The law of value is a central concept in Karl Marx's critique of political economy, first expounded in his polemic The Poverty of Philosophy (1847) against Pierre-Joseph Proudhon, with reference to David Ricardo's economics.[1] Most generally, it refers to a regulative principle of the economic exchange of the products of human work: the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labor-time which are currently socially necessary to produce them.[2] Thus, the exchange value of commodities (exchangeable products) is regulated by their value, where the magnitude of their value is determined by the average quantity of human labour which is currently socially necessary to produce them (see labor theory of value and value-form).
The "law of value" is often equated with the "labour theory of value" but this is strictly speaking an error. The law of value only states a general regulative principle about the necessary and inevitable relationship between the trading values of commodities, and the social labour-time currently required to make them. The labour theory of value in economics aims to explain how that determination actually works, what kinds of causal relationships are involved, how the law of value interacts with other economic laws, etc. For Marx himself, the "labour theory of value" referred only to the theory of value upheld by some of the classical political economists from William Petty to David Ricardo.
Marx never referred to his own theory as a "labour theory of value"; his own critique of the political economists was, that they all failed to explain satisfactorily how the determination of value by labour-time actually worked - they assumed it, but they did not explain it consistently (see below). Marx often regarded himself as perfecting a theory which had already existed for a long time, but which had never been consistently presented before. However, in the Marxist tradition, Marx's theory of value is conventionally labelled "the labour theory of value" - even although controversy still persists about how much Marx's theory actually differs from that of the classical political economists.[3] For some interpreters, Marx's theory departs very radically and absolutely from any "conventional" economics; for other interpreters, Marx's theory features both continuities and discontinuities with previous economic thought.
In Das Kapital Marx normally thinks of the quantity of labour that determines value as the ratio between the average total amount of labour-time required to produce a reproducible good, and the corresponding average amount of labour required to produce a unit of gold (see also gold standard).[4] His idea is effectively that the "value" of traded products is the objectified expression of the current social valuation of the human labour implicated in producing them.[5] How any individual happens to regard a particular product normally cannot change that social valuation at all; it's simply a "social fact" in the same way as "the state of the market" is a social fact, even though particular products can at any time trade at prices above or below their socially established value. Marx realized very well that the assumption of gold-money was a simplification - there might not be such a stable relationship between price-levels, average commodity values, and gold quantities - but he regarded the assumption as helpful in explaining the basic laws of motion of the capitalist mode of production. Adding in an extensive analysis of monetary and credit phenomena would only complicate the picture unnecessarily. The influence of the credit system on capitalist production is considered only in Capital, Volume III, part 5.
While Marx used the concept of the law of value in his works Grundrisse, A contribution to the critique of political economy, Theories of Surplus Value and Das Kapital, he did not explicitly formalise its full meaning in a mathematical sense, and therefore how it should be exactly defined remains to some extent a controversial topic in Marxian economics. Different economists dispute about how the proportionality between exchange-value and labour-time should be mathematically understood or modelled, and about the measures which are relevant.[6] Underlying this debate are difficult conceptual questions about how the causal relationships in the economy between price relativities and time worked should be understood. Marx's analysis of value was "dialectical" in the sense that he thought value phenomena could only be understood dynamically, holistically and relationally, but he did not spell out all the conceptual, quantitative and logical implications of his position with great exactitude. The scholarly debate about those implications continues even today.[7]
Excess demand can raise the exchange-values of products traded, and excess supply can lower them; but if supply and demand are relatively balanced, the question arises of what regulates the settled exchange-ratios (or average price-levels) of products traded in that case, and this is what the law of value is intended to explain. According to the law of value, the trading ratios of different types of products reflect a real cost structure of production, and this cost structure ultimately reduces to the socially average amounts of human labor-time currently required to produce different goods and services.
Simply put, if product A takes 100 hours of human work to produce in total, and product B takes 5 hours to produce, the normal trading-ratio of A and B will gravitate to a rate of around 1:20 (one of A is worth 20 of B), because A is worth much more than B. The trading ratio will never be 20:1, 1:5, 1:100, or 500:1 (unless there was an exceptional shortage or oversupply of these products, or unequal exchange took place). Moreover, if A and B are combined and used up to make product C in 40 hours, then product C is likely to be worth the equivalent of around 145 hours of human work in total (including the work of actually making product C).[8]
For that reason, most market trade in products is regular and largely predictable as far as price levels are concerned, rather than chaotic and arbitrary; norms of what products are worth relative to each other are mostly clearly known and established, even if people lack an exact knowledge of prices.
The concept of a "cost structure" refers here to the (direct and indirect) current labour inputs required to make a product, reflected in its price level. The concept of a "price structure" refers to the fact that prices rarely exist, or change, in isolation; instead, price-levels are interdependent on other price-levels, so that, if some prices would change, a lot of other prices would start to change as well - transmitting a change in valuation across the economy. Modern economics is indeed often viewed as a "science of prices", where economists make mathematical models of how particular prices can be affected by other prices. Marx argues that the cost structures and price structures for products are, in general, determined by the law of value. He was well aware of various "counteracting influences" but he evidently thought that such influences could not cancel out the law of value as a general law of motion (a determinant) of capitalist production.
The law of value originates in the "terms of exchange" established for different products. If a producer has to supply too much of his own product to get a different product, this has direct consequences for the additional time he has to work to sustain himself and the trading of his product. Yet the producer only has so much time, he doesn't have all the time in the world. In practical life, producers are rarely "stupid"; they know what the consequences are for their worktime if they trade on unfavourable terms; they know fairly accurately the maximum amount of product they are willing to trade to obtain another product, and they try to get the best return for their own product.[9]
Over time, and with more market integration, relatively stable values for products are established in accordance with production norms which exist independently of the productivity of individual producers. In that situation, each producer has to adapt his own production to those socially accepted values, the average terms of trade for products vary only within fairly narrow margins, and thus producers' activities fall under the sway of the law of value, which links "the economy of labour-time" with "the economy of trade".
In this way, Marx argues, production activities become dominated by the values of the products being produced and exchanged ("market forces"), often quite irrespective of what human needs might be, because these values determine whether it is "economic" or "uneconomic" to produce and trade products.
The field of application of the law of value is limited to new output by producers of traded, reproducible labour-products[10], although it might indirectly influence trade in other goods or assets (for example, the value of a second-hand good may be related to a newly produced good of the same type). Thus, the law does not apply to all goods, services or assets in an economy, and it does not "rule" the whole economy, which contains far more assets and activities of all kinds (it "rules" only the working population, to the extent that their work effort is organized according to the principles of the commercial exchange of labour and its product).[11] Rather, it limits, regulates and constrains the trade in products.
Primary products are a special case, which Marx discusses in his theory of differential and absolute ground rent.[12] World market prices for primary products can at any time be strongly influenced by the yield of harvests and mines in different countries, regardless of labour effort.[13]
According to Marx, the knowledge that the law of value existed, expressed in one form or another, was very ancient. People knew very well that there was a definite relationship between time worked and the value of products traded; in itself that was not a very difficult insight to grasp.[14] The economic effects of the availability or lack of labour were rather self-evident in practical life. Nevertheless, different thinkers in history failed to conceptualize it with any adequacy.
