Posts Tagged ‘profit’

Law of Value 10: Price and Value

December 23, 2012

[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.

Value-Price- a draft script

December 15, 2012

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.

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.

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:

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:

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.

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.

Posted in Econ 101-value profit exploitaiton, The Law of Value, Uncategorized | Tagged cost-price, marx, money, price, prices of production, profit, SNLT, transformation problem, value | 3 Comments »

Value Can’t Be Created in Exchange

April 5, 2012

After Law of Value 9: Abstract Labor I will conclude the trio of videos dealing with Marx’s method (not that I’ve conclusively said all there is to say on the topic, but all that I have to say for this series). The next 2 or 3 videos deal with the price-value relationship. I suspect that this will be of interest to many viewers as this is a topic full of confusion and varying interpretations. My plan is to stick as closely as possible to what I understand to be Marx’s take on the subject. For this reason I will draw somewhat on the Temporal Single System Interpretation’s literature on the topic, especially some essays by Alan Freeman and the book Frontiers of Political Economy by Guglielmo Carchedi, as this is the school of thought that I think most coherently establishes the logical consistency and relevance of Marx’s value theory (though I don’t claim to have an exhaustive knowledge of the all of the different takes on this topic and their surrounding debates.) Of course Marx’s writing on the subject, especially vol. 3 of Capital will be in the forefront of my considerations as well.

But in preparation for the task of preparing the scripts for these videos I thought some preparatory explorations might be in order. Perhaps the first place to start would be to explore the rationale behind and relevance of Marx’s observation that value cannot be created in exchange.

Value cannot be created in exchange

In his Vol. 3 transformation procedure Marx holds that total value equals total price. (Despite the fact that prices and values diverge, the coherence and relevance of value theory is maintained by the equality of total value and total price, and total surplus value and total profit.) Bohm Bawerk, Marx’s famous Austrian detractor, argued that this assertion proved nothing. “… it is perfectly true that the total price paid for the entire national produce coincides exactly with with the total amount of value or labor incorporated in it. But this tautological declaration denotes no increase or true knowledge, neither does it serve as a special test of the correctness of the alleged law that commodities exchange in proportion to the labor embodied in them. For in this manner one might as well, or rather as unjustly, verify any other law one pleased- the law, for instance, that commodities exchange according to the measure of their specific gravity.” (Bohm Bawerk, “Karl Marx and the Close of His System” p 36 of the 1975 Sweezy edition) He goes on to give an example where individual commodities do not exchange at their specific weights but total weight equals total price, thereby apparently showing the tautological uselessness of Marx’s first equality.

Gravity

Like much of Bohm-Bawerk’s critique, his reading of Marx here is inaccurate and simplistic. Yet his critique is a good jumping off point for clarifying what Marx is actually arguing. Marx’s theory of value does not require that goods trade in exact proportion to the labor time embodied in them. Neither does his theory require that prices fluctuate around a ‘center of gravity’ that is embodied labor times. Rather Marx argues that prices and values systematically deviate and that this poses no problem for any aspect of his theory of capitalism.

Marx’s claim that total price equals total value is not supposed to “serve as a special test of the correctness” of his value theory. Rather it is a logical conclusion of his observation in Volume 1 of Capital that value cannot be created in exchange. This observation flies in the face of everything that is sacred to the Austrian school. As Bohm-Bawerk writes, “Where equality and exact equilibrium obtain, no change is likely to occur to the disturb the balance. When, therefore, in the case of exchange, the matter terminates with a change of ownership of the commodities, it points rather to the existence of some inequality or preponderance which produces the alteration.” (ibid p. 68) In other words, people exchange things because of a subjective difference in their estimation of the value of goods. Exchange happens because of an inequality in subjective estimations in value. This leads to the bizarre notion of “subjective profit” which, more than anything else, makes it obvious that the entire idea of marginal utility comes from an attempt to impose the objective rational of the capitalist investor upon the the subjectivity of individual consumers.

Two points should be made in response to Bohm-Bawerk. First, despite the impressions that could be had from a naive reading of the first chapter of Vol. 1 of Capital, Marx does not believe that every exchange involves an equality of labor times. The very concept of socially necessary labor time (SNLT) implies inequalities in exchange between the social value of a commodity and the individual value (between the labor time considered socially necessary for its production and the labor time actually spent on its production.) The gap between social and private labor is the mechanism whereby value regulates private labor for social purposes. (2) Rather, Marx is claiming that value cannot be created in exchange. While there can always be inequalities in exchange, these cannot be the source of profit because no aggregate addition to the total value of society can be created just by moving commodities from one person’s hands to another’s.

Now Marx does often ask his readers to assume, for sake of argument, that value and price are identical for individual commodities. Why?…because this makes it easier for him to show that profit must come from the exploitation of wage labor, rather than from an inequality in exchange. If value can’t be created in exchange we must look to production and the exploitation of wage labor to explain profit. But this type of profit is different than the super-profit that comes from selling below the SNLT. Thus it makes sense to assume the sale of commodities at their SNLT in order to look at the source of profit proper, rather than super-profit. Sometimes people, like Bohm-Bawerk, claim that Marx holds price and value equal for the first two volumes of Capital, later dropping it for the 3rd volume. But the concept of SNLT, which entails sale above and below SNLT, occurs at the beginning of Vol. 1!

Equivocation is the misleading use of a term with more than one meaning.

Secondly, the Austrian school’s concept of inequality being the prerequisite to exchange is highly problematic. It rests on a conflation of two different definitions of the term “value”: on one hand the subjective estimations made by individuals, on the other the real, concrete prices which commodities sell for in the market. Just because we make subjective judgements about our preferences for commodities doesn’t mean that these judgements are the same as or have any bearing on the market prices of commodities.

I question whether the concept of “subjective profit” so popular to Austrian thought has any usefulness. It seems like a bad analogy to the real, concrete profit of capitalists. Whereas capitalist profit can be easily measured, there is no measure of this so-called subjective profit that individuals supposedly get in exchange. Yes people buy things by their own free will. But on what basis can we say that this is a result of their preferring a commodity more than they prefer money? Money only has value because it can buy things. To say buying deodorant demonstrates that I prefer a $5 stick of deodorant more than I prefer $5 in cash seems to overlook the obvious fact that a commodity worth $5 has just exchanged for $5. I have exchanged one use-value for another yet the amount of economic value I have has not changed. While there has been a transfer of use values there has been no transfer or value. While the Austrian instinct is to follow the movement of these use-values, to conflate their circulation with the motor force of capitalism, Marx is more interested in the movement of value. Since value can’t be created in exchange, the motor of capitalism is the exploitation of wage-labor. This allows Marx’s gaze to focus on production, class, the movement of value… all of the things that the bourgeois economists try to abstract out of their theory.

We need look no further for an illustration of the problematic conflation of subjective value and real market prices than Ludwig Von Mises’ “Human Action”. P. 329: “Valuation is a value judgement expressive of a difference in value. Appraisement is the anticipation of an expected fact. It aims at establishing what prices will be paid on the open market for a particular commodity or what amount of money will be required for the purchase of a definite commodity.” and later:” “The valuations of a man buying and selling on the market must not disregard the structure of market prices; they depend on appraisement. In order to know the meaning of pr ice one must know the purchasing power of the amount of money concerned.” (Human Action, p.329, The Scholars Edition).

Here Mises clearly states that our subjective valuations are not the same as market prices and that market prices effect our subjective valuations. It is a logical conclusion from here to the fact that an exchange of $5 for a stick of deodorant with a $5 price tag is an exchange of equivalent values (value defined in this objective sense) regardless of what the personal valuations of individuals are regarding deodorant. Mises goes on to assert that these market prices are just the result of personal value judgement. But just because market prices are formed in the process of people making judgements does not mean that these judgments determine the exchange ratios between commodities. Regardless, once one acknowledges the fact that prices are an objective quantity one has to admit that value cannot be increased merely by trading two commodities with the same price. Whether or not there is a “subjective profit” (and I don’t think this can be proven or that it has any relevance [1]) has no bearing on the fact that value can’t be created in exchange.

