Is Marx's "Labor Theory of Value" True? What's LoV Got to Do with It?

Jim Devine jdevine@lmu.edu

In an e-mail discussion, Brad deLong of U.C.-Berkeley economics wrote that: "The LTV [labor theory of value] is not true: average market prices are not labor values, and the deviations of the average prices of particular commodities from their labor values are not simple redistributions of 'surplus value' from boss to boss…. "

It's hard to say that Marx's "labor theory of value" is "not true" if one doesn't understand it, just as it's hard to say that it's "true" if one doesn't understand it. In fact, there are a lot of questions about what "it" is. In fact, it's unclear what to call "it." Below, I present one interpretation of the "LTV" which I hope will make these questions clear, allowing us to move on to other issues.

The "labor theory of value" (the most common phrase) is easy to confuse with David Ricardo's "labor theory of price" (especially since Marx was heavily influenced by Ricardo's economics in his early studies). In Ricardo's theory, each price was proportional to the amounts of labor needed to produce a commodity. Since he recognized exceptions, this "theory" worked at least 93 percent of the time. In my experience, the confusion of Marx with Ricardo in turn gets us into writing complex mathematical equations for the determination of prices and endless debates about how to mathematically "transform" values into prices, all of the while assuming that values and prices are totally independent of each other, so that one (values) can be used to mathematically derive the other (prices). (Of course, the question automatically comes up: why not derive values from prices?) On top of that, we get into emphasizing market equilibrium conditions, such as the equalization of profit rates between industries, even though markets are seldom, if ever, in equilibrium. That is, if we see monopolies, profit rates that aren't equalized between industries, working conditions and wages that aren't equalized, etc., as usual, the "labor theory of value" seems irrelevant. So why not rely on good ol' supply and demand to understand prices, or some version of supply and demand such as the neo-Ricardian price theory developed by Piero Sraffa.

That road is a dead end, so we need to start from scratch. Since Marx himself never used the phrase "labor theory of value" except to describe others' theories, I'll use his phrase, "the law of value" (LoV) instead. And it's important to remember his purposes. He didn't aim at developing a theory of price determination as much as to understand the "laws of motion of modern society." To the extent that he had a price theory, it was supply and demand in a somewhat Ricardian mode. As we shall see, this doesn't contradict his LoV. That is, there is nothing in the LoV that conflicts with the everyday "common sense" appearances of how markets work, as seen in the workings of supply and demand.

Values versus Prices.

One thing that should be clear from the start is that the LoV does not assert is that "average market prices" for each market equal "labor values." Quite the contrary, deviations of prices from values are normal under capitalism and just as important as their connection with each other. In fact, each commodity has both a value and a price (though sometimes something with zero value has a positive price).

This contrast between prices and values can be seen early on in Marx's Capital, volume I, where he writes that:

"We have seen that when commodities are in the relation of exchange, their exchange-value manifests itself as something totally independent of their use-value. But if we abstract from their use-value, there remains their value, as has just been defined. The common factor in the exchange relation, or in the exchange-value of the commodity, is therefore its value. The progress of the investigation will lead us back to exchange-value as the necessary mode of expression, or form of appearance, of value. For the present, however, we must consider the nature of value independently of its form of appearance." [Vintage/Penguin edition, p. 128, chapter 1, §1]

This first says that the value of commodities as they are exchanged for each other – or when stated in terms of money units, their prices – are very different from their value in use to human beings. This, among other things, means that exchange-values differ from moral values or the values of the commodities to society as a whole or to the capitalist class or to the working class. Next, Marx abstracts from the differences in the latter, use-value, and thus from the concrete differences amongst commodities. He famously found that what's left is that all commodities have value. That is, each of these commodities is the product of labor, as part of a community, with each commodity producer contributing his or her time to the societal division of labor. Each commodity is social in its nature. Third, value is not the same thing as exchange-value (or price). Rather, the value is the shared characteristic of each commodity. He calls this the "common factor," whereas someone else might call it the "essence." In contrast, the exchange-value represents the appearance or form of value. Just as with used cars, the shiny appearance may differ radically from the lemony essence.