In part, Marx believed that the reason was that unrestricted trade of almost everything (including all kinds of labour) purely according to their exchange-value, was a comparatively recent phenomenon in human history. In pre-capitalist societies, there were far more restrictions on trade, the scope of trade was much less, and trade was influenced much more strongly by local custom, religion and cultural tradition. It was therefore difficult for philosophers to reach the theoretical conclusion, that only human work effort is the real substance of economic value; it seemed to contradict all kinds of other influences at work.[15]
The basic idea of the law of value was expressed very clearly by Adam Smith in The Wealth of Nations when he wrote:
"If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days' or two hours' labor, should be worth double of what is usually the produce of one day's or one hour's labor. If the one species of labor should be more severe than the other, some allowance will naturally be made for this superior hardship; and the produce of one hour's labor in the one way may frequently exchange for that of two hours' labor in the other..." .[16]
Utz-Peter Reich comments:
"This law of value is from Adam Smith (1776), the founding father of our economics science. As economists, however, we have been trained to reject this thesis, or more precisely to accept it only on the condition that the average cost equals the marginal cost of hunting those animals and this in turn equals the marginal utility of eating them. This value theory is firmly established in first-year economics."[17]
In this sense, neoclassical economist Paul A. Samuelson (1971) famously argued that "the beaver-deer exchange ratio can range anywhere from 4/3 to 2/1 depending upon whether tastes are strong for deer or for beaver" and, therefore, it seems that trading ratios are regulated only by the volume and intensity of consumer demand, as expressed by consumer preferences, rather than by labour-time.[18] According to the classical economists, however, such shifts in trading ratios would quickly cause a switch from beaver-hunting to deer-hunting or vice versa; short-term fluctuations in demand could not usually change the labour-costs of hunting as such, except if new technologies suddenly made it possible to capture more game in less labour-time, or if the herds of animals had become seriously depleted.[19] Thus Marx writes:
"Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for that value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or the other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that value, we have, therefore, nothing at all to do with the temporary effects on market prices of supply and demand."[20]
The concept of the law of value was also stated by David Ricardo at the very beginning of his Principles of Political Economy and Taxation, as follows:
"The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour."[21]
At the most basic level, this Ricardian law of value specified "labor-content" as the substance and measure of economic value, and it suggests that trade will - other things being equal - evolve towards the exchange of equivalents (insofar as all trading partners try to "get their money's worth"). At the basis of the trading process is the economising of human time, and "normal" trading ratios become known to, or accepted, by economic actors. This leads naturally to the idea that the law of value will "balance out" the trading process.[22]
Marx's real concern is to understand and analyze how the law of value determines or regulates exchange, i.e. how the balancing of the production of outputs and the demand for them could be accomplished, in a society based on a universal market such as capitalism, and how this was regulated by labour-time.[23] He tries to do this by starting off with simplifying assumptions and then gradually building up a complex theoretical structure.
Marx's theory specifically aims to grasp capital in motion, i.e. how, through the circulation and competitive dynamics of capital, changing expenditures of social labor are reconciled with (or fail to be reconciled with) changing social needs. This is an enormously complex undertaking, and Marx did not get much further than to specify the main tendencies and dynamics, and "pure cases". In the third volume of Das Kapital, he aims to show how the competition for profits from production is constrained by the law of value, and how this shapes the developmental pattern of capitalist production. He concludes that the law of value cannot directly regulate commodity prices in capitalist production, but only indirectly (prices of production are constrained by comparative costs in labour time).
Marx praised Adam Smith for already recognizing that in the transition "from simple commodity exchange and its law of value to... exchange between capital and wage-labour... something new occurs, [so that] apparently (and actually, in the result) the law of value changes into its opposite."[24]
However, Marx noted both Adam Smith and David Ricardo were unable to explain consistently how product-values were regulated by labour-time within capitalist production. They kept confusing capitalist exchange with simple exchange. Both Smith and Ricardo deeply believed that price structures for products were determined by the law of value; but, Marx argued, neither of them could explain how that value-price relationship operated, without contradicting themselves.[25] They could not theoretically reconcile the regulation of commodity trade by law of value, with profit-receipts in proportion to capital employed (rather than in proportion to labour-time worked).[26] Being at a loss at this point, Smith and Ricardo mooted the concept of "natural prices" instead, to postulate a "natural" (intrinsic) self-balancing tendency of markets - at the point where demand and supply were balanced, the "natural" price (the "true" value) had been reached.[27] The effect was that their "labour theory of value" was disconnected from their theory of capital distributions.
Economic value exists necessarily, according to Marx, because human beings as social beings and moral subjects must co-operatively produce and economize their means of life to survive. Humans have to value things, and each other, in order to survive.
In so doing they are subject to relations of production. They know that their products have a socially accepted value, even if no trade occurs yet. Human valuations originate in the ability of living organisms to prioritize behaviours according to consciously self-chosen options, but social and individual valuations begin to interact. Three main kinds of relationships are involved which are objectively and empirically verifiable, and often formalised in law:
The attribution of value to labor-products, and therefore the economising of their use, occurs within these three types of relationships interacting with each other. The value of one product then depends on the value of many other products, and, in a community of independent private producers, their economic relations are then necessarily expressed through the product-values of what they trade. This expression involves character masks. Over time, most products acquire a normal exchange-value, meaning that what a product costs relative to other products remains fairly stable.
However, because these three types of relationships co-exist and interact objectively, as a given social fact, independently of particular individuals, it may appear that economic value is an intrinsic property of products, or alternately, that it is simply a characteristic that results from negotiations between market actors with different subjective preferences.
Marx recognised that value has both objective and subjective aspects - he tries to explain why economic value is perceived by people in a specific way[28] - but he was primarily concerned with the objectification of value through market trade, where objectified (reified) value relations rule human affairs (see value-form).[29] Paradoxically, he argues, this phenomenon meant that human lives became ruled and dominated by the products which people themselves had produced, and more specifically by the trading values of those products.
When more and more of human requirements are marketised, and a complex division of labor develops, the link between value and labor-time becomes obscured or opaque, and economic value seems to exist only as an impersonal "market force" (a given structure of priced costs and sale-values) to which all people must adjust their behaviour. Human labor becomes dominated by the economic exchange of the products of that labor, and labor itself becomes a tradeable abstract value (see Abstract labour and concrete labour).
The result of the difficulties in explaining economic value and its sources is that value becomes something of a mystery, and that how the attribution of value really occurs is no longer clear.[30] The three relationships mentioned become mixed up, and are confused with each other, in commercial and economic discourse, and it appears that things and assets acquire an independent power to create value, even although value is a human attribution. Marx refers to this as commodity fetishism or thingification (Verdinglichung or reification) which culminates in what he calls fictitious capital. Value then seems to appear spontaneously out of trading activity. He regards this perception as an inevitable effect of commercial practice, since it involves the circumstance that objects acquire a value which exists independently of the valuer, a value "set by the state of the market" which individuals normally cannot change and must adjust to.