On with the story…

If value can’t be created in exchange then this puts us quite far along in our path to understand the value price relation. The exchange process is one of measuring the value of commodities against each other. If a commodity is exchanged above or below its value then value is transfered from one person to another. This can be a source of profit for one person but it cannot increase the total amount of profit in society. Though Marx doesn’t use the term, sometimes one hears the words “super profit” used to describe this profit arising from unequal exchanges.

If profit can’t come from exchange then we must look to production for it. There is one commodity that can produce more value than it costs to buy. This is labor power. Labor power is the only commodity whose cost of production (the cost of the means of subsistence) differs from the value it transfers to the final product. The amount of value created by the worker in production cannot be determined by looking at the wage. It can only be determined by looking at the total amount of work that has been done. This is the source of profit proper.

Marx’s theory of SNLT contains both types of profit, profit proper and super-profit. All capitalists in an industry exploit labor and thus make profit. But they also compete to outsell each other in the market by introducing new production techniques which allow them to produce under the SNLT. This allows them to appropriate value through exchange, hence making an additional super-profit on top of the profit proper.

The source of this super-profit is the surplus value created by workers in other firms. It works like this. All capitalists in an industry must at least cover their costs of production or else they will go out of business. So let’s assume all firms are at least making enough to cover costs. Now if the SNLT corresponds to the modal (not average) level of productivity in an industry this means there will probably be firms operating above, at, and below the SNLT. Firms operating above the SNLT will lose business and make less profit. Firms operating below the SNLT will get more business and realize more profit. The more efficient firms carve out a larger space for themselves in the market, squeezing out less efficient firms. They cut into the profits of competitors. Less efficient firms are not able to realize all of the surplus value they have created while more efficient firms realize more profit than just the surplus value their workers created.

If value can be transferred in exchange, and if this transfer of value comes through redistributing surplus value created in production, then we already have the tools needed to understand Marx’s theory of Prices of Production. Sometimes we are told the notion of prices of production involves some modification of Marx’s value theory. I do not believe this to be the case. All of the tools we need to understand prices of production are already present in the notion of SNLT, and all of these points flow logically from the observation that value can’t be created in exchange. (I will leave the topic of prices of production for a future post.)

The Fraternity of Capital

The fact that surplus-value is transferred in exchange allows Marx to theorize the interrelations between different factions of the capitalist class. The theory of prices of production demonstrates that the specific profit a capitalist accrues are not just the result of surplus value originating in their own workforce. Their profits also consists of surplus value transfered in exchange. Thus the capitalists class, as a whole, exploits the working class as a whole.

This however only covers the relation between different productive capitalists. There are also merchants, bankers and the state to consider. Merchants don’t create value but they siphon off value created in production by taking a cut of the Industrial capitalist’s profit in exchange for bringing the product to market. Bankers charge interest for loans to industrial capital. The state siphons off tax revenue. These interactions bind the different factions of the capitalist class in their united interest in the daily exploitation of wage labor. We see the cohesion of the class most strikingly in a crisis where the state must act as the arm of the collective capitalist class to preserve the institutions of wage labor at all costs.

Obviously individual capitalists compete against one another to get more of this super-profit then their competitors. Obviously there are times when some factions of the capitalist class have power over others. For instance, WalMart seems to have the ability to dictate profit margins and production techniques to producers. Or, to take another example, the banking class seems to have a dominant voice in the state’s attempt to mediate the current crisis. But, despite this competition, the one thing that is always constant, the one feature that makes the rest of this system possible, is the exploitation of wage labor.

This should be the cover of the next Penguin edition of Capital...

Footnotes:

1. For one, the use of the word “profit” is problematic because it too closely conflates capitalist investment activity with consumer behaviour. Capitalist investment is an objective, measurable process. Consumer behavior is not. Austrians argue that utility is ordinal. But capitalist profit is not ordinal. It is clearly delineated in objective quantities of money. Capitalist profit cannot emerge merely from exchange, as discussed above. Use of the word profit for both phenomenon is clearly an ideological device for obscuring the nature of capitalist profit.

Consumers don’t take their subjective profit and use it to reinvest in the creation of more profit. They don’t hire accountants to keep track of their subjective profits. The state can’t tax their profits. There is really no way that this concept of subjective profit has any relation to the real profit of capitalists.

2. Now SNLT is an average, a center, which pulls less efficient producers towards it, punishing less efficient producers, disciplining labor to achieve a social average. But this center point which labors are drawn to is also constantly in motion as the same process also rewards those who produce under the SNLT. This is why we can’t think of Marx’s theory of value as an equilibrium theory. The theory does not contain any final resting point at which supply and demand meet, and labor stops undergoing revolutions in productivity.

Posted in Econ 101-value profit exploitaiton | Tagged equality, exchange, marx, production, profit, subjective, value | 35 Comments »

Kapital vol 3; Chapter 14. Counteracting Influences

November 30, 2010

Capital Vol. III Part III: The Law of the Tendency of the Rate of Profit to Fall
Chapter 14. Counteracting Influences

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

The rate of profit does not just plummet downward toward destruction and crisis everyday. Like any other observation we can make about the structural contours of a relation, once we understand the inherent tendencies within this relation we have to put it in a wider context of other relations to see how this wider context mediates the potency of our initial observations. For instance, we know that the wage relation pits workers and capitalists against each other in diametrically opposed material interests. Yet the extent of exploitation and the level of class struggle are mediated by all sorts of other factors like the political strength of both classes, the value of the means of subsistence, etc. Yet these other factors don’t change the basic form of wage-labor. They merely mediate its expression.

More important though is to understand the notion of tendency more deeply. It was until I read Paul Sweezy’s critique of the Tendency of the Rate of Profit to Fall (TRPF) in his classic “Theory of Capitalist Development” that I began to understand the importance of the inner relation between a tendency and a counter-tendency. Of course, I completely disagree with Sweezy on this point. Sweezy points out that many of Marx’s counter-tendencies are linked to the same force as the tendency, the development of the social productivity of labor. He says, for instance, that we can’t privilege the rising organic composition over the rising rate of surplus value because both are caused by a rise in productivity (By introducing more machines into the labor process we raise the organic composition thus lowering the rate of profit, but we also cheapen subsistence goods raising the rate of exploitation and thus the rate of profit.) Sweezy argues that because the tendency and counter-tendency are bound up in the same force that there is no way to determine the dominance of one over the other. It makes more sense, he argues, just to talk about a net change in the rate of profit, not some tangly mess of tendencies and counter-tendencies. Similarly, David Harvey dismisses those who give primacy to the TRPF because of the “complex interaction effects” of all of these counter-tendencies.

Thus, when Sweezy develops his underconsumptionist theory of crisis (the theory which would become the defining backbone of the ‘monopoly school’ or ‘monthly review school’) he treats counter-tendency differently. He identifies a long-term tendency towards underconsumption and stagnation which is mediated by a set of external counter-tendencies. The state mops up surplus capital, the state stimulates demand, foreign markets are opened up, etc. Each tendency is external to the logic of the basic drive to underconsumption. Thus he is able to argue that in the end all of these counter-tendencies will run-out, leading to a long-term tendency towards stagnation.

In critiquing Sweezy’s approach we can bring out what is really crucial and distinctive about Marx’s approach.The whole point of a tendency is that it is generated by the same forces that make for a counter-tendency. And because of this inner relation of a tendency with its own limits, with its own opposite, we get three possible types of motion. This is motion and dynamism generated from an internal contradiction. In his Frontiers of Political Economy Guglielmo Carchedi lists 3 types of tendencies:

1. The tendency dominates and the counter-tendencies are fluctuations around a tendential point. ie the wages
2. The Counter-tendency dominates, the tendency causing aborted and incomplete motions toward a tendential point that is never reached. ie the average rate of profit…
3. Cyclical movement where either the tendency or counter-tendencies are dominant given the point in the cycle.