Charles Andrews, in his classic textbook on this subject, differentiates exchange-value and value as follows:

"The magnitude of value is the quantity of abstract labor required to produce a commodity. The magnitude of exchange value, or prices, is the amount of abstract labor that a commodity obtains in exchange." [p. 34]

In his pre-Ricardian labor theory of value, Adam Smith had two separate visions, which were often confused. The first was that commodities were products of labor. This fits with Marx's conception of value. On the other hand, Smith thought in terms of the value of a commodity being the amount of labor that could be commanded by its sale, i.e., how many labor-hours could be purchased. This fits with Marx's conception of exchange-value. Unlike Smith, Marx focused on both the unity and the contrast between values and exchange-values.

Not only are values the "essence" of exchange-value, but this discussion suggests that there's a clear relationship between them on the macro-societal level: the total amount of exchange-values (price times quantity of output added up for all of society) should equal the total amount of value (value times quantity added up) because the total amount of labor commanded cannot differ from the total amount of labor actually done.1 Alternatively, as I suggested in my 1990 paper, the total claims on value cannot differ from the total contributions to society's pool of labor.

On top of that, Marx argues at length, that value cannot be created in exchange. Rather, what happens is that the benefits of value are redistributed. When the exchange-value of a commodity exceeds its value, that means that the seller benefits from value redistribution, while the buyer loses.

One of the reasons why people confuse prices and values is that people have embracing an incorrect notion of the "transformation problem." People have assumed that values are a raw material that allow theorists to use mathematics to calculate prices. Instead, Marx wrote that "the competition between capitals transforms values into prices" (1982: 429). That is, it is capitalism's normal operations that causes prices to deviate from values.

So we must turn the familiar "transformation problem" discussion upside-down, to reveal its rational core. That is, in a commodity-producing society, we should expect prices to deviate from values if all of the following conditions are met:

  1. Exploitation: there is exploitation, so that the rate of surplus-value is positive;
  2. Free Labor: there is a tendency for wages and working conditions to be equalized between sectors (as in Adam Smith's theory of compensating differences), so that the rate of surplus-value is equal in different sectors;
  3. Heterogeneous Capitals: the different sectors of the economy have different technological conditions, so that the organic composition of capital differs between them;
  4. capitalists insist on being paid in money (rather than in value) and earning a rate of profit that is calculated using money terms; and
  5. Capital Mobility: there is a tendency for the rate of profit to be equalized between sectors, due to the movement of capital in search of the highest possible profit rate.

The first condition says that if we are dealing with a commodity-producing society, it is capitalist (i.e., producing surplus-value). The second one tells us that even though workers are exploited they have choice about who they are exploited by (unlike under slavery or feudalism) but then takes that freedom to an ideal extreme, for simplicity's same, so that the rate of surplus-value is the same in all sectors. As is well known in this literature, the third condition says that if we initially assume that price equals value in each sector, then we'll have profit rates that differ between sectors, because of the equalized rate of surplus-value and the differing organic compositions of capital. The final condition leads to the familiar price-value deviation, starting with prices assumed equal to values, since movement into a sector in which the profit rate is higher than average there will increase supply there and drive prices down below value and the profit rate down toward the societal average. This process also drives both prices and the profit rate up if it initially starts below the societal average.

In the real world of capitalist society, all of these are likely to prevail approximately and if the movement toward equilibrium is not disturbed, except perhaps #2. Below, we will assume that this condition does apply, while relaxing the other conditions for analytical purposes. If any one of these conditions is relaxed, values and prices tend toward equality.

If values do not equal prices, what's the point? In Marx's analysis, price and value should be seen as two different characteristics of each commodity. The price represents how a commodity is "valued" by individuals in the market. The value, on the other hand, represents how that commodity is "valued" by capitalist society as a whole. It represents the contribution of the labor that went into producing that commodity to the total societal labor process, to what might be thought of as a community of workers, one that's usually hidden from view.