The end result is that value theory is banished from economics as a useless metaphysics, surviving only in the form of assumptions made about price behaviour (after all, we cannot talk about price aggregates without assuming some valuation principle or value criterion - we must be able to distinguish/define value equivalence and comparability, conserved value, value transfer, value used up or lost, value increase and value newly created). Because money-prices offer convenient quantifiable and generally applicable units of economic value, no further inquiry into value is deemed necessary.[31]
To solve the riddle of economic value, Marx argues, we must investigate the real historical origins of the conditions which give rise to the riddle in the first place, i.e. the real economic history of trade and the way that history has been reflected in human thought. Once we do this, value is no longer defined simply an attribute of products and assets, but as a relation between objects and subjects.[32]
Some Marxists such as Thomas T. Sekine have interpreted Marx's law of value as a purely theoretical principle of market equilibrium which has no application to empirical reality.[33] This raises the question of how we verify that it is a "law" at all. Others such as Paul Mattick argued that Marx offered no theory of market equilibrium, only a dynamic theory of enlarged economic reproduction.[34] In reality, markets were rarely in equilibrium anyway (that was more a hypothesis used by economists, or a euphemism for "price stability"), and what explained the market behaviour of individuals and groups was precisely the imbalances between supply and demand propelling them into action. On this interpretation, capitalist development is always imbalanced development which, typically, the state tries to mitigate or compensate for.[35]
Under capitalist conditions, balancing output and market demand depended on capital accumulation occurring.[36] If profits were not made, production would stop sooner or later. A capitalist economy was therefore in "equilibrium" so long as it could reproduce its social relations of production, permitting profit-making and capital accumulation to occur, but this was compatible with all sorts of market fluctuations and disequilibria. So long as workers were "back to work" each working day, maintaining the value of assets and creating new value, it was "business as usual". Only when shortages or oversupply began to threaten the existence of the relations of production themselves, and block the accumulation of capital in critical areas (for example, an economic depression, a political revolt against capitalist property or against mass unemployment), a genuine "disequilibrium" occurred; all the rest was just ordinary market fluctuations. Marxist economist Paul Mattick comments:
"There can be no “equilibrium” between production and consumption, at any particular time or in the long-run, because progressive capital expansion means widening the gap between the two. Market “equilibrium” can exist only in abstract value terms: it exists when the market demand is one that will assure the realization of surplus-value by way of capital expansion. The semblance of a supply-and-demand “equilibrium” exists only within the process of capital accumulation. It is only in this sense that the law of value “maintains the social equilibrium of production in the turmoil of its accidental fluctuations.” Even so, in maintaining the “social equilibrium of production,” the law of value asserts itself just “as the law of gravity does when a house falls upon our ears.” It asserts itself by way of crises, which restore, not a lost balance between supply and demand in terms of production and consumption, but a temporarily lost but necessary “equilibrium” between the material production process and the value expansion process. It is not the market mechanism which explains an apparent “equilibrium” of supply and demand but the accumulation of capital which allows the market mechanism to appear, at times, as an equilibrium mechanism."[34]
So this kind of Marxian "equilibrium" was more a condition of social stability, not a hypothetical and unverifiable perfect match between supply and demand under idealised, static conditions. In any case, real social needs and their monetary expression through market demand might be two very different things. A demand might exist without any buying power, and it might be that more could technically be supplied, but isn't (see Capacity utilization). Economic equilibrium was not created by any perfect match of supply and demand, but by the social framework which permitted the balancing act to occur. The role of the political state was essential in this, to provide an enforced legal framework for fair trade, currency stability and secure property rights[37] Marx himself regarded the idea that society was somehow balanced out by market trade as a typical figment of bourgeois ideology and he was a strong critic of Jean-Baptiste Say. In the real world, there was only a more or less haphazard adjustment of supply and demand through incessant price fluctuations. In reality, a lot of non-market activity was necessary to keep market activity going,[38] and the role of the state was indispensable (for the security of private property, currency stability and the enforcement of trading obligations).[39]
The difference between the equilibrium theories of neoclassical economists and Marx's theory of the regulation of trade can be illustrated with a simple analogy. It is extraordinarily difficult to stay in balance while sitting on an ordinary bicycle, if the bicycle is stationary; but as soon as forward motion is achieved, balance is usually also achieved (give or take a few close shaves, perhaps). That balance therefore exists only as a motion involving the rider, the bike and the ground. All of these are necessary. If we just focused on the rider and the bicycle only, and ignored the ground, we would miss an important factor, to our peril.
A physicist would no doubt explain all this in terms of momentum, mass, velocity, kinetic energy, gyroscopic forces, torque and the law of gravity. The law of value performs a similar function in economic science. It tells us that the trading pattern in a society does not behave chaotically or arbitrarily, but is regulated at the very least by the relative proportions of work effort involved. A community of private producers working independently of each other has no other way to adjust their production volume to each other, than via the trading-value of their products. Exchange-value thus expresses a necessary relationship between the demand for a good by people who need it, and the quantity of society's labour-time required to produce it.
By contrast, what economists often concern themselves with is a question of this type: suppose the purpose of the bicycle is to be perfectly stationary, and the rider to sit on it while perfectly stationary. Under what conditions would the balancing act then be successful? What kind of bike would we need? What skills does the rider need? Which is interesting to speculate about. We could for example experiment with a unicycle, but most people do not ride unicycles and certainly not over long distances. A real economy has a "front wheel" (the economy of trade) and a "rear wheel" (the economy of labour-time). Because riding the bike we face forwards, we do not see the rear wheel, but that does not mean it isn't there. If it really isn't there, we can't ride.
While riding the bicycle, a potential risk exists that it will crash or collide with something; balance may be lost momentarily, yet also quickly restored. But the point is, we learn little about the possibilities or conditions for such an imbalance or crash from only examining the necessary conditions for a balancing act on a stationary bicycle - except trivia such as that if balance is not achieved, the rider must fall to the ground. We have to study the whole phenomenon interacting in motion.
More sophisticated econometric models in fact do this, by identifying the quantitative effects of the interaction of many different economic trends; this is sometimes referred to as "dynamic equilibrium", but it is often no longer clear what exactly is being equilibrated, or what the equilibrium would consist in (since in the last instance the knowledge of equilibrium depends on the observation that "things remain constant" according to some criterion). It is more a theory of how to prevent the decline or collapse of the circulation of commodities, money and capital, or promote balanced growth on some definition. The market equilibrium concept is also frequently confused with "the stability of the economic system".
Just like the law of gravity, the law of value can interact with other phenomena which modify its effects.
The 15 main factors counteracting the operation of the law of value, as a law governing the economic exchange of products, are:
All of these phenomena occur to some degree or other in any real economy. Hence the effect of the law of value would usually be mediated by them, and would manifest itself only as a tendency, or as a law of "grand averages".
Nevertheless price-value divergences are typically quantitatively limited - whereas a fraction of goods and services will always trade for prices deviating significantly from what they are really worth, normally few people will buy an apple for $10 or sell a wellfunctioning car for $50 (unless it was part of some other deal). So although the real cost structure of production can be distorted by all kinds of extraneous factors, nevertheless the law of value places limits on the amount of the distortion. Even if goods sell at an abnormally low or high prices, that abnormality relates to a "normal" referent price, and it is precisely that price which, according to Marx, is constrained by the law of value, i.e. by the proportionalities of human labour-time.