The TRPF is of the latter, cyclical type. At the rise of a boom constant capital is cheap and the rate of surplus value high. Over time the successive development of the means of production can only squeeze so much more surplus from workers. Every time you double the productivity of a worker you get half as much more SV from them, yet they require twice as much constant capital. And as the mass of surplus value grows relative to the amount of workers in the economy the only place for it to go is into constant capital. It doesn’t matter if the constant capital is getting cheaper. The mass of profit is always getting bigger and more and more of it is going into constant capital while the amount going into wages is falling.

All economic laws act as tendencies and thus all of them have counter-tendencies that are inherent to their internal logic. For instance, there is a tendency for capitalists to overproduce without regard to their markets. But at the same time there is counter-tendency to respond to market signals (falling prices and devaluation) and reallocate capital to more productive investments. This is a dialectical phenomenon. Forces have relations to their opposites. This relation creates a type of motion.

In contrast, Sweezy’s approach is not dialectical but positivistic. He defines underconsumption and its counter-tendencies in isolation, not relationally. Once defined positivistically he brings them into interaction. But this doesn’t allow for any theory of motion. So instead of some sort of cycle we get a theory of long-term stagnation. I wonder if we can even push this critique farther and ask if all theories of stagnation must be missing some crucial dialectical notion of motion…..

And now for a look at those counteracting tendencies…

I. INCREASING INTENSITY OF EXPLOITATION

If the rate of profit is s/(v+c) then obviously an increase in the rate of exploitation will increase profits. But how is the rate of exploitation increased? Much of the time the rate of surplus value is increased by increasing the social productivity of labor, by having the same amount of or less workers put into motion more materials or more machines. Thus, while profits rise, the organic composition of capital (v/c) rises as well. In order for a rising rate of exploitation to arrest the falling rate of profit the organic composition must remain stable or change slower than the rate of exploitation.

A rise in absolute surplus value through the lengthening of the working day or hiring more workers can potentially raise the rate of surplus value without changing the composition of capital. Workers work longer and produce a higher rate of surplus value but they aren’t working up more constant capital in relation to the variable capital. The amount of labor being employed is not shrinking in relation to constant capital. This would have the opposite effect of the falling rate of profit. Of course the ability to extract absolute surplus value does imply a growing mass of fixed capital to employ the new laborers so we can’t really argue that there would be no alteration in the composition of capital.

In Volume 1 Marx talks about the historical and theoretical limits to a rise in absolute surplus value. The working day can only be increased so long given the state of class struggle. The working population can only be increased so much relative to the size of capital before wages start to rise. Thus capitalists turn to relative surplus value.

Relative surplus value is produced by the increasing the social productivity of labor. The means of subsistence are cheapened by decreasing the socially necessary labor time for means of subsistence. Or individual firms produce at under the socially necessary labor time driving this average level of productivity up through competition. Either way a rising organic composition is implied which means a falling rate of profit even as the rate of exploitation rises.

Here Marx even says that the struggle over relative surplus value is the “real secret of the tendency of the rate of profit to fall.” This relates to my question at the end of the previous chapter as to whether relative surplus value was at the heart of Marx’s theory of rising organic composition. It seems from this passage that it is and that I must be misreading the passage in chapter 13 that I thought suggested otherwise.

One further point, a point Paul Sweezy should have understood but didn’t: There is a limit to the amount of surplus value you can squeeze from a worker. Let’s say that I work 8 hours a day, 4 hours of necessary labor and 4 hours of surplus labor. My boss decides to double my rate of exploitation changing the proportion to 2 hours of necessary and 6 hours of surplus. In so doing I require twice as much constant capital. This doubling of constant capital produces 2 extra hours of surplus. He then decides to double my productivity again. This changes the proportions to 7 hours of surplus and 1 hour of necessary labor. This time the constant capital has doubled but the surplus has risen by half as much. If we continue the procedure each doubling of constant capital produces half as much additional surplus value. This why the rising rate of exploitation is a counter-tendency and not a tendency.

II. DEPRESSION OF WAGES BELOW THE VALUE OF LABOUR-POWER

Marx doesn’t talk about this here even though he says it is a major factor in arresting the FRP. The depression of wages below the value of labor power belongs to an analysis of competition, which doesn’t happen in this volume. What does Marx mean by this? Clearly prices of production involve competition. The theory of prices of production are a theory of capitalists in competition equalizing the profit rate. I am very interested in Marx’s order of operations so I want to make sure I understand this statement. I think Marx’s order of operations begins in this volume with a look at the rate of profit as an effect of the capital-capital relation. This allows him examine the falling rate of profit which requires an understanding of capital-capital relation and the wage-labor relation. Everywhere here the law of value still operates cleanly. It may take on different quantitative expressions with the price of production, but there are no disturbances in supply and demand which keep market prices from equalling their prices of production. In the real world forces like monopoly and state regulation or just the daily disturbances away from equilibrium force prices away from their prices of production. But we can’t understand these market interferences without first understanding value and prices of production. We measure the strength of monopoly by looking at the degree to which monopoly forces price to diverge from value. Thus value comes first, then the deviation. The same goes for the commodity called labor power. Wages can be depressed below the value of labor power. But we can’t understand this deviation until we understand the price of labor power first. Thus competition which alters the law of value from operating freely is secondary in the primary analysis of the law of value. We first must look at the falling rate or profit and the natural countervailing tendencies that grow out of the basic formal structure of the rate of profit before we look at other forces which alter the ability of the law of value to express itself.

III. CHEAPENING OF ELEMENTS OF CONSTANT CAPITAL

This countervailing tendency is probably the one that has led to the biggest critique of the falling rate of profit. In physical terms, the amount of machines and raw materials can increase per worker but this doesn’t mean that the value of these means of production must increase. The same social productivity which demands more machines and materials also decreases the value of these materials. Marx has already qualified, multiple times, his description of the rising organic composition by saying that the value of means of production rises more slowly than their mass. Here he devotes just two short paragraphs to the topic and doesn’t really ever give a reason as to why this tendency isn’t strong enough to serve as a long term fix.

In the 2nd short paragraph he does talk about depreciation which is often mentioned as a limit to this counter-tendency. Depreciation of existing capital happens when improvements in social productivity mean that cheaper means of production are being created which lower the market value of the already owned capital. Now, just because the current value of the means of production falls, this doesn’t mean that capitalists that already owned these machines can just subtract the difference from their balance sheets. If my means of production are devalued this means that I have to sell my commodities at a loss and eat it. My rate of profit, measured on my total capital investment, falls because of the depreciation. This is the argument made by the TSSI and others. Notice that it hinges on this notion of temporality. The only way to argue that depreciation lowered the organic composition of capital on already existing capital would be to argue that time was static and that all rates of profit should be measured in some timeless void. (The debate over how to measure the cost of fixed capital (whether at its historical cost or its current cost) is a hot topic. For more see the debates between Andrew Kliman and Michael Husson.)

Yet here in this paragraph it seems unclear as to whether Marx makes this temporal distinction. He seems to be saying that depreciation can arrest a falling rate of profit. He says, “The foregoing is bound up with the depreciation of existing capital (that is, of its material elements), which occurs with the development of industry. This is another continually operating factor which checks the fall of the rate of profit, although it may under certain circumstances encroach on the mass of profit by reducing the mass of the capital yielding a profit. This again shows that the same influences which tend to make the rate of profit fall, also moderate the effects of this tendency.” This doesn’t seem like a good defense of the TSSI reading, yet I can’t see how Marx could be correct in claiming that depreciation of fixed capital arrests a falling rate or profit.

IV. RELATIVE OVER-POPULATION

Here we are discussing an external counter-tendency.

Overpopulation relative to the demand for labor cheapens labor. This takes away some of the urgency in the quest for relative surplus value. If labor is easily exploitable why bother mechanizing and investing in more efficient means of production? Marx argues that this counter tendency is not strong enough to check the TRFP because most industries follow a trajectory of low to high organic composition. As time progresses the raising of absolute surplus value is less and less useful and the pursuit of relative surplus value gradually increases. The organic composition slowly rises.

