Value-Price- a draft script

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

Intro

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

When people get their panties in a bunch about price/value it’s over this issue of price and value not being the same all the time. At noon today a hot dog that took 20 minutes to make might sell for the same price as a bowel of soup that took an hour to make. Ack! Is this non-identity of value and price the end of Marx and the end of all radical politics?

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

But we don’t have a planned economy. What division of labor and what level of productivity are necessary for the division of labor to reproduce itself each day? Nobody knows.  When capitalist hire workers and buy inputs they don’t know what sort of profit they will make. And when we go to the store we don’t know how much labor has gone into the things we buy. These decisions all must happen through the fluctuation of price signals. These fluctuations reflect back upon production to discipline and apportion labor.

Discipline and Apportion

When we say that labor is ‘disciplined’ we meant that individual workers must strive to work at the average level of productivity. This is Socially Necessary Labor Time (see my video ‘Socially Necessary Labor Time’). When we say that labor is ‘apportioned’ we are talking about the division of labor, that is, deciding how much labor should be apportioned to what tasks. The division of labor and the SNLT determine what is produced, how much is produced and what the values between these commodities are.

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

Production and Exchange

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

‘value cannot be created in exchange’

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

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

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

Value- Price

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

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

Money

When we say that price is the ‘form of appearance’ of value we mean that the value of a commodity is not stamped on its side for the world to see. We only see the relations between laborers through the exchange ratios of commodities. Money is the god of all commodities. It is the one commodity that all other commodities measure their value in. As such money represents value in the abstract. It is a measure of abstract labor (See my video on Abstract Labor).

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

Demand and Supply

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

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

Side Note on Marx’s Method

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

Review:

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

3 components of value

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

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

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

But capitalists also must have an incentive to invest. They also require profit. But the profit they get from selling their commodities is not always equal to the surplus value they produce. Previously we said that value is created in production but that the seller can gain more or less value depending on the fluctuation of price. Now we can also say that surplus value is created in production but the capitalist can gain more or less profit than depending on the price of the commodity. If a capitalist’s profit is higher than the surplus value they create in production we call this “super-profit”. As we discussed in the video on SNLT, super-profits are the prime motivating force of a capitalist economy. They drive innovation and attract investment. The deviation of individual capitalists’ profit and surplus value is thus a necessary part of capitalist competition. However the total amount of surplus value produced is always equal to the total amount of profit received. As with price and value, surplus value can only be created in production even though it is redistributed in exchange.

Prices of Production

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

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

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

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

c+v+p

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

Criticisms

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

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

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

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

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

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

Conclusion

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

Footnotes:

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

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

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

appropriation of value: Bourgeois theory often confuses the appropriation of value with the creation of value in its idea of returns to factors of production.

Money: Marx sees money as the embodiment of labor time in the abstract. He builds this theory directly from his theory of the commodity. Commodities have both a use-value and an exchange-value. The use-value is a specific dimension of the commodity particular to each object and their various uses. Exchange-value is a universal, abstract dimension of the commodity. It is the empty quantitative relations between a commodity and all other commodities. It is numbers, not qualities. This leads to the separation of use and exchange value. Use-value stays in the bodily form of the commodity while exchange-value separates itself from the commodity in the form of money. Money becomes the commodity that all other commodities measure themselves against. As such it is the universal measure of value and the universal measure of abstract labor.

Equalities: Marx famously held three equalities to be true for the economy as a whole: 1. total value equals total price; 2. total surplus value equals total profit; 3. total value rate of profit equals total money rate of profit

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

Organic Composition: the ratio of constant to variable capital is called the organic composition of capital and is drawn as c/v. The higher the organic composition in society as a whole, the lower the rate of profit.

Value and Price Q&A

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Q: What is Socially Necessary Labor Time?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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