There are many indications that Marx believed the future would see an increasingly "purified" capitalism. That is, obstructions to market expansion in every area would be cleared away through privatisation and removal of legal or technical restrictions on the expansion of trade, and that would in turn mean that the law of value would impose itself more, not less. Thus, the socially average real production costs would then influence the trading ratios in economic exchange more, not less; the allocation of goods would be determined more by private costs and private profits. Indeed, Marx felt confident about analyzing the commercial tendencies of capitalist development in their "purest form" precisely because he believed those tendencies would ultimately "win through" in the making of economic history, with "iron necessity". In other words, the "real" would in the long term increasingly approximate the theoretical "ideal", an ideal which abstracted from all kinds of contrary tendencies in local circumstances.[40]
Marx argues that, as economic exchange develops and markets expand while traditional methods of production are destroyed and replaced by commercial practices, the law of value is modified in its operation.
Thus, the capitalist mode of production is a type of economy in which both inputs and outputs of production have become marketed goods and services (or commodities). In such an economy, Marx argues, what directly regulates the economic exchange of new labour-products is their prices of production. The production price is the price at which output would have to sell, in order to realize the average, normal rate of profit on the capital invested in producing that output. In pre-capitalist societies, where many inputs and outputs often weren't priced goods but allocated "by right" or according to custom, such an expression would be meaningless. The corollary in capitalist production is the free movement (or at least mobility) of labour and capital among branches of industry, in other words that capital and labour can be traded and shifted around fairly freely (in pre-capitalist societies, such market mobility was usually not possible).
Another way of saying the same thing, is that "sale at production prices becomes the normal precondition of supply" for new outputs produced[41] (although in particular cases, fluctuating market prices might be above or below the production price). This means two things: the average price for which a commodity sells will typically diverge to some extent from the labour-value it represents, so that more labour exchanges for less labour and vice versa, and that the exchange values realised in trade reflect not only a physical production cost, but also a "mark-up" or surplus-value in excess of that cost. Usually this is in a range of perhaps 8-15% of capital invested (net) or about 10-40% of product unit-prices in the market, depending on the case (there is obviously a difference between the profit rate on capital invested, and the profit rate obtained from selling a single commodity).
The fact that products can be traded above or below their value (and hence that more labour can exchange for less labour) became a fundamental theoretical problem for classical political economy. But for Marx, this was not an "aberration" in the exchange process at all, but instead the pivot of business competition in capitalist society. Price-value differences determined how much of the new surplus value produced by enterprises could be realized as profit.
Capitalist economic exchange, Marx argues (contrary to David Ricardo's theory), is not a simple exchange of equivalents.[42] It aims not to trade goods and services of equivalent value, but instead to make money from the trade (this is called capital accumulation). The aim is to "buy as cheaply as possible, and sell as dear as possible", under the competitive constraint that everybody has the same objective. The effect is that the whole cost-structure of production permanently includes profit as an additional impost - which, according to medieval Christian theologians, should never be more than one-sixth (16-17%) of the value of the traded object.[43] In an overall sense, Marx argues the substance of this impost is the unpaid surplus labour performed by the working class; part of society can live off the labour of others due to their ownership of property.[44]
In this situation, output values produced by enterprises will typically deviate from output prices realised. Market competition for a given demand will impose a ruling price-level for a type of output, but the different competing enterprises producing it will take more or less labour to produce it, depending on productivity levels and technologies they use. Consequently, output values produced by different enterprises (in terms of labour-time) and output prices realised by them will typically diverge (within certain limits): enterprises can get more or less income for the value of what they produce. That divergence becomes a critical factor in capitalist competition and the dynamics of the production system, under conditions where the average price-levels for products are beyond anyone's control.[45]
If capital accumulation becomes the dominant motive for production, then producers will do everything they can to cut costs, increase sales and increase profits. Since they mostly lack control over the ruling market prices for their inputs and outputs, they try to increase productivity by every means at their disposal and maximise surplus labour. Because the lower the unit-costs of goods produced by an enterprise, the greater the margin will be between its own production costs and the ruling market prices for those goods, and the larger the profits that can be realised as result when goods are sold. Producers thus become very concerned with the value added in what they produce, which depends crucially on productivity. Marx comments:
"The fundamental law of capitalist competition, which political economy had not hitherto grasped, the law which regulates the general rate of profit and the so-called prices of production determined by it, rests... on [the] difference between the value and the cost-price of commodities, and on the resulting possibility of selling a commodity at a profit under its value."[46]
In the classical competitive situation, capitalists basically aim to employ workers to produce and sell a greater volume of products more quickly, at a competitive market-price which is below the socially established "normal" valuation for that kind of product which applies in market-trade, principally by means of a better labour-exploitation rate than their competitors, which lowers the cost-price per unit of product, yet provides a superior profit rate on capital invested, even if the selling price is below the normal valuation. Such price-cutting competition is limited in scope however, because if competitors adopt the same production methods, the productivity advantage will disappear. In addition, beyond a certain point workers will begin to resist their exploitation, and they may join trade unions. And, obviously, if market prices for products were reduced to their most competitive cost-prices only, profits would fall to zero; the commercial rationale for producing the products would then disappear altogether.
This leads to constant attempts worldwide to improve production techniques to cut costs, improve productivity and hold down labour-costs, but ultimately also to a decline in the labor-content of commodities. Therefore, their values will also decline over time; more and more commodities are produced, for a larger and larger market, at an increasingly cheaper cost. Marx claims that this trend happens "with the necessity of a natural law"; producers had no choice about doing what they could in the battle for productivity, if they wanted to maintain or increase sales and profits.[47] In business, if you don't go forward, you go backward. That was, in Marx's view, the "revolutionary" aspect of capitalism.[48]
However, competition inexorably gives rise to market monopolies, which may constrain further significant advances in productivity and innovation.[49] The negative influence of the tendency of the rate of profit to fall on business income can be overcome only by organizing production and sales on a larger and larger scale. To be able to compete in product markets in the end requires enormous amounts of investment capital, which (1) cuts out most would-be producers and (2) lowers the profit rate on investment capital. Investors will no longer commit very large amounts of capital to investment projects if they are uncertain about whether those projects will yield an adequate return in the future. The more uncertainty there is, the more difficult it is to "securitize" (insure) their longer-term investments against losses of capital. If the state will not provide financial backing, private finance must provide it, but the latter is reluctant to do so if the risks outweigh the yields. This causes a powerful development of capital markets and supporting financial services.