Now I think Marx is accurate in describing this gradual rise in organic composition in many industries. But it certainly isn’t true in all industries. This is another area in which the falling rate or profit is sometimes critiqued. In our lifetime we have seen a dramatic rise in the service sector. Some argue that this means a more labor-intensive capitalism. I wonder though if this is really the case with the service sector. Take a hotel for instance. I bet most hotel jobs are classified as service jobs. Now the ratio of constant capital to wages in a hotel isn’t nearly as high as in a auto-factory. Still, a hotel spends a lot of money on fixed capital and energy costs. It’s not exactly a low organic composition industry either. How many of these service jobs really have truly low organic compositions? I’m curious if there has ever been an attempt to actually chart organic composition in various industries. This would certainly add a lot to the debate. Erik Olin Wright cites a 1972 paper by Mario Cogoy on this subject and concludes that, “Even a strong proponent of the rising organic composition thesis such as Cogoy has to admit that the meagre data which support his views are as equivocal with the data which oppose them.”(I haven’t read Cogoy’s paper myself as it appears to be in French though he did write a 1973 paper on the topic in response to Paul Sweezy which I may take a look at.) Of course not all jobs classified as “service sector” are productive labor. The financial industry is often characterized as a service industry but these are not productive industries and so they do not figure into accounts of organic composition. And we can’t forget that the rise of the “service sector”, both unproductive and productive, came as a response to the crisis of the 1970′s which was a crisis of large industry with high organic compositions.

V. FOREIGN TRADE

This is also an external counter-tendency.

Foreign trade allows capital to seek out cheaper inputs, thus lowering the cost of constant and variable capital. This raises the profit rate. But this also encourages the growth of accumulation which tends to raise the organic composition which tends to lower profit rates. Like the decreasing value of constant capital Marx always sees the overall trajectory of accumulation itself as the primary motive force in falling profits. If anything foreign trade is a means of postponing these falling profits. This idea of displacing crisis geographically doesn’t really appear in any mature form in Marx, as far as I know, but it is a key part of David Harvey’s analysis of the geography of capitalist accumulation. Marx does here say that there is a need for an “ever-expanding market” though he doesn’t give a reason for this here. I assume that, true to his argument in volume 1, that this means that capital is always in search of more labor power and more raw-materials, though he could also mean, as the underconsumptionists argue, that this ever-expanding market comes from the need to sell-off surplus product.

Foreign trade can also boost the rate of profit because of imbalances in the rate of profit, value of labor-power, rate of exploitation, and exchange rates between countries. A highly-mechanized first-world country can produce commodities more efficiently than in peripheral nations. When they sell in those markets they do exactly the same thing that a capitalist who produces below the socially necessary labor time does: they sell their commodities in this foreign market above their value but below the socially necessary labor time in the country. Thus they realize higher profits than they would in their home country.

Colonial and peripheral countries often have higher rates of profit which attracts the investment of capital. I don’t quite understand the point Marx is making in regard to Ricardo in terms of investing capital in these countries with higher profit rates…

But this unequal exchange can boost profit rates in both the advanced country and the dependent country. The advanced nation receives more labor through the inequality of exchange. While the dependent nation gives up more labor in exchange, they also receive commodities at prices much lower than they must pay in their own country. If they are buying productive inputs then this can boost the rate of profit in both countries. But regardless of these effects, the overall trajectory of foreign trade is toward a rising organic composition in the home country and over-production for foreign markets.

Before Marx goes onto discussing the last counteracting tendency, stock capital, he takes about a page to summarize his argument about counteracting tendencies. (He does this here, rather than at the end of the chapter, because the last counter-tendency is of a different nature.) The counteracting tendencies don’t “do away with the law, but impair its effect. Otherwise, it would not be the fall of the general rate of profit, but rather its relative slowness, that would be incomprehensible. Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.” It would be nice to get a more thorough explanation of how this effect takes place over long periods of time, what form it manifests itself in, etc. But we don’t get that here. This idea of falling profit rates over long periods of time does correspond with the theory of Long Waves (which I associate with Mandel’s book on Long-Waves) as well as with Kliman’s recent research into long-term profit rates (different than Long Wave theory).

The only new point Marx makes in the summing up is that profit rates don’t fall because of a rise in wages. This was the conservative explanation of the crisis of the 1970′s. We heard echoes of it again when this crisis revealed excess capacity and stagnation in the US auto-industry. Marx says that a rising rate of surplus value can accompany a falling rate of profit. Capital goes into crisis because labor is more productive, not less productive. Of course a rise in wages could squeeze profits. But this runs counter to the entire trajectory of accumulation which tends to decrease the value of labor power. Thus a fall in profits due to rising wages must be seen as an exception to the general tendency of accumulation.

VI. THE INCREASE OF STOCK CAPITAL

This last point is different from the rest because it involves the distribution of surplus value between money-capital, productive-capital, and rent. Interest payments are a deduction out of total surplus value. Thus they are smaller than the total surplus value. Money-capital gets a lower rate of return on investment than the average rate of profit. If we were to calculate the profit rate based on interest payments the TRPF would be even lower. That is why Marx doesn’t talk about this division of the surplus until after he’s talked about the rate or profit in the abstract.

Now, just dividing the mass of surplus value up into interest, rent, merchant capital, productive profit, etc. doesn’t effect the rate of profit. But when people invest in stock they accept a lower rate of return on their investments, called dividends. This keeps the profit rate from equalizing which means that joint-stock companies like railroads don’t enter the equalization of profit rates. If these companies were brought into the equation the profit rate would drop even lower.

I don’t think I fully understand this. Why would issuing stock keep a firms profit from entering into the equalization of the profit rate? It seems that the credit system is a tool for equalizing the profit rate even better. Yes, is smoothes over temporary fluctuations in profitability, but it also unifies all investment decisions around a uniform interest rate.

Flipping through David Harvey’s “Limits to Capital” I found a brief mention of this issue. Speaking of the centralization of capital in his chapter on interest-bearing capital he says, “But the credit system also furnishes means to counter the de-stabilizing effects of technological and organizational change. For example, Marx lists an increase stock capital as one of the influences counteracting the tendency towards a falling rate of profit. Undertakings of particularly high value composition comprised largely of fixed capital can be organized via the credit system so as not to ‘enter into the equalization of the rate of profit’ since they can be produced if they yield ‘bare interest’ only.” (Limits, p.271. The quotes are from Marx.)

Ironically I see a giant question mark next to this passage that I must have drawn when I read this book several years back. But then over the question mark are drawn three exclamation marks to show that on a later rereading I had figured out what it was all about. I then had written, “Brilliant!” underneath the passage. Of course now I don’t remember what was so brilliant or how I had made sense of this. So it goes!

I later posed this question on marxmail and got some long responses from a few different folks, some which disagreed with each other. One day I will get around to sorting this out and posting a better explanation.

Posted in Kapital Vol. 3 | Tagged andrew kliman, capital, capitalism, counter-tendency, crisis, Das Kapital, David Harvey, economics, falling rate of profit, kapital, karl marx, labor theory of value, prices of production, profit, surplus value, tendency, underconsumption, volume 3 | 10 Comments »

Law of Value 6: Socially Necessary Labor Time

September 21, 2010

Socially Necessary Labor Time

This video is part of an ongoing series: The Law of Value

part one:

part two:

Alone on his tropical island Robinson Crusoe can take as long as he wants to build a cabin for himself. It’s up to him. We don’t have that luxury when we produce for market exchange. When Wonder Bread makes bread they are competing in the market against Pepperidge Farm, Arnold and White Rose. If their workers are less productive, if they take longer to make bread, that doesn’t mean they can sell their bread for more money. The social value of bread is not set by individuals but by the average amount of time it takes to produce bread. This is called the “Socially Necessary Labor Time”. (SNLT)

In neo-classical economic theory there are all sorts of concepts that, though mathematically elegant on paper, have very little descriptive power in the real world. When was a capitalist society ever in General Equilibrium? When was there ever Pareto Optimality? When did consumers ever measure their desires in utils?

