This is a draft of a script from my upcoming video series “Law of Value”.
I’ve already explained the theory of prices of production in my video “What Transformation Problem?” This video will explore some of the theoretical background and significance of the theory.
The notion of prices of production will be much more easily understood if we begin by reminding ourselves that prices and values diverge all of the time. In fact, the deviation of price from value is the mechanism by which the law of value operates. Socially necessary abstract labor time serves as an ultimate regulating force amidst a sea of fluctuating prices. How else can any economic law assert itself in a market than as a tendency amidst constant fluctuation and correction?
Price and Value
The theory of prices of production explains how prices diverge from value in the context of an average profit rate. Many people have found fault with Marx for this idea that there could be a systematic deviation of price from value in conditions of average profit rates. This causes some people to really get their panties in a bunch because they have a false understanding of the way Marx deduces the existence of value. Their mistake goes something like this: “Marx says that two things exchange for each other because they embody equal quantities of labor time. If he now argues that in the real world prices can systematically diverge from values this means that his original deduction of value makes no sense.” But, as we have seen, Marx’s original argument actually was that because any commodity can express its exchange value in any other commodity this means that they all must have a common social substance. Marx does not say that values have to equal prices all of the time in order for exchange to happen. He just says that this social substance, this socially necessary labor time, is what underlies exchange. People don’t know the social value of something when they buy or sell it. They guess, and through this guessing process values are established. There must be deviations of price from value is this social labor time is to be apportioned through market signals.
In conditions of monopoly prices deviate from values. But this doesn’t render exchange impossible. In a monopoly a producer receives more value in exchange than they produce in production. There is a value transfer. (If prices deviate from values in a monopoly then what use is the theory of value? For one, it helps explain the different between a monopoly price and a non-monopoly price. Secondly, Marx uses the law of value to develop his theory of capital and through this theory of capital comes a theory of monopoly that explain the tendencies toward and away from monopoly in a capitalist economy.)
In the theory of prices of production there is also a value transfer. The great classical economists before Marx knew that labor created value yet they were perplexed by how this theory could be reconciled with the phenomenon of average profits. The problem went like this: Different industries have different ratios of dead to living labor. Living labor means workers. Dead labor means the product of past labor- machines, raw materials, partially finished goods, etc. A capitalist must buy both living and dead labor. But if only living labor creates value then the profits of firms with lots of workers and very few machines would be higher than those with lots of machines and few workers. There would be an unequal profit rate.
Yet in a free market higher profit rates will attract investors which will raise supply thus lowering prices and profits. This process moves the profit rates of different industries toward an average profit rate. Some even call it an equal profit rate. (Throughout both the classical and neoclassical tradition equal profit rates were assumed in economic analysis.) So it seems like the labor theory of value predicts unequal profit rates, yet an observation of competition suggests equal profit rates. Marx’s predecessors were unable to solve this problem. Marx however did solve this problem. The solution is quite brilliant and helps clarify a lot of things about the theory of value.
Marx’s analysis of capitalism proceeds through a series of unfolding abstractions. At each stage of the analysis the picture he is painting becomes more and more complex and takes on greater and greater explanatory potential. Marx’s goal was to lay bare the social relations of a capitalist society, relations that were obscured by the fetishism of commodities.
Marx begins with the most fundamental relation of all: the commodity. All other economic relations in a capitalist society, whether it’s workers selling their labor to capitalists, bankers selling loans to capitalists, or capitalists selling to each other, take the form of commodity exchanges. Therefore the starting point of Marx’s analysis is the commodity relation. From the commodity relation he deduces the existence of value. It is the movement of this value that forms the basis of all other economic relations. The law of value is primary.
Marx next shows how the law of value implies the existence of capital. The analysis of capital is merely a higher stage of the analysis of the law of value. Capital is a theory of the expansion of value through the exploitation of labor. This brings a second social relation into view: the antagonism between labor and capital. [For market socialists like David Schweikart the labor-capital relation does not immediately spring from the value relation. Market socialists believe that markets between worker cooperatives can exist without a labor-capital relation coming into existence. I do not know what the justification of this position is in light of Marx’s methodical derivation of the capital relation from the value relation. For mutualist anarchists like Ben Tucker and Kevin Carson it is precisely the opposite from Marx. Capital is an abomination that disturbs the law of value. They see capital as the result of unequal exchanges made possible through state violence. Without the state they say the law of value would make exploitation impossible. In my opinion such views grossly misunderstand the duality of labor power and the notion of capital as self-expanding value. For Carson this mistake is probably due to his attempt to think of the law of value in subjective terms.]