In a developed capitalism, the development or decline of the different branches of production occurs through the continual entry and exit of capital, basically guided by profitability criteria, and within the framework of competition. Where demand and profits are high, capital moves in, and when demand and profits are low, capital moves elsewhere. Thus, supply and demand are reconciled, however imperfectly, by the incessant movements of capital. Yet, Marx argues, this whole process is nevertheless still regulated by the law of value; ultimately, relative price movements for products are still determined by comparative expenditures of labour-time.[50] Thus, market prices for outputs will gravitate towards prices of production which themselves are constrained by product-values expressible in quantities of labour-time.[51]
In economic crises, Marx suggests, the structure of market prices is more or less suddenly readjusted to the evolving underlying structure of production values. Another way of saying this is, that the law of value will ultimately assert itself, by forcing a change in relative prices, in conformity with real production costs. In turn, this implies that although production values and market prices can diverge significantly from each other (in particular, because there exists no "perfect competition" - competition involves also blocking competitors), there are also limits to the possible discrepancies (because ultimately competitors will bring down artificially inflated prices, and goods sold further and further below value would eventually put producers out of business when incomes could no longer cover costs).
Neo-classical economics holds that, left to themselves, markets will balance supply and demand relatively quickly. If equilibrium does not exist, it will exist in the future, provided obstacles to market functioning are cleared away.
In his Bundesbank speech on January 13, 2004, US Federal Reserve chairman Alan Greenspan, stated:
"Globalization has altered the economic frameworks of both developed and developing nations in ways that are difficult to fully comprehend. Nonetheless, the largely unregulated global markets do clear, and, with rare exceptions, appear to move effortlessly from one state of equilibrium to another. It is as though an international version of Adam Smith's "invisible hand" is at work."[52]
This was a reference to Adam Smith's Wealth of Nations (1776) where Smith wrote:
"Every individual intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his original intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it."[53]
Marx's theory of how the law of value operates in capitalism aims to reveal what the "hidden hand" of markets theorised by Adam Smith really consists of.[54] It aims to explain how it comes about, that the markets get "a life of their own", by showing what drives the markets, and how the market-balancing process actually occurs.[55] But it can do so only by distinguishing between a domain of value-relations and a domain of price-relations, and between potential values and actual prices realised; after all, a process is involved whereby products move into markets, are sold for a price, and then move out of markets or are resold; this can be rationally understood only by assuming a temporal continuity (or conservation) of product-values through successive exchanges.[56]
Another "take" on the law of value, from an investor's perspective, is by George Soros:[57]
"Every market participant is faced with the task to estimate the value in the present of a future development of events, but that development is co-determined by the value which all market participants together attribute to it in the present. That is why market participants are forced to be led partly by their subjective judgement. Characteristic of that bias is that it is not purely passive: it has influence on the course of events which it should represent. This active aspect is lacking in the concept of equilibrium such as is used in economic theory."[58]
In the real world, investors are constantly juggling between actual market prices and hypothetical (ideal) prices, based on assumptions about what the objective value of a good (its "real worth") is likely to be, now and in the future. A difficulty here is that the majority of objects of value in a society at any time don't have any actual market price, because they are not being traded. Thus, value proportions between those objects objectively exist, but at best these can only be approximated or estimated in price terms.
Marx tries to model the market outcomes macro-economically with regard to new outputs from production, assuming that values and prices will diverge, the argument being that this divergence will create a systematic pattern of economic behaviour by producers and investors. He is not interested in the circus-act of a clown balancing on a stationary bicycle, but in the bicycle ride. Once the economist is riding on his bike, he can discover many things that he would never know about, if he just tried balancing on it while it is stationary, or just theorizes about that possibility.
Marx believed that the operation of the law of value was not only modified by the capitalist mode of production, but also in the world market (world trade, as contrasted with the home market or national economy).[59]
The main reason for this was the existence of different levels of the intensity and productivity of labour in different countries, creating for example a very different cost structure in different countries for all kinds of products.[60] Products that took 1 hour of labour to make in country A might take 10 hours to make in country B, a difference in production costs which could strongly influence the exchange values realised in the trade between A and B. More labour could, in effect, exchange for less labour (an "unequal exchange" in value terms) for a prolonged time. In addition, the normal rate of surplus value could be different in different countries - one hour of labour might cost $1 in country A, $10 in country B, and $20 in country C. That makes a huge difference not only to profitability, but to the ability to sell products at competitive prices.
So traders would try to use this differential to their advantage, with the usual motto "buy cheap, sell dear". The result, some Marxists argue, is an international transfer of value, from countries with a weaker bargaining position to those with a stronger one: products produced in country A with undervalued labour are acquired for a low price and resold in country B where labour is more highly valued, for a much higher price.[61] The differential in labour valuations becomes a source of profit (see also global labor arbitrage).
Among German Marxists, Marx's fragmentary remarks on the law of value in a world market setting stimulated an important theoretical debate in the 1970s and early 1980s.[62] One aim of this debate was to move beyond crude Ricardian interpretations of comparative advantage or comparative costs in explaining the pattern of world trade. To some extent similar debates took place in the USA, France and Japan.[63]
In particular, when the volume of intra-industry trade (IIT) between countries grows (i.e. the same kinds of products are both imported and exported by a country, e.g. cars, wine, beer, clothes, vegetables), and when different branches of the same multinational import and export between countries with their own internal price regime, international comparative advantage theories of the Ricardian type do not apply.
Nowadays, Marxian scholars argue, comparative advantage survives mainly as an ideology justifying the benefits of international trade, not as an accurate description of that trade (some economists however draw subtle distinctions between comparative "advantages" and comparative "costs", while others switch to the concept of competitive advantage).[64]
Ultimately, the "comparative advantage" ideology is based on a very simple ideology about trade. This ideology says, that if everybody specializes in what they are the best at producing, this provides the greatest amount of wealth for everybody, because then everybody will be operating in the most efficient way. But this ideology is hopelessly naive. The simple reason is that, even if products are produced very efficiently, this says nothing about the terms on which products will be traded, and the incomes which producers will get for their work. They might work very efficiently, but get very little money for their effort.
The operation of the law of value in the world market might however seem rather abstract, in view of the phenomena of unequal exchange, differences in accounting norms, protectionism, debt-driven capital accumulation and gigantic differences in currency exchange rates between rich and poor countries. These phenomena can create very a significant distortion in world trade between final market prices for goods, and the real production costs for those goods, resulting in superprofit for the beneficiaries of the trade.
Jayati Ghosh writes:
"While developing countries as a group more than doubled their share of world manufacturing exports from 10.6 per cent in 1980 to 26.5 per cent in 1998, their share of manufacturing value added increased by less than half, from 16.6 per cent to 23.8 per cent. By contrast, developed countries experienced a substantial decline in share of world manufacturing exports, from 82.3 per cent to 70.9 per cent. But at the same time their share of world manufacturing value added actually increased, from 64.5 per cent to 73.3 per cent."[65]
That is, the value and physical volume of manufactured exports by developing countries increased gigantically more than the actual income obtained by the producers. Third world exporters might have got mighty rich, but the reality is that third world nations relatively speaking received less and less for what they produced for sale in the world market, even as they produced more and more; this is also reflected in the international terms of trade for manufactured products.