SNLT is not like that. SNLT is something very real that we can observe at work everyday. The private labor that goes on behind factory doors will not know for sure what its social value is until the products of that labor enter the market to be compared to the products of other workers. In the market these private labors become social. Socially necessary labor time is asserted. This SNLT then acts back upon production. It disciplines what goes on in the factory. Factories that were spending more labor than was socially necessary are considered inefficient. They must change their production methods or else go out of business. Factories that were producing under the socially necessary time, that were more efficient than average, are rewarded.

Let’s say that the average television takes 1 hour to make. 1 hour is the SNLT for televisions. But the owner of the ACME TV factory invests in some fancy new machines that make his workers twice as productive. They can now make a television in 30 minutes. They are producing way below the SNLT. This allows ACME to produce twice as many televisions in the same amount of time.

Now if ACME sold their new TV at half the old price they wouldn’t make any more money than before and there would have been no point in investing in all that new stuff. Rather than sell them at their individual value (30 minutes) they continue to sell them at the SNLT (1 hour), or perhaps just under the SNLT in order to out-sell their rivals. Because the price of TVs hasn’t changed significantly there is still the same demand from consumers for TVs, but now there is a giant surplus of TVs on the market because ACME has been making twice as many TVs. ACME’s rivals won’t be able to sell all of their TVs. Part of their product will go unsold. Meanwhile ACME will sell most of their TVs at the SNLT, making not just their normal profit, but an additional “super-profit” because they sold their TVs above their individual values by selling at or near the SNLT.

Profit vs. super-profit

Profit comes from exploiting workers. The only way to turn money into more money is to invest it in workers, or to be precise, in labor power, the only commodity which can produce more value than it costs. (This is all covered in the video “Law of Value 5: Contradictions”.) When ACME sells TVs at under the SNLT they don’t just reap their normal profits from exploiting workers. They also get super-profits: profit appropriated in exchange because their TVs are made at under the SNLT.

It is this race for super-profits that drives much of the technological dynamism of a capitalist society as capitalists compete to constantly lower SNLT. By doing so capitalists don’t just exploit value from workers. They also appropriate value in exchange.

Physical vs. Value Productivity

A superficial look at the ACME TV factory might give one the impression that ACME is making more profit because they are creating more value. But this is not the case. The same amount of workers are doing the same amount of work as before. The same amount of labor time is being performed, spread out over a greater number of commodities. Thus the amount of value they create is not increasing merely because the physical output is increasing. It is extremely important to understand this difference between physical productivity and value productivity. As it becomes easier to make TVs their prices fall. Thus, just because we can make more of something doesn’t mean we have created more value. If other firms were to adopt technology similar to ACME’s we would see the SNLT of TVs fall to half of its former value and ACME’s super-profits would disappear.

Appropriating Value in Exchange

What does it mean to say that ACME makes a super-profit by appropriating value in exchange? If you trade one commodity for another of greater value then you have appropriated value in exchange. There are lots of ways this might happen. One of these ways of appropriating value is to produce a product at less than the SNLT but to sell it at the SNLT. Thus we get back more in exchange than we put into exchange. But where does this appropriated value come from?

At first glance it appears to come from the consumers that buy the commodities. But these consumers are buying a commodity at its value, at the SNLT. They are not losing value in exchange. They pay $50 for a TV and they get a TV worth $50. The people that do lose value are all of the other capitalists who are still producing at the SNLT. They are not able to sell all of their product. They lose out. ACME is able to lure more consumers away from them.

Exchange is a zero-sum game. Whenever one person wins another must lose. There are only so many people willing to buy TVs at the SNLT. When ACME appropriates value in exchange this doesn’t mean that they are stealing money from the coffers of their competitors. It means that they are filching away sales from their rivals. More value comes to ACME than it actually created, less goes to its rivals. (1)

SNLT and the Labor Process

This process goes on everyday in a capitalist society. We have an obsession with time and efficiency. Everything from the working day, to the motions of workers are timed and rationalized. From the moment the alarm clock rings you are checking train schedules, punching time cards, and working as efficiently as possible. There is an entire field of industrial engineering which is devoted to decreasing SNLT in society. Some of the most influential minds of the last century have been people like Henry Ford and Frederick Taylor who made substantial contributions to the reduction of SNLT, all in the quest for a super-profit.

This drive to produce a super-profit does not mean that less and less labor is happening in society. It means that the same amount of labor is producing more output. We are often told that machines will make life easier, reducing the need for work. But this has never been the case in a capitalist society. Machines just create more output per hour worked. Often times machines are used to get more work out of workers because the machine can dictate the pace and intensity of work. SNLT is a force that presses down upon us, disciplining our motions, driving us to produce value merely for the sake of producing value, rewarding us when we can produce above the average productivity and punishing us when we fall behind.

SNLT and the centralization and concentration of capital

Capitalists compete to lower the SNLT by investing in fancier equipment. The better the machines the more efficient the labor process the higher the output the lower the prices the more super-profit the more money available to invest in new machines… Competition for SNLT means that more and more equipment is needed in order to stay competitive. This makes it harder and harder for small firms to stay in the market. The size of the firm gets larger and larger and the amount of firms in an industry shrinks. The winners gobble up the losers and capital is consolidated into fewer and fewer hands. If firms become powerful enough they may even take measures to blunt competition so that nobody can produce more efficiently than them. (2)

SNLT and Market Socialism

The tools we use to critique capitalism determine how we envision an alternative to capitalism. Models for market socialism that talk of worker-owned cooperatives coordinated by market exchange clearly see that production for the enrichment of the capitalist class must be done away with if we are to overcome capitalism. Yet any society coordinated by market exchange is still disciplined by SNLT.

This means that workers in such a society would still have to discipline their actions to the social average. Cooperatives that worked at under the SNLT would appropriate value in exchange. Cooperatives would compete to modernize their equipment so as to lower the SNLT. And how would co-ops obtain the money to invest in better, labor-saving equipment? They would have to exploit themselves. That is, the more money that workers want to plow back into making their labor competitive, they less they can pay themselves. Not only would the workers be disciplined by SNLT, they would also find themselves disciplined by the need to amass surplus value so as to stay competitive. What happens to the workers in firms driven out of business by the centralization of industries? Where do they get the capital to start new firms? Do they have to sell their labor in the market?

Production of surplus-value for its own sake, fierce competition over super-profits, the disciplining of the labor process to the whims of impersonal market forces… sound familiar? Now perhaps one might be of the opinion that it is impossible to do away with SNLT, with market coordination. If this is the case then our best option is do debate what type of market socialism would be least exploitative, least alienating. But why not challenge ourselves to imagine a world without these things?

A world without What?

This seems to be the big question whenever we critique capitalism. Surely labor will always take time and we must have a way of coordinating labor to produce all of the goods society needs. Surely this labor must not just produce immediate goods but also surplus goods, as well as invest in long-term projects like infrastructure and machines that will make work better in the future. So we can’t say that we want to produce a society without work, without time, without surplus product, or without machines. (4)

What is unique about capitalism is that labor time, surplus and commodities are all measured in value. The types of commodities created, the types of assets the surplus is invested in, and the quality of the life of those who do the labor are not important. What is important is this endless expansion of value for its own sake. This is capital’s defining substance.

But if we are to coordinate human labor, the production of surpluses, innovation, distribution, etc without value production then what other method are we to use? It is not within the scope of this series evaluate different proposals for alternatives for capitalism. But it is the place to talk about how Marx’s analysis of SNLT might help us evaluate these different proposals.