Prices and market relations tell us only about the surface of society, the relationships among commodities bought and sold on markets. In this vision, as Margaret Thatcher once said, it looks as if "there's no society, just individuals." Marx, on the other hand, argued that the focus on markets obscures the relationships among people. (This is his theory of commodity fetishism in a nutshell.) In reality, society is a totally interdependent system – a "seamless web" – that involves a division of labor of people who are directly or indirectly cooperating with each other to produce the goods and services we use. There's a community of workers that is working together to produce. Of course, under capitalism, they're not allowed to run this "community" democratically – and in fact find themselves dominated by markets and by capital – but the existence of that hidden community is important to remember. Value refers to each explicitly-organized group of workers' contribution to the community.

Crucially, even though the price of any individual is likely to differ from its value, there is a macrosocietal connection between prices and values. In fact, there are two such connections, which apply at any specific time:

  1. The sum of all the prices of all commodities sold (price times quantity for all items sold) equals the sum of all values of commodities sold, because value cannot be created via purchase and sale. That is, all that can happen via exchange is redistribution.
  2. The sum of all profits (or, more accurately, of all property income) equals the sum of all surplus-value in society, because no individual capitalist can make a profit simply by way of buying and selling unless it corresponds to some other capitalist's loss.

The total value refers to the total amount of labor done in society. This labor must be done before it can be redistributed by prices among commodity buyers and sellers. Similarly, the total surplus-value refers to the total amount of labor that workers in society do beyond that necessary to pay for the cost of their wages. How much surplus-value there is depends on the state of the class struggle in society. The total amount of surplus-value that is produced limits the amount of property income that can be earned.

Note that Marx did not reject the role of prices, even though he only discussed them when he got to volume III of Capital, when he turned to consideration of the "surface of society." The participants of the system don't see values, while prices are the basis for their decisions. They do not see the macrosocietal relations of dependency. They (and we) live in a fetishized world – a world in which the workers' community is hidden – and we act according to the incentives it sets up, which depend on prices.

In sum, values present an alternative accounting framework to prices, one that shows the interdependency of society. Without values, we have no quantitative way to examine society besides prices. If prices actually equaled values, then much of the social relations of capitalism would be more obvious to the casual observer within the system and to the economist. But since they don't so, Marx needed the "acid of abstraction" to cut through surface appearances. That's what the LoV is for.

Reading Capital.

Orthodox (neoclassical) economists start their analysis with the isolated individual person coping with scarcity and then move on to trying to understand the common-sense but superficial world of markets. Marx, on the other hand, starts with society, the society that limits, shapes, and sets the context for the operations of individuals and markets. In philosophical terms, that socioeconomic system is a totality. In Levins and Lewontin's terms, a totality is a system in which "part makes whole, and whole makes part."1 What this means is first that the individual actors in society (the "parts") act ways that create the entire economy and society. It's more than the individuals alone who do this, since we can't represent society as somehow fitting the Robinson Crusoe fable. The individuals are heterogeneous. In addition, we have to look at the complex system of interactions amongst these diverse individuals to figure out the aggregate impact. Third, the economic and social system that results from the individuals' actions limits the effects of each individual's efforts. We make history, but not exactly as we please. Finally, the society we and many others have created deeply affects our perspectives on the world and our expectation, not to mention our personal characters. That is, there's a feed-back from the "whole" to the "parts," so that not only do we make history, but history makes us.

In Capital, Marx is trying to understand capitalism, a social system. In the light of Levins and Lewontin's sketch, it would be a mistake to simply look at an individual producer alone. Even orthodox economists have turned against the idea that the entire economy could be represented by a single agent making decisions. Though Marx gets a lot out of studying a specific industry, the cotton-textile sector, he knew that the heterogeneity of the world prevents us from generalizing too much from it.

Of course, it's hard to present such a complex system in a simple way, so we have to start somewhere. As many observers have observed, Marx starts with the abstract and moves to the concrete, from the general to the specific.

In the first three chapters of volume I of Capital, he discusses commodity production (the production for market) on a very abstract level, without labor-power, capital, or exploitation. This egalitarian market economy is often described as "simple commodity production." Under these weird conditions, on average, prices equal values. In the "transformation problem" literature, this equality is a simple result of the zero degree of exploitation, so that prices equal values. Note also that this society lacks capital mobility (condition #4), which reinforces our conclusion.

