are not only concerned with measuring prices, but also with explaining the way the basic social structure of capitalism is reproduced. It is a much wider and more ambitious scope.]

If all these inputs and outputs line up, if everything balances out, capitalism is in equilibrium. But if things go out of balance we will see the overproduction of some commodities in one of the departments without enough demand to buy it back. If such an overproduction diverges far from balanced growth we see violent crisis in the economy: profit falls, investment falls, unemployment rises, commodities face devaluation, etc.

9. Karl Marx set about to establish such a model for a capitalist society in equilibrium. And he discovered this. If Department 1 reinvests half of its surplus in constant and variable capital, at the same ratio of constant to variable capital, and if Department 2 reinvests 3/10′s of it’s surplus in constant and variable capital, preserving the same ratio, the model can grow forever without crisis. Of course it may encounter external barriers, like environmental crisis, but our investigation here is about internal crisis.

I’ve decided that the math of the argument isn’t all that suited for a Youtube video. But if you’d like to check it out, you can check out my wordpress blog where I have posted a “Math Supplement” to this video.

http://kapitalism101.wordpress.com/math-supplement-to-capitalist-equilibrium/

So there you go: capitalism, theoretically, can grow and grow forever without problem. Story over.

Well… maybe there are a few more things to say….

10. If you’ve been paying close attention, you might have noticed, even without the math supplement, that there are some fishy things about this equilibrium model. First of all, if equilibrium requires very specific investment strategies, how are these reinvestment strategies ever to be reached if they are the result of lots of individual capitalists acting on their own? We can’t use the old argument of supply and demand naturally balancing each other out, of the “hidden hand of the market” coordinating reinvestment, because we’ve just seen that supply and demand themselves are formed via these very reinvestment strategies. Such a restrictive reinvestment scheme could only be reached by accident.

In fact, these restrictions actually conflict with some of the more important aspects of our model. If exchange is free and voluntary than the model should allow capitalists to invest outside of their own department. We know that this happens all the time in the real world- automakers invest in computer companies, soft drink companies invest in the entertainment industry, etc. Michio Morishima has shown that if we allow capitalists to invest outside of their department, our model produces either progressive economic stagnation or violent crisis.

This model also assumes that capitalists don’t change the ratio of constant capital to variable capital when they reinvest- in other words, it assumes that for every $100 reinvested, $50 go to new machines and $50 go to new workers. But we have already argued that the whole point of introducing machines into the labor process is to replace human labor. That’s what machines are for. So, it makes no sense to reinvest in production at the same proportions.

If we allow for a steady increase in machines relative to workers we start to see a fall in the total amount of value created relative to total investment. In other words, we get a falling rate of profit. A falling rate of profit means a shrinking pool of profitable investments. And this means that capital stops flowing: a crisis.

Bibliography:

Das Kapital, vol. 2, by Karl Marx

Limits to Capital, by David Harvey

Marx’s Revenge, Meghnad Desai

“Marx’s Theory of Value and the Transformation Problem”, by Anwar Shaikh, from “The Subtle Anatomy of Capitalism” Jesse Schwartz, ed.        Shaikh’s work is available online at: http://homepage.newschool.edu/~AShaikh/