We’ve probably all heard Marx’s famous description of the higher phase of communism: “From each according to his ability, to each according to his need.” Marx didn’t actually come up with this phrase but he quotes it in one his rare commentaries on communism. Here an hour of one person’s work is equal to an hour of anyone else’s, creating a basis for real equality throughout society, regardless of the productive abilities (or privileges) of individuals. In the Critique of the Gotha Program Marx describes the lower phase of communism as a system in which, after an hour of labor, all workers receive a certificate entitling them to a certain amount of consumption goods in proportion to their working time, not their level of productivity. There is no SNLT, and no inequality, because everyone’s work has the same social power. Obviously this is not a robust plan for how a communist society should be run. But it gives us a glimpse into the sort of radical questions we should be asking ourselves when thinking about communism. (5)

Conclusion

Our private labor doesn’t immediately become social. It must become value in order to be social. But in becoming value it is disciplined by socially necessary labor time. SNLT acts as an external force which disciplines our private labor, constantly compelling us to work more efficiently, yet never actually making our work easier or more fulfilling. SNLT creates the possibility for super-profits when one produces under the SNLT, and the search for super-profits drives much of the mad, chaotic development of the productive forces of a capitalist society, generating all sorts of unforeseen consequences.

In a society not producing for competition or capital, but for communal ownership, there would not be a SNLT in this same sense. This means that work would not exist in order to make value. Work would exist in order to both provide use-values for society and to better the life of the worker. In our culture we have an intense fascination with those rare people whose work is fulfilling and challenging. Great musicians, athletes, artists, etc inspire us because these are people whose work has challenged them to become the best possible person they can be. Perhaps in a world without SNLT such an experience of work could become more universal.

Footnotes:
1. Here is another example of the way in which individual value and social value diverge. Many times lay-critics of Marx (like the trolls often found stalking this blog) think they can “disprove” Marx’s theory of value by pointing to instances where the individual value of a commodity (the amount of time an individual put into making it) diverges from its social value. But as we can see such deviations are a central part of Marx’s theory. In fact it is these deviations of individual value from social value that create the dynamism and disequilibrium that Marx was so intent on theorizing. It is important to constantly point this out as many lay objections to Marx’s theory of value come form the misconception that social value and individual value must always coincide.

2. On the other hand, there are counter-acting forces that sometimes exert pressures to decentralize capital. The opening up of new, labor-intensive lines of production is one.

3. From Marx’s Critique of the Gotha Program:
“T]he individual producer receives back from society…exactly what he gives to it…He receives a certificate from society that he has furnished such-and-such an amount of labor…and with this certificate he draws from the social stock of means of consumption as much as the same amount of labor costs. The same amount of labor which he has given to society in one form, he receives back in another.”

4. No doubt many viewers are familiar with the ramblings of the “Zeitgeist Movement”. These folks believe that technology can liberate us from all work, establishing a labor-free, money-free paradise where robots do everything for us. These folks also believe, in some form or another, than the liberating potential of machines is being kept from society by the conspiring powers of bankers and other elites tied to “the money system”. As much as I share their desire for a society with out money, bankers, elites, over-work, etc, I am very critical of many of their explanations of the way capitalism works (they don’t use the word capitalist much actually) and the solutions these critiques point them towards. Chief amongst these complaints of mine is their notion of work. They have essentially projected the capitalist experience of work onto the entire experience of work for all time and space, implying that the universal nature of work is evil, something to be avoided. In contrast Marx sees work as the very substance of society, the thing that binds us together as it shapes our social life. The organization of our work effects how we understand our selves individually and collectively. I think that radicals need to recast the nature of work in a potentially liberating way. Similarly the Zeitgeist folks are entirely saturated by the contradictory experience of machines in a capitalist society. On the one hand machines fascinate us with their amazing, seemingly-liberatory potential. On the other hand the reality of the machine is that it is a tool for control of the labor process at the expense of the worker and that the consequences of technology are often socially, environmentally biologically, and psychologically degrading. The Zeitgeist folks make the assumption, then, that if we just had more machines then the problem would be solved. They share the bourgeois romance of the machine as liberator. Without going into an argument as to the ability of machines to replace all human labor, I would question what we would do without some sort of social labor. What would be the point of anything? As well, I wonder that if machines could really do everything that people could do, including much of our creative labor as the Zeitgeist folks claim, would they not be conscious entities of some sort capable of refusing work, of withholding labor, of claiming some sort of juridical rights in society? I believe that in posing alternatives to capitalism we should aim to heal the separation of conception and execution in the capitalist labor process, not to carry that separation to a further level of alienation.
5. One of the crucial aspects of such a method of organization is that without productivity-based labor certificates there is no chance of these certificates circulating as money. Indeed this is Marx’s objection to some of the labor-money schemes advanced by his contemporaries. What would keep such labor-notes from circulating as money, merely replicating commodity production? Wouldn’t they just make labor indirectly social again? In Marx’s scheme all labor is directly social and therefore there is no reason to exchange labor notes on any black markets. For more on this point see Andrew Kliman’s “The Transformation of Capitalism into Communism in the Critique of the Gotha Program.”

Suggested readings:
Marx, Proudhon and Alternatives to Capital by Seth Weiss

http://www.marxisthumanistinitiative.org/philosophy-organization/marx-proudhon-and-alternatives-to-capital.html

Limits to Capital by David Harvey – chapter 5 on centralization of capital

Kapital vol 1 Karl Marx, first chapter

Andrew Kliman “The Transformation of Capitalism into Communism”

http://www.marxisthumanistinitiative.org/alternatives-to-capital/what-must-be-changed-in-order-to-transcend-capitalism.html

Posted in Econ 101-value profit exploitaiton, The Law of Value | Tagged capitalism, communism, Das Kapital, economics, karl marx, labor theory of value, market socialism, profit, socialism, socially necessary labor time, super-profit, wage labor, worker | 58 Comments »

Law of Value 5: Contradiction

August 20, 2010

Contradiction and the Law of Value

This video is part of an ongoing series on the Law of Value.

Marx is always talking about contradictions in the law of value. But these aren’t logical contradictions like “round square” or “military intelligence”. They are contradictions inscribed into the very heart of the social relations of a capitalist society. Some prefer to use the word “antagonisms”.

We are all painfully aware that modern society is full of social antagonisms. There’s poverty amidst great wealth, over-work alongside massive unemployment, banks taking away homes, gentrification, racial tensions, violence against women, labor struggles, environmental apartheid, police brutality, gang violence, hate groups, massive dislocations of populations, and lots of war. Marx was interested in explaining all of these antagonisms, but he doesn’t start his analysis with any of them.

Instead he begins with what at first seems a rather innocuous thing: the commodity. Why? Because the commodity is the most elemental piece of the social relations of capitalism. The productive relations between people take the form of commodity exchanges. The commodity is the basic organizer of social relations. So if we want to understand how all of these different social antagonisms relate to one another we need to start with the commodity.

As we’ve already seen, the commodity contains a contradiction: it has a use-value and a value. (As we saw, value lies behind exchange value. So while at first we said the contradiction was between use-value and exchange-value, we later refined this to use-value and value.) At first glance this does not seem all that antagonistic. Yet as we start to look closer we see more significant antagonisms emerge.

Property, exchange and violence

Why is it that people must sell their labor in the market for exchange value, for money?-Because they can’t produce their own means of subsistence for themselves. This is a distinct aspect of a capitalism. In previously existing modes of production the majority of people had use of some sort of means of production for themselves which they used to make most of the things they needed. (Note that I say “had use of” and not “owned”. This is because much of feudal production happen on common land. This collective use of land has been part of many other pre-capitalist societies.) People sometimes bartered for things but they did so by selling part of the surplus they had created for themselves. (Selling off your surplus product is very different than producing exclusively for exchange.) Over the course of a very long, violent, historical process called “Primitive Accumulation” these means of production were privatized and became the possession of a group of people called capitalists. Whereas before people labored directly for their own use, now they have to enter the market in order to attain their subsistence.

So already the fact that we produce for exchange and not directly for use expresses a social antagonism between the propertied and the propertyless. There is an underlying coercion already at work in the “free market”. And this coercion requires some threat of violence to enforce it whether it be a state, private military, or hired thugs. Violence was necessary to privatize the means of production and it remains necessary to enforce all of the legal aspects of property.

Labor Power

In order for people to buy their subsistence in the market they have to sell something else. Since the means of production are privately owned the only thing they have to sell is their labor. But of course labor can’t really be sold. Instead we sell our ability to labor: our labor power. We sell a definite amount of working time, whether it is measured in hours, weeks or years. This is why value is an expression of labor time.