The postulate of the law of value does however lead to the Marxian historical prediction that global prices of production will be formed by world competition among producers in the long term. That is, the conditions for producing and selling products in different countries will be equalised in the long run through global market integration; this will be reflected also in International Financial Reporting Standards. Thus globalisation means that incipiently the "levelling out of differences in rates of profit" through competition begins to operate internationally.[66] Trading ratios and exchange-values for products sold globally would thus become more and more similar, in the long term.[67]
This hypothesis can be empirically tested by means of international price comparisons. To illustrate (this is only an approximate, simplified calculation) according to the Big Mac Index of The Economist, on July 22, 2010 the average cost of a big mac hamburger was highest ($7.38) in Norway and lowest ($1.81) in the Ukraine. Nominally, the Norwegian burger therefore costs four times the Ukrainian one, if one works with a US dollar valuation. When, however, one adjusts for purchasing power parity, the Norwegian burger is worth about $4.93 and the Ukrainian burger is worth about $5.25. In other words, Norwegians have a higher wage, but they can buy less for their money. VAT on the Norwegian burger is 14% and VAT on the Ukrainian burger is 20% so the Norwegian burger before indirect tax imposts costs $4.24 and the Ukrainian one $4.20.
Admittedly, corporate tax in Norway is at 28%, and it is 25% in the Ukraine, so one could in principle weight these results most simply by reducing the Norwegian cost by 3% to get a more accurate picture of the difference in direct production cost. To express the real disparity in value, we could then strike a ratio between $4.11 (for the Norwegian burger) and $4.20 (for the Ukrainian burger), i.e. the real differential in value between the nominally most expensive burger in the world and the nominally least expensive burger in the world, expressed in US dollars, is likely to be around 2%.
In the rest of the world, one could conclude, for the most part international value differentials for burgers are unlikely to be very much larger (in fact, the tax and social security levies involved in the total labour cost of a MacDonald's employee are proportionally somewhat higher in the Ukraine than in Norway).
In his letter to Louis Kugelmann of July 11, 1868, Karl Marx commented gruffly:
"As for the Centralblatt, the man is making the greatest concession possible by admitting that, if value means anything at all, then my conclusions must be conceded. The unfortunate fellow does not see that, even if there were no chapter on 'value' at all in my book, the analysis I give of the real relations would contain the proof and demonstration of the real value relation. The chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science. Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society's aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products. Where science comes in is to show how the law of value asserts itself. So, if one wanted to 'explain' from the outset all phenomena that apparently contradict the law, one would have to provide the science before the science. It is precisely Ricardo's mistake that in his first chapter, on value, all sorts of categories that still have to be arrived at are assumed as given, in order to prove their harmony with the law of value. On the other hand, as you correctly believe, the history of the theory of course demonstrates that the understanding of the value relation has always been the same, clearer or less clear, hedged with illusions or scientifically more precise. Since the reasoning process itself arises from the existing conditions and is itself a natural process, really comprehending thinking can always only be the same, and can vary only gradually, in accordance with the maturity of development, hence also the maturity of the organ that does the thinking. (...) The vulgar economist has not the slightest idea that the actual, everyday exchange relations and the value magnitudes cannot be directly identical. The point of bourgeois society is precisely that, a priori, no conscious social regulation of production takes place. What is reasonable and necessary by nature asserts itself only as a blindly operating average. The vulgar economist thinks he has made a great discovery when, faced with the disclosure of the intrinsic interconnection, he insists that things look different in appearance. In fact, he prides himself in his clinging to appearances and believing them to be the ultimate. Why then have science at all? But there is also something else behind it. Once interconnection has been revealed, all theoretical belief in the perpetual necessity of the existing conditions collapses, even before the collapse takes place in practice. Here, therefore, it is completely in the interests of the ruling classes to perpetuate the unthinking confusion. And for what other reason are the sycophantic babblers paid who have no other scientific trump to play except that, in political economy, one may not think at all!"[68]
"...the Marxian law of value holds generally, as far as economic laws are valid at all, for the whole period of simple commodity production — that is, up to the time when the latter suffers a modification through the appearance of the capitalist form of production. Up to that time, prices gravitate towards the values fixed according to the Marxian law and oscillate around those values, so that the more fully simple commodity production develops, the more the average prices over long periods uninterrupted by external violent disturbances coincide with values within a negligible margin. Thus, the Marxian law of value has general economic validity for a period lasting from the beginning of exchange, which transforms products into commodities, down to the 15th century of the present era. But the exchange of commodities dates from a time before all written history — which in Egypt goes back to at least 2500 B.C., and perhaps 5000 B.C., and in Babylon to 4000 B.C., perhaps to 6000 B.C.; thus, the law of value has prevailed during a period of from five to seven thousand years."[69]
Engels apparently believed that the law of value directly regulated the simple exchange of products up to the 15th century, whereupon simple exchange began to give way to capitalist exchange of products regulated by the prices of production. This did not mean that Engels believed "a society consisting exclusively of simple commodity producers" had ever existed. It meant just that commodity trade was very ancient, emerging at first - as Marx noted - in the interstices of traditional agrarian societies, as an ancillary economic activity. For most of the history of civil society, commodity trade did not dominate the economy. Marx's whole point was that as soon as "generalized commodity production" emerged (where both the inputs and the outputs of production are all commodities), production became fully subordinated to the laws of capital accumulation. But for most of human history, "generalized" commodity production never existed; for most of human history, commercial production was at best only a specific branch of production, not most of production. Of course, even in a developed capitalist economy, plenty of non-commercial production also occurs, e.g. household production, or production by the state authorities. Nevertheless such non-commercial production is often valued or evaluated according to what it is worth in money terms (or how much money it saves).
There has been a long and drawn-out debate among Marxists about whether the law of value also operates in non-capitalist societies where production is directed mainly by the state authorities. There is still little agreement on the issue, because different Marxists use different definitions and concepts which are often influenced by political attitudes (for example, some regarded the Soviet Union as "socialist", others as "capitalist", and still others as "neither capitalist nor socialist").
In his famous pamphlet Economic Problems of Socialism in the USSR, Joseph Stalin argued that the law of value did operate in the socialist economy of the USSR.[70] After all, Marx had stated in Das Kapital that:
"...after the abolition of the capitalist mode of production, but still retaining social production, the determination of value continues to prevail in the sense that the regulation of labour-time and the distribution of social labour among the various production groups, ultimately the book-keeping encompassing all this, become more essential than ever."[71]
Stalin was primarily concerned at the time with the problem of wasted labour, in an economy where workers often could not be easily fired (they had a constitutionally guaranteed right to a job, and there was considerable featherbedding of employees), and where there was often no clear relationship between salary-levels, work performance and actual output. The Stalin theory of the law of value was critically discussed by Włodzimierz Brus in The market in a socialist economy.[72]
Supporters of the theory of state capitalism in the USSR and scholars such as Andre Gunder Frank have also believed that the law of value operated in Soviet-type societies.[73] However, it is not always clear what they mean by the law of value, beyond the vague idea that the direct producers remain dominated by their own products, or that labour costs remain important, or that Soviet-type societies remained influenced by the world market.
According to Ernest Mandel, the law of value, as a law of exchange, did influence non-capitalist societies to some extent, inasmuch as exchange and trade persisted, but because the state directed the bulk of economic resources, the law of value no longer ruled or dominated resource allocation.[74] The best proof of that was, that there was mostly no clear relationship at all anymore between the exchange-value of goods traded, and what it really cost to produce them; accounting information, insofar as it was valid, might in fact be unable to show anything about the real nature of resource allocation. Insofar as the social priorities of state policy ensured that people got what they needed, that was a good thing; but insofar as resources were wasted because of a lack of sensible cost-economies, it was a bad thing. Cost-accounting is, of course, no more "neutral" than profit-accounting; a lot depends on what costs are included and excluded in the calculation.