Less formally, if we have a bunch of workers who aren't hired by others and don't hire, market competition tends to equate price and value: if one is working more hours than one's being paid for in terms of prices, one cuts back production. See Charles Andrews' excellent book, cited at the end, for a more complete explanation. I won't tell you which chapter, since the whole book is an excellent source for an understanding of the LoV.

Even under simple commodity production, there are lots of deviations due to the constant fluctuations of supply and demand. But this analysis provides some insights into commodity exchange in general and sort of a moral yardstick (but only from the capitalists' own point of view) for judging capitalism, i.e., equal exchange under which prices equal value.

Then, after chapter 3 of volume I, Marx brings in labor-power, capital, and exploitation, i.e., with a very abstract version of capitalism, since he ignores the differences among capitals, their heterogeneity. He presents the representative capital – a single capitalist hiring a bunch of workers in a societal factory that represents the whole – to talk about how exploitation works and how capital accumulates power. Here, value = price for different reasons than under simple commodity production, i.e., because the representative capitalist stands in for the entire societal factory, the entire community of workers. That is, if the society is producing only one commodity besides labor-power, then there's only one price and it moves with the amount of labor necessary to produce it. Alternatively, the "transformation problem" literature indicates that if all capitals use the same technology – if we drop assumption #3 – as would happen in a world of homogeneous capitals, prices = value when other equilibrium conditions apply.

In Marx's analysis, it turns out that capitalism fails according to its own moral yardstick of equal exchange, since capitals are able to exploit labor despite equal exchange. Marx shows that that surplus-value cannot be created on the societal level simply via buying and selling but must be produced by labor. If one capitalist can make a profit by buying low and selling high, then another is making a loss. So unequal exchange simple redistributes profits. Marx shows us where the profit arises from: workers work more than is necessary to pay for the cost of hiring their labor-power. They do not have access to the consumption goods needed for their livelihood without working for the capitalists, who control the means of production. Thus, the workers pay surplus-value (property income) to the capitalists for the ability to survive.

In the volume I story of abstract capital, one of the key differences between capitals that's abstracted from is differences in the "organic composition of capital" (differences in technology). Nor are there any land or scarcity rents. So, just as in the first three chapters, values = prices. It's much more intelligent that the common orthodox economist's assumption that an aggregate production function exists, since Marx is talking about the shared characteristics of diverse capitals, i.e., the exploitation of labor and the accumulation of capital. But it's an aggregate theory, a macrofoundation for the microeconomics of volumes II and III. Here, he developed the central conservation principle that I think defines the "LoV" more than anything else except the theory of commodity fetishism: as any point in time, the total of all surplus-value produced in the exploitation process of capitalism as a whole equals the total of all property income (profits, interest, rent, some of taxes) in that society, just as the total labor done in capitalist society equals the total price of the commodity produced.

Next, in volume II, be brings in the relationships among capitalists, who are heterogeneous. Here, Marx was especially explicit that he was assuming that price = value, in order to bring out the details of the circulation of commodities over time and between industries.

It's only in volume II that Marx gets to microeconomics of the sort that economists like to talk about (and typically talk about exclusively). He brings in the role of time – metamorphoses of capital, the circuits of capital, turnover time, introducing the differences amongst capitals. He turns to discussions of the relations between different types of industries (in the famous but often-misinterpreted reproduction schemes) while being very explicit that he is assuming that values = prices.

 

Finally, in volume III, he discusses how these relationships and the heterogeneity of capitals changes the results that he attained in volume I. As noted, prices and values show a systematic deviation due to the heterogeneity of capitals and their interaction.

In volume III, he not only brings up the differences among capitals but looks at how they interact with each other. At this point what was obvious all along to Marx comes out: prices don't equal value, while individual profits don't equal the surplus-value that each individual capitalist organized the production of (since in reality, organic compositions aren't equal between industries). Supply and demand work to make sure that some capitalists are rewarded more than indicated by their workers' contribution to the societal surplus-value. suppose that an enterprise has extremely "capital intensive," having a high organic composition of capital. If this firm were to be rewarded according to its workers' contribution of surplus-value, then its rate of profit would be below average for society. Thus, the capitalist running the business would like to leave this sector post-haste. But this exit from the industry reduces the supply of the commodity being produced, raising its price. This makes the enterprise's operations more profitable, keeping most firms from leaving. In sum, prices (and supply and demand) work here to allocate profits in a way that tends to equalize the rates of profit between sectors.