Our own creative working ability, the very thing that makes us human and links us to society, becomes a commodity that we sell to someone else, a commodity called “labor-power”. Labor power, like any other commodity, has a use-value and an exchange-value, and… you guessed it- there is a contradiction between them. The exchange value is the money paid for our working time, the wage. Wages are set by the cost of our subsistence. They depend on the cost of food, housing, clothes, transportation, etc. But the use-value of our labor power is that it can produce value. These are the two opposing sides of labor-power: On one hand it costs a wage, on the other it produces value. This makes it possible to produce more value than we are paid for.

You could be paid $5 an hour yet produce $20 worth of commodity value an hour. (1) If this happened you would be being exploited. In fact your rate of exploitation would be 400%. Exploitation is made possible by the contradiction between the use-value and exchange-value of labor power.

Profit

Exploitation explains a puzzle about capitalism: the existence of profit. Capitalists start off the day with a sum of money which they invest in production. At the end of the day they have a quantity of commodities which they sell for more money than their initial investment. It would seem that they have made a profit just by buying and selling things. Yet profit can’t be made through mere buying and selling. This is because buying and selling is a zero-sum game. When we exchange commodities we are just moving commodities from one place to another. This process does nothing to change the total amount of value in society. Sure it might be possible to rip someone off, to over-charge someone, to charge a monopoly price, etc. But a win for one person in the market is a loss for another. There can be no aggregate profit just be moving commodities around. Yet profit is something that does exist in the aggregate. The total amount of value in society grows each year (GDP) through this expansion of value called profit.

So we seem to have a puzzle, or a contradiction, on our hands. On one hand the market is a realm of equality and symmetry. Market exchange conserves the value of commodities: the total value of commodities is not changed merely by transferring ownership. Any loss by one person is offset with a gain by another so that there is an inherent symmetry to commodity exchange. Yet profit is a phenomenon where value expands through the buying and selling of commodities. Profit is asymmetrical. More comes from less. How is this possible?

To solve this puzzle Marx tells us we must look beyond the market into the mysterious realm of production. It is in production where value is expanded through the exploitation of labor. Exploitation does not break any of the rules of market exchange because it doesn’t happen in exchange. Labor power is bought at its value. The products of that labor are sold at their value. No profit has been made through these exchanges. The profit is not from the market at all but from the labor process. It is the amount of labor preformed over and above the value of wages that determines the amount of profit. While the market remains a realm of equality and symmetry, production is a realm of asymmetry and exploitation. Thus there is a contradiction between production and exchange. And this contradiction is made possible by the contradiction between the use-value and exchange-value of labor power.

Class

This antagonism between the use and exchange value of labor power expresses a social antagonism between capitalists and workers. Capitalists and workers have opposing interests. Workers want their means of subsistence: housing, food, clothes, beer. They want use-values. Capitalists aren’t interested in use-values. They are after exchange-value. They want to expand the size of their capital by making a profit. In order for either class to get what the want they need the other. The workers must sell themselves for a wage in order to survive. The capitalist must hire workers in order to exploit them for profits. Yet despite this codependence their interests are entirely antagonistic. The more the workers are paid in wages the less profit the capitalist makes. The more profit the capitalist makes the more impoverished the working class. (This isn’t because capitalists are bad apples. It’s because they personify the interests of capital.)

Clearly the struggle between capital and labor has always been present in capitalist societies whether it takes the form of day to day struggles over the amount of work we consent to, or long-term battles for better wages and working conditions. But even outside of the workplace the class antagonisms of capitalism are clearly ever-present. The distribution of the value created by the working class into wages, profits, rent, interest and taxes has everything to do with the standard of living we are able to enjoy, the kinds of neighborhoods we live in, the type of life-chances we have, and the quality of our lives. In a society structured to maximize profit for one class rather than produce use-values for social need the quality of our lives is inversely proportional to the needs of capital. In the past 30 years, as neoliberalism broke down barriers to the free flow of capital, massive sums of wealth have been consolidated into the hands of a smaller and smaller class of uber-capitalists, while the standard of living for the rest of the world has steadily worsened.

Society has enough food, housing and technology that the entire world’s population could work a lot less and still have all of the basic amenities of life. (Maybe we couldn’t all have mansions, fancy cars, and all the expensive cocaine we wanted, but we could live comfortable lives.) And they’d probably be more fulfilling if we didn’t spend our whole life working for someone else. But we don’t have such a society because our labor is not aimed at creating use-values for society but at creating profit for capital. The constant revolutions in technology and productivity are not aimed at making work easier or improving the quality of our lives, but in creating more profit by submitting labor to greater control. Thus the workplace becomes increasingly dominated by machines, assembly lines and computers all designed to discipline labor to its task of creating more value.

The Labor Process

As the knowledge of work is removed from the worker it is placed into the machine. The worker loses control over the labor process, becoming just a minor cog in the machine, easily replaceable. Another contradiction is revealed: that between the conception and execution of work. Our own knowledge of the labor process is taken away from us and placed in a machine which dominates us, reducing our work to a job- the carrying out of routine tasks with no meaning to us except that they are a means to a wage. This is a contradiction which fascinates popular culture: man vs. machine. But behind the machine lies a social relation between ourselves and our own creative powers that have been taken from us, alienated from us, standing over us, dominating our work.

Crisis

And with this steady accumulation of capital in the form of machines comes another contradiction, this one between the capital invested in dead labor like machines and raw materials, and the capital invested in living labor. Though an increase in machinery allows capitalists to better exploit workers (and to appropriate value in competition as super-profit) machines can’t create value. As more and more capital is reinvested in machines and raw materials and less and less on labor, the actual value-creating substance of society is crowded out. This is the starting point for Marx’s theory of crisis. As the mass of capital that must be constantly reinvested in expanding production grows it becomes increasingly invested in dead labor rather than living labor. This sets the stage for massive crisis that require the destruction and devaluation of capital in all of its forms.

Conclusion.

All of Marx’s model of a capitalist society is derived from his basic starting point: the analysis of the commodity. From this basic idea of value as the organizing principle of a commodity producing society he establishes the contradiction between the use-value and value of a commodity. And then, over the course of multiple volumes he shows how the unfolding of this contradiction reveals all of these other contradictions: contradictions between classes, between society and itself, between people and machines, and between the conception and execution of work. What begins as a seemingly innocuous distinction between use and exchange becomes the substance of class struggle and crisis.

This doesn’t mean that every problem in society is directly explained by the law of value. Yet, how can we really understand any discussion of inequality without first understanding the way in which social wealth and power is created and distributed? How can we understand violence without understanding the coercive nature of the market, the deep inequalities generated by commodity exchange, and compulsion of capital to accumulate at all costs? How can we discuss a solution to the environmental crisis without discussing the way the productive relations of a capitalist society are organized? The problem with the left is not that there are not enough people who care about these things. It is that not enough people have the theoretical tools to think about these things in terms of the basic structure of our society. That is why the law of value is so important to understand today. If we want to overcome the antagonisms of society we need to understand how these antagonisms are related and to do this we must start at the beginning with an analysis of the commodity.
35:40

Footnotes
1. Of course the price of a commodity is more than just the immediate labor that goes into it. There is also the past labor that went into the raw materials and the instruments of production like machines. The price of the commodity is the sum of the money laid out for dead labor (raw materials, machines and other products of past labor) and living labor (wages for workers) plus the amount of surplus value, unpaid labor, performed by workers.

Posted in Econ 101-value profit exploitaiton, The Law of Value | Tagged capital, capitalism, class, crisis, Das Kapital, economics, Exploitation, karl marx, labor, labor theory of value, profit, surplus value, use, value, wage labor | 30 Comments »

Law of Value 6: Socially Necessary Labor time- another draft

August 11, 2010

This is another draft of my SNLT script, substantially different in content than the last script. I must thank previous commentators on the last draft. Their input was really helpful in me forming my thoughts about what I wanted to get across in this script. I have swapped the order of this video with the one on contradictions (the draft of which I posted yesterday). I am hoping to get some good feedback on both drafts before starting production.