The Mystery of Capital…
Marx’s theory of exploitation helps explain a mystery about capital. The law of value explains that value is created in production not in exchange. Exchange can only transfer value from one place to another. But capital is a process of expanding value, of money turning itself into more money in the form of profit. How is it possible for the total capital to be expanding in a world of equal exchanges? Marx’s theory of exploitation shows that when labor power trades at its value it can still be exploited in production. This is because there is a difference between what a worker is paid and how much value they produce (the difference between the use-value and exchange-value of labor power.) This is a crucial point. All of the forms of profit whether they be industrial profit, rent or interest are all based on the exploitation of workers. But the capitalist who exploits his workers may not himself receive the full profit from this exploitation. These profits can be redistributed in exchange to landlords, bankers, merchants and other parts of the capitalist class. But though profits may be redistributed in exchange they can’t be created in exchange. Value can only ever be created by human labor.
From the analysis of capital Marx makes all sorts of observations about the social antagonisms of a capitalist society, the forces behind technological change, the cycles of boom and bust, cycles of unemployment, and all sorts of other phenomenon. (Because neoclassical theory confines its microeconomic analysis merely to explaining day to day prices and not to explaining the social relations between producers the neoclassical tradition has no theoretical tools to explain many of the social phenomena addressed by Marx’s theory.) For much of the analysis Marx is looking at things from the perspective of capital-in-general and labor-in-general. He’s talking about social relations in their basic, abstract forms. He’s not talking about this or that capitalist or worker but capitalists as a class, workers as a class. And through this perspective he is able to show that whenever there are capitalists and workers there will always be exploitation, poverty, crisis, growth for its own sake, debt, etc.
[These are qualitative features of a capitalist society that are inherent in capital. There are also quantitative features of the analysis. Capital can only grow through the quantitative difference between the wages paid to workers and the total value these workers produce. The total social capital, the collective capitalist class, must constantly grow and this can only happen by exploiting the collective working class. This is because exchange is a zero-sum game. The economy can’t grow just by exchanging things. Even if I make a profit by ripping you off I haven’t created any more value. I’ve only transferred value from you to me. No growth has occurred. But capital as a whole, as a system, as a class, must grow. The total social capital must always be growing or capital goes into crisis. This growth cannot come from exchange. It can only come through the exploitation of the working class.]
Marx realized that the source of profit, or surplus value as he called it, is often obscured through exchange. In exchange all sorts of relations go on between capitalists filtching surplus value from one another. Bankers siphon off some of the surplus value created by industrial capitalists through loans. Merchant capital filtches some of this surplus value away as well. Landlords act as a parasitic class siphoning off surplus value from industrial capital and siphoning income from the wages of workers. All of this creates the illusion that growth can happen just by loaning money, renting land, or selling things in the market. But these things are all just transfers of value already created somewhere else. To attribute the value creating powers of labor to money, land or exchange is the most gauche of fetishism!
For this reason Marx spends the entirety of the first 2 volumes of Capital just talking about the capital-labor relation. It’s not until Volume 3 of Capital that he starts to look at the relations between capitalists. Once we understand that value can’t be created but only transfered between capitalists we are on our way to solving this mystery of the average profit rate. The creation of an average profit rate means that surplus value is redistributed between capitalists in exchange. Prices to diverge systematically from values. Industries with lots of workers and few machines sell their commodities below their values. Industries with lots of machines and few workers sell their commodities above their values. These are the “prices of production.” Through this systematic deviation of prices from values an average rate of profit is formed. (For more explanation see my video “What transformation problem?”) [explain this systematic deviation better?] But this deviation of price of production from value doesn’t create any value!
It should be said that there is a dispute among many Marxists as how to interpret the notion of average profit. Marx’s theory seems to explain how prices of production would form in the condition of an equalization of profit rates across industries. But most of the time he uses the term “average profit” rate which is different than an equalized profit rate. (The average age in a coffee shop might be 29 but the formation of this average doesn’t reduce everyone’s age to 29.) In reality profit rates vary across industries. This leads many people to question whether the theory of prices of production is all that important and to claim that empirical evidence shows a closer value-price relation within industries. [Maybe refer to some specific schools of thought here.]
Who cares about Prices of Production?
Prices of production at first may seem like a boring academic problem. What do they really tell us about capitalism? They are actually really important. For one, the transfer of surplus value between capitalists means that exploitation is truly a matter of one class as a whole, exploiting another class as a whole. Secondly, since profit rates are equalized across the economy this means that the amount of profit an individual capitalist makes is determined by the amount of their total investment, regardless of whether this investment is in workers or machines (living or dead labor.) Profit appears to emerge equally from both living and dead labor. Capital itself seems to be creating value. And this indeed explains the fetishistic illusion that attributes magical powers of value creating to inanimate objects and pieces of paper.
If the profits of individual capitalists are not affected by the ratio of dead to living labor then there is no mechanism in which to keep the economy as a whole from eliminating more and more living labor from production. This is why Marx moves immediately from his theory of prices of production to discussing his theory of crisis. The drive to maximize efficiency causes capitalists to spend more and more on machines, less and less on labor, thus eliminating the real value-creating substance from production. And this is the source of economic crisis. (See my video on the “Falling Rate of Profit” or “Crisis- the Overaccumulation of Capital”.)