 

 

In fact, someone can earn revenues and profits without actually contributing to total value or total surplus-value, as with those unproductive folks in the FIRE (finance, insurance, & real estate) sector who simply gain from the redistribution of surplus-value from other sectors. They receive revenues and profits because people within the system find that they have little choice but to deal with financiers, insurance companies, and real estate agents. "Supply and demand" redistribute surplus-value to that sector. And a redistribution it is, since the conservation principle referred to above applies. The FIRE sector is able to capture a piece of the aggregate surplus-value pie even though they don't contribute to it.8

The theory of land rent is very similar. The ownership of land does not contribute to the total surplus-value produced in society. However, land is a necessary input to production, so that those who own it can deny its use to others. Thus, they can and do receive a chunk of society's surplus-value. (This, in short, is the theory of "absolute rent.") Further, some land is better than other land, so its owners can get more than this basic amount of rent ("differential rent").

To summarize, Marx's "LoV" is a societal theory (seeing the "economy" as implicitly embedded in society), emphasizing the way in which commodity fetishism – volume III's illusions created by competition – obscures the reality of capitalist society, using values as a conceptual tool for prying out that reality, while seeing that society as a unified totality involving the exploitation of labor, so that those who receive profits, interest, or land-rent benefit from exploitation even if they don't exploit labor themselves.

Is the LoV "true"? What are the criteria used to answer such questions? Using the standard ones, this theory is logically consistent and hardly contradicts empirical reality (though the discussion above was still at a high level of abstraction). It hardly contradicts supply and demand theory. Further, this theory, unlike the orthodox economists' one, does not leave out important issues of societal relations and exploitation. That is, it is not one-sided, incomplete. All of these issues can be discussed more, but I'll stop here for now.

Notes:

1. This is true both in demand = supply equilibrium and ex post. On the latter, labor done that is not commanded will not be socially necessary.

See their The Dialectical Biologist, p. 272.

4. This is the Robinson Crusoe story, ignoring all the social relations aspects of the original book, including colonialism, as Steve Hymer pointed out years ago in Monthly Review.

5. I wish he had written like a modern academic, explaining what he was talking about and the progress of his presentation better. The first page of vol. III is a notable exception.

6. He doesn't deal seriously with labor's side of the conflict, as Mike Lebowitz stresses in his Beyond Capital, so that it's mostly a story of capital rampaging over labor. I guess Marx hoped that it would arouse labor to resist and fight for something better.

7. This assumes a constant "Monetary Expression of Labor Time." Even so, it's more complicated if we bring in the articulation with other modes of production or the family, but Marx doesn't do so.

8. They do contribute in the sense that Doug Henwood can write interesting books about them, though.

 References:

Andrews, Charles. 2000. From Capitalism to Equality, Oakland, CA: Needle Press.

Devine, James. 1989. "What is 'Simple Labor'? A Re-Examination of the Value-Creating Capacity of Skilled Labor," Capital and Class, issue 39, Winter: 113-131.

_____. 1990. "The Utility of Value: the 'New Solution,' Unequal Exchange, and Crisis," Research in Political Economy (Paul Zarembka, ed.), vol. 12: 21-39.

_____. 1993. "The Law of Value and Marxian Political Ecology" In Jesse Vorst, Ross Dobson, and Ron Fletcher, eds., Green on Red: Evolving Ecological Socialism (Socialist Studies/Études Socialistes, vol. 9), Winnepeg/Halifax, Canada: Society for Socialist Studies/Fernwood Publishing, pp. 133-54.

Levins, Richard and Richard Lewontin. 1985. The Dialectical Biologist. Cambridge, MA: Harvard U.P.

Marx, Karl. 1977. Capital, vol. I. New York: Vintage. Ben Fowkes, tranls.

_____. 1982. Capital. vol. III. New York: Vintage. David Fernbach, transl.

Jim Devine jdevine@lmu.edu & http://bellarmine.lmu.edu/~JDevine/AS