The script:

Title sequence

In neo-classical economic theory there are all sorts of concepts that, though mathematically elegant on paper, have very little descriptive power in the real world. When was a capitalist society ever in General Equillibrium? When was there ever Pareto Optimality? When did consumers ever measure their desires in utils?

Let’s say that the average television takes 1 hour to make. 1 hour is the SNLT for television. But the owner of the ACME TV factory invests in some fancy new machines that make his workers twice as productive. They can now make a television in 30 minutes. They are producing way below the SNLT. This allows ACME to produce twice as many televisions in the same amount of time.

Profit vs. super-profit

Physical vs. Value Productivity

Appropriating Value in Exchange

SNLT and the Labor Process

This drive to produce a super-profit does not mean that less and less labor is happening in society. It means that the same amount of labor is producing more output. We are often told that machines will make life easier, reducing the need for work. But this has never been the case in a capitalist society. Machines just create more output per hour worked. Often times machines are used to get more work out of workers because the machine can dictate the pace and intensity of work to the worker. SNLT is a force that presses down upon us, disciplining our motions, driving us to produce value merely for the sake of producing value, rewarding us when we can produce above the average productivity and punishing us when we fall behind.

SNLT and the centralization and concentration of capital

Capitalists compete to lower the SNLT by investing in fancier equipment. The better the machines the more efficient the labor process the higher the output the lower the prices the more super-profit the more money available to invest in new machines… Competition for SNLT means that more and more equipment is needed in order to stay competitive. This makes it harder and harder for small firms to stay competitive. The size of the firm gets larger and larger and the amount of firms in an industry shrinks. The winners gobble up the losers and capital is consolidated into fewer and fewer hands. If firms become powerful enough they may even take measures to blunt competition so that nobody can produce more efficiently than them.

SNLT and Market Socialism

A World Without SNLT

What would it mean to create a society without surplus value, SNLT or super-profits?

No SNLT means that the products of labor don’t meet in the market as commodities with values. In other words, if we challenge ourselves to imagine a world without SNLT then we must begin to think about a world without value production- a world where the labor process is not coordinated by market exchange. Obviously there are a lot of different ideas about how such a world might be organized. This is not the place to evaluate all of those ideas. Rather, here we should realize that Marx’s theory of value is a powerful tool not just for critiquing capitalism as we know it, but also of helping us evaluate proposals to change the world. That doesn’t mean that Marx’s theory of value has all of the answers for those who want to change the world. But it is incredibly useful in helping us understand the complexity of the task, the consequences of our actions, and the possibilities that might lie before us.

Conclusion

In a society not producing for competition or capital, but for communal ownership, there would not be a SNLT. The engineer-worker would be free to design their labor time anyway they wanted, without the external compulsion to maximize output per labor time. There would still be an incentive to increase efficiency, but it would not be an external compulsion to increase efficiency at the expense of the worker. A job would cease to be a job- that is, a passionless series of motions we are compelled to carry out in order to eek out a living in the market. Work could become something much more deep and fulfilling, a means of self-discovery and expression, and a means of establishing social bonds. A radically different notion of work would mean a radically different world.

Posted in The Law of Value | Tagged capital, capitalism, Das Kapital, economics, exchange, Exploitation, production, profit, socially necessary labor time, super-profit, surplus value, value | 17 Comments »

Law of Value 6 (or 5): Contradictions – a draft

August 10, 2010

An exchange I had with someone regarding my draft of a Socially Necessary Labor Time (SNLT) script has made me think that I should probably do this video first before discussing SNLT. Here is the reason: Since SNLT is a fairly simple concept I wanted to expand on the topic and talk about the way capitalists get a super-profit by producing under the SNLT. But talk about super-profit before talking about profit in general might be confusing. So I think I will make the 5th video in the series this one on “contradiction” since there is a bit about exploitation and profit in this video. This is a draft and, as always, all comments are much appreciated, especially criticism.

Contradictions and the Law of Value

Property, exchange and violence

Labor Power

Profit

Class

The Labor Process

Crisis

Conclusion.

Footnotes
1. Of course the price of a commodity is more than just the immediate labor that goes into it. There is also the past labor that went into the raw materials and the instruments of production like machines. The price of the commodity is the sum of the money laid out for dead labor (raw materials, machines and other products of past labor) and living labor (wages for workers) plus the amount of surplus value, unpaid labor, performed by workers. Etc, explain v+c+s…

Posted in The Law of Value | Tagged capital, capitalism, class, crisis, economics, Exploitation, karl marx, labor theory of value, machines, marx, profit, surplus value, value, wage labor, worker | 13 Comments »

Marx and Temporalism- a Tutorial

November 28, 2009

This is a workshop on the Temporal Single System Interpretation (TSSI) of Marx’s value theory. It was recorded in November of 2009 at the Rethinking Marxism conference in Amherst Mass. The presenters are Andrew Kliman and Alan Freeman, two of the leading figures in the TSSI. The TSSI aims to show that by viewing Marx’s value theory through a temporal lens the claims by Marx’s opponents that his value theory is inconsistent are refuted. I think that the work they are doing is very important.

I have discussed the TSSI in my video “What Transformation Problem?“. I have also posted videos of Kliman and Freeman speaking at the 2009 Left Forum and a panel on the economic crisis at the 2009 Rethinking Marxism conference. I also highly recommend my interview with Andrew Kliman.

I apologize for the sound quality of this video. The conference center had a noisy ventilation system that left a loud “whirring” on all the video. I did by best to minimize the background noise but it was hard to do so without compromising the audibility of the speakers. I think this is a great tutorial and that it warrants close listening even with the poor sound.

Kliman’s website:
http://akliman.squarespace.com/

Freeman’s website:
http://econpapers.repec.org/RAS/pfr102.htm

you can look at Freeman’s powerpoint here: 091105 RM tutorial

You can see Kliman’s powerpoint here: BCM

Posted in Uncategorized | Tagged alan freeman, andrew kliman, capital, crisis, falling rate of profit, marx, Okishio, profit, surplus, temporal single system interpretation, tssi, tutorial, value theory | 5 Comments »

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

November 17, 2009

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.

Posted in Econ 303- Crisis | Tagged credit, crisis, demand, exchange-value, falling rate of profit, finance, marx, money, prices, profit, stocks, underconsumption, use value, value | 9 Comments »

	Doug Prishpreed on The Critique of Political Econ…
	kapitalism101 on The Critique of Political Econ…
	allan harris on The Critique of Political Econ…
	Dr.Kividos on The Critique of Political Econ…
	skywanderer on The Critique of Political Econ…

Posts Tagged ‘profit’

Share this:

Like this:

Intro

Discipline and Apportion

Production and Exchange

Value- Price

Money

Demand and Supply

Side Note on Marx’s Method

Review:

3 components of value

Prices of Production

Criticisms

Conclusion

Footnotes:

Share this:

Like this:

Value cannot be created in exchange

Share this:

Like this:

Capital Vol. III Part III: The Law of the Tendency of the Rate of Profit to Fall Chapter 14. Counteracting Influences

I. INCREASING INTENSITY OF EXPLOITATION

II. DEPRESSION OF WAGES BELOW THE VALUE OF LABOUR-POWER

III. CHEAPENING OF ELEMENTS OF CONSTANT CAPITAL

IV. RELATIVE OVER-POPULATION

V. FOREIGN TRADE

VI. THE INCREASE OF STOCK CAPITAL

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

The Law of Value- the series

Recent Comments

Email Subscription

Econ101- commodities, value, exploitation

Econ 202- Capital, Credit, Money

Econ 303- Crisis Theory

Econ 404- Work, Domination and Consent

Econ 505- super advanced shit

Recent Posts

Blogroll

Marxists to watch out for

Follow “Kapitalism101”

Capital Vol. III Part III: The Law of the Tendency of the Rate of Profit to Fall
Chapter 14. Counteracting Influences