Che Guevara adopted a similar view in socialist Cuba; if more resources were directly allocated to satisfy human needs, instead of commercially supplied, a better life for people would result. Guevara organised an interesting conference at which the theoretical issues were debated[75] Generally, the New Left adopted the idea that true socialism would involve the abolition of the law of value, since commodity production would be abolished - goods and services would be allocated according to need, and primarily according to non-market principles. But even if this claim is accepted, it still remains true that people cannot get away from the physical reality that the products they consume inescapably take a certain quantity of work effort to produce. In that sense, as Marx implies, there is still a "law of labour" to be reckoned with, i.e. the necessity to allocate, account for, and economize work effort so that people can get the products they need to live. Guevara proposed a mix of moral and material incentives to ensure this would be the case.
Some Marxist authors, such as John Weeks, have argued that the law of value is unique to an economy based on the capitalist mode of production.[76] They reject the claim by Engels that the law of value is associated with the entire history of economic exchange (trade), and modified when the vast majority of inputs and outputs of production have become marketed, priced commodities. Marx himself said that the law of value "develops fully only on the foundation of capitalist production", implying that the law of value already asserted itself before capitalist production.[77]
Other Marxists (including Ernest Mandel and the Japanese scholar Kozo Uno) followed Marx & Engels in believing that the law of value emerges and develops from simple exchange.[78] Here, it is argued that, if the law of value was unique to capitalism, it becomes impossible to explain the development of pre-capitalist commodity exchange or the evolution of trading processes in a way consistent with historical materialism and Marx's theory of value. So a better approach, it is argued, is to regard the application of the law of value as being modified in the course of the expansion of trade and markets, including more and more of production in the circuit of capital. In that case, a specific society must be investigated to discover the regulating role that the law of value plays in economic exchange.
In contemporary Venezuela, the German socialist economist Heinz Dieterich has argued that the production and distribution of products should occur in accordance with their true labour costs, as shown by special macro-economic labour accounts estimating how much work-time products take to make (in Socialism of the 21st century this is called "equivalence economy").
However, this argument is very controversial. Its critics claim it is practically impossible, and some indeed point to Marx's rejection in the Grundrisse of the "time-chit" theory of allocating goods proposed by 18th and 19th century utopian socialists such as John Francis Bray and John Gray[79] On this view, Dieterich at most shows that the allocation of goods according to commercial principles is only one method of allocating resources; other methods such as sharing, redistribution, subsidization, barter, grants and direct allocation according to need may often serve the interest of fairness, efficiency and social justice better, provided that people accept a common ethic about what is best for all, if they can see that adopting such an ethic has good results.
In almost any society, market and non-market methods of allocating resources are in practice combined, which is acknowledged in official national accounts by the inclusion of market and non-market sectors. The real question for economists is how the two can be combined to achieve the best economic result for citizens, and what the effect is of market and non-market methods on each other.[80] This can be a highly politicized and contentious dispute, since the chosen methods can advantage some and disadvantage others; it is very difficult to devise allocation methods which distribute the gains and losses of economic policy in an equal or equitable way among all economic actors.
Traditionally, criticism of Marx's law of value has been of three kinds: conceptual, logical, and empirical.
The conceptual criticism concerns the concept of value itself.
For Marx, economic value in capitalist society was an objectified social characteristic of labour-products, exchanged in an economic community, given the physical reality that products took a definite amount of society's labour-time to produce, for a given demand. A product had a value, regardless of what any particular person might think about it, priced or unpriced (see value-form). Marx regarded the law of value as analogous to an objective physical law, since people could never escape from the fact that the products they consumed presupposed an objective cost in human labour time. Critics however argue that economic value is something purely subjective, i.e. a personal valuation determined by personal preferences and marginal utility; only prices are objective.[81] One of the first Marx-critics to argue this was the Austrian Eugen von Bohm-Bawerk.[82]
However, many prices are not objective either - they are only ideal prices used for the purpose of calculation, accounting and estimation, not actually charged or applying directly to any real transaction.[83] Yet, these notional prices can nevertheless influence economic behaviour, inasmuch as the prices estimated affect expectations of incomes and expenditures. Economists then debate about when a price can be said to be "objective". Objectivity of prices, could be taken to mean e.g. only that the prices are empirically observable, not that they are independent from subjective values. But many prices are not empirically observable either, they exist only as a numerical idea. For that reason, markets become very mysterious things: does the price-level change, because of a subjective preference, or does subjective preference change, because of the price-level? The point is that we can never know the answer for sure; at best we can "model" the most likely interactions between preferences and prices.
In almost all cases, cars will sell for more than carrots, but why? If value is subjective, all we can say is that people value cars more than carrots, or that cars are more in demand than carrots. Marx argues by contrast that cars and carrots have different objective costs of production, reducible to different amounts of labour-time. So cars will always cost more than carrots; one car will trade for, or be worth, quite a few tonnes of carrots, at least in the normal situation.
Against this view, one could also argue that objective amounts of comparable resources (such as energy, land, water, etc.), necessary to manufacture a car, are much larger than resources necessary for growing a carrot, explaining why the cost (and, hence, minimal price) of a car is larger than the cost of a carrot. In other words, it is the total input costs (including costs of labour), not the amount of labour per se, which create the difference in costs (and, therefore minimal equilibrium prices) of the goods. Marx however argues in the first chapters of Das Kapital that most of such costs (i.e. insofar as they refer to reproducible goods) are again reducible to direct and indirect costs in human labour time. When we see a car, we do not see the worldwide cooperation of labour-efforts that produced it at a certain cost, yet those labour efforts, weighed against other labour efforts, determine its value.
Austrian economics explicitly rejects the objectivity of the values of goods as logically and conceptually unsound. On this view, we cannot validly say that products took a certain amount of labour, energy and materials to make, and compare them on that basis. It follows that the Austrian school thinks most contemporary economic theory is invalid, as it relies in one way or another on the aggregation and comparison of actual and ideal prices. This is forcefully argued by Friedrich von Hayek who therefore was skeptical about the objectivity of macroeconomic aggregations as such.[84] However, this raises the question of "what is the explanatory power of Austrian economics", if all we can say about a realized price is that it expresses a subjective preference, given that there are billions of subjective preferences which are all different.[85]
Ecologists and environmentalists have criticized Marx on the ground that natural resources have (or should have) a value which has nothing to do with production costs in labour time, because in fact they are entropic non-reproducible goods.[86] However, Marx himself never denied this; he was merely referring to the bourgeois valuation scheme, originating from commercial trade, double-entry bookkeeping and the theory of prices.[87]
Precisely because natural resources were for a long time either non-reproducible or freely available goods (i.e. not reproducible commodities) the whole tendency of the market economy was for those resources to be plundered for private gain, rather than economized appropriately.[88] Their "value" became apparent, only when they became scarce, and had somehow to be maintained, restored, recycled or reproduced. Moreover, the only way a market economy has to "value" natural resources was to impute a notional money-price to them.