Remember that Marx begins his analysis of capitalism by analyzing the commodity. The commodity contains a contradiction: it is both a use-value and an exchange value. At first this contradiction doesn’t seem that severe, yet over the course of his exposition we see this contradiction take on greater and greater meaning. Human labor is sold as a commodity as labor power. The difference between the exchange value of labor (it’s wage) and its use (it’s ability to create value) creates the possibility for exploitation and thus for capital to self-expand. But as capitalists to compete to get more profit than they seek to produce at less than the socially necessary labor time, that is to eliminate labor from production. This means that capital is self-contradicting. It exploits, mistreats and attempts to eliminate whenever possible the very thing that gives it life: human labor. Prices of production embody this contradiction. The value-creating powers of labor appear as powers of capital. The capitalist is motivated to increase her profit by increasing her capital investments regardless of whether these investments drive out actual value-creating labor. And individual capitalists can prosper quite well doing this. But the class as a whole doesn’t. And this is the prisoner’s dilemma that is a capitalist economic crisis.
Often one hears it said that Marx’s value theory has long ago been “debunked” or “discredited”. About half of the time that people say this they have no idea what they are actually referring to. (You should always ask people what they are specifically talking about when they say this.) The other half of the people are usually referring to 2 different lines of criticism that have been directed at this theory of prices of production.
The criticism that has had the biggest effect on the discussion of Marx in the academy is a rather math-y criticism called “The Transformation Problem” which was formulated by Ladislas Bortkiewicz in 1907, but which came into popularity in the 40’s. “The Transformation Problem” has been refuted by modern Marxist economic currents, though many people have yet to acknowledge this and still refer to the Transformation Problem as if it is a valid argument. I explain this debate in my video “What Transformation Problem?” so I won’t duplicate the explanation here.
The other line of criticism is an earlier one posed by the Austrian economist Bohm-Bawerk in his book “Karl Marx and the Close of His System”. Bohm-Bawerk’s critique, like the rest of Austrian economics, has not been very influential in the academic debates over Marx’s value theory. But his arguments are still sometimes evoked often so they are worth mentioning.
Bohm-Bawerk’s criticism extended beyond Marx’s theory of prices of production but he focussed much of his energy on the prices of production theory because he felt that this theory exposed the weaknesses of Marx’s argument.
Bohm-Bawerk’s basic argument was this: In volume 1 Marx claims to that prices equal values. In volume 3 he claims that prices deviate from values. Therefore Marx contradicts himself. A seemingly devastating critique? Perhaps if it was true that Marx anywhere claimed that prices always equal values. But as we have already stressed this is not the case. Marx instead held that price was a form of appearance of value, a fleeting momentary estimation of value in a constantly fluctuating, anarchic market. Underneath these fluctuations of prices one can see labor time being apportioned to different tasks in a never-ending, dynamic process.
The fact that two things exchange with each other does not mean that they have to have been the products of the exact same expenditures of socially necessary labor time. It just means that they share a common substance, value, which is being compared. There is no way for two individuals to know if their exchange is of equal value. But when millions of people meet in the market to exchange commodities we see the law of value assert itself over time.(rephrase all this)
Another charge of Bohm-Bawerk’s was that the theory of prices of production made a theory of value irrelevant. He said that all prices of production was was the admission that prices are just the cost of production plus average profit. This had been theorized by many people before. Big deal. It’s not a theory of value.
The response is that in some ways Bohm-Bawerk is right. Marx theory of prices of production is that prices are cost of production plus average profit. But what makes him unique is in his examination of where this profit comes from: that profit can’t be created in exchange, that it comes from a the exploitation of one class by another, that it obeys the law of value. Furthermore Marx shows in detail how prices of production are derived from values. They are a systematic deviation, still measured in value terms. It is not a matter of just replacing one theory with another. This analysis led him to identify two main points: 1. The total value in society is equal to the total level of prices; and 2. The total amount of surplus value is equal to the total amount of profit.
Bohm-Bawerk rejected these two equalities. He said that merely saying that two quantities are equal is a meaningless statement. I could say that the total amount of prices is equal to the total weight of all commodities, but that individual weights systematically deviate from their price. This is an interesting criticism and it takes us to the root of the question of what value is and why it should be analyzed.
If the point of economic analysis was just to play intellectual parlor games, or merely explain momentary prices then perhaps Bohm-Bawerk’s critique would be useful. The reason that weight or color or any other physical property isn’t a useful tool for a theory of value is that these are not economic categories. Labor is. Economic theory must be able to explain how labor is apportioned through commodity exchange. It must be able to explain what happens when social relations between producers take the form of commodity relations.
[I should make a longer presentation and critique of Bohm-Bawerk on my blog.]