This resource price, however calculated, can only be based on one of three variables (or a combination of them): the cost-price of its appropriation, or the cost-price of substituting an alternative resource; the demand for it from buyers, and what they could pay for it; and the (potential) income that could be obtained from owning and selling it. These three variables therefore necessarily refer back to the existing cost- and price-structures, as well as the property rights within the market economy that already exist, and therefore, indirectly, the pricing does refer back to the results of the economizing of human labour-time which has already been achieved.
The only alternatives the bourgeois state has, are either to prohibit exploitation of the natural resource, to modify property rights (access) with respect to the resource, or to impose a tax levy of some type on their exploitation - with the aim of ensuring better stewardship of the natural resource. Such policies however are not formed independently of the existing economy; they have to respond to valuations which exist already. Generally speaking, rich people buy the nice places to be, while the poor live in what Mike Davis (scholar) calls the "planet of slums".[89]
Ecologists also note that Marxist theories of value caused large-scale environmental problems in the industrialization of the Soviet Union[90] China[91] and other countries ruled by communist parties; thus, whether or not an economy is a market economy or a state economy does not seem to make much difference, the problem is rather with the values of human cultures themselves or with industrialization processes as such. This more complex debate[92] cannot be dealt with in this article; it may be noted only that newly industrializing countries to a large extent imitated technical methods used in industrialized countries, and that Marx can hardly be held responsible for all the things done in his name - he had explicitly referred to problems of environmental despoilation quite a number of times, including in Das Kapital.[93] He never dealt systematically with socialist economics, amongst other things because he lacked an evidential basis for theorizing about that.[94]
The logical criticism revolves around the idea that Marx is unable to reconcile the domain of value relations and the domain of price relations, showing exactly how value magnitudes correspond to price magnitudes.
Various arguments are made to show that Marx's theory of value is logically incoherent. The most famous of these is the controversy about Marx's prices of production, sometimes called the transformation problem in which it is argued that total output value must equal total output prices, and total profits must equal total surplus value, so that the distributions of particular output values and output prices can then be inferred from each other, via mathematical functions and a tidy accounting sum, assuming the same rate of profit on capital invested by all sectors.[95] Since, however, this exercise gives rise either to logical problems which have never been satisfactorily resolved, or to an unmanageably large string of assumptions and variables, it is argued that Marx's theory should be abandoned.
Specifically, it cannot be proved, whether logically or empirically, that the total output value is equivalent to total output prices, and on that ground alone, many critics argue, there is already no proof that there is any necessary quantitative relationship between them (Marx simply assumes that relationship, but does not prove it). If that is so, then, the critics argue, there is no sense in which the Marxian product-values can explain market prices for products as the determinants of those prices. An additional problem discovered in mathematical modelling is that the assumption of the identity of total prices and total values (or the identity of total surplus value and total profits) cannot be maintained simultaneously with the assumption that the rate of profit on production capital is the same for all industries.[96] Marx is left saying "e pur si muove".
But although this is often overlooked by economists[97] Marx himself used a uniform rate of profit for all industries in Capital Vol. 3 only for modelling purposes, to show in a simple way how the ruling profit rates on capital impacted on the development of production system, and he explicitly denied that a uniform rate of profit obtained in reality; he only argued that at any time there would exist an average "minimum acceptable" profit rate on capital invested in industries, and if there was no realistic possibility at all of reaching at least that profit rate sometime in the future, capital would very likely be disinvested after a while, since the relevant business would then simply lack commercial viability; alternatively, the business would be taken over, and restructured to restore an acceptable profit rate. This minimum profit rate applying to new investments is closely linked to the ruling interest rates applicable to producing enterprises;[98] if the interest rate is e.g. 5%, then the industrial profit rate on production capital must net at least 10% (or more), otherwise investors are likely to keep their money in the bank, or buy other assets.[99] Thus Marx writes:
"The general rate of profit, however, appears only as the lowest limit of profit, not as an empirical, directly visible form of the actual rate of profit."[100]
Marx and Engels also explicitly denied that in reality total product-value would be equal to the total of product-prices (see prices of production). Such an "accounting identity" was ruled out in the real world by continual variations in labour productivity and because, at any time, no competitive force existed that could exactly cancel out the difference between goods sold above value and goods sold below value.[101] It was also ruled out by the imperfections of the price-form itself, which, the fetishization of price statistics notwithstanding, permitted the expression of product-values only in an approximate way (see real prices and ideal prices). At best - Marx assumed - there was a reasonably close correspondence between total product-value and total product-prices. He believed economic fluctuations implied that if some products were sold under their value, this necessarily meant that other products were sold above their value.[102]
The divergence between total product-values and total product-prices on the whole was, Marx believed, probably not so very large, in an open, competitive market, where enormous price-value discrepancies were ordinarily impossible to maintain commercially for any length of time (among other things because in that case people would exchange very large amounts of work for very small amounts of work; they might be prepared to do that for some products, but not for most of them, because they simply could not afford to do so). But that is something which is very difficult - if not impossible - to prove. At best one could estimate the relationship between average product prices and the average cost in labour time which it currently takes to make them, for a large range of products, and then analyze the statistical correlations between unit prices and average costs in labour time; if no positive correlation exists, the theory is false.
In the real world, ultimately nothing stays constant except the progress of time, which we can measure with clocks;[104] all the economic variables are constantly moving and fluctuating. To prove an identity of total output values and total output production prices, we would require a counting unit of value which can be specified independently from money-prices, but we cannot specify that unit in that way. That unit can exist only as a theoretical entity (or as an ideal price comparable to an empirical price) which is also exactly how Marx used it in his simplified illustrations of value relationships. He simply uses a number for the value-quantity and another number for the price-quantity, to indicate a proportion. Empirically, one can only get as far as establishing a "grand average" for the price of an hour of work (this is often referred to as the "monetary equivalent of labour time", or MELT) and one can discuss the extent to which labour is undervalued or overvalued in a relative (comparative) sense.[105]
Product-values in Marx's sense quite simply cannot be directly observed, only inferred from the actual behaviour of trading relations.[106] Product-values manifest themselves and can only be expressed as trading ratios, (ideal) prices, or quantities of labour-time, and therefore the academic "transformation controversy" is according to many modern Marxist theorists misguided; it rests simply on a false interpretation of the relationship between the value-form of commodities and the price-form.[107] As soon as we admit that product-prices may fluctuate above or below product-values for all kinds of reasons - a central determinant of market dynamics - the quantitative relationship between values and prices is at best probabilistic, not a fixed function of some type. Marx himself actually made this perfectly explicit already in 1844, long before he began work on Das Kapital:
"...James Mill commits the mistake - like the school of Ricardo in general - of stating the abstract law without the change or continual supersession of this law through which alone it comes into being. If it is a constant law that, for example, the cost of production in the last instance - or rather when demand and supply are in equilibrium which occurs sporadically, fortuitously - determines the price (value), it is just as much a constant law that they are not in equilibrium, and that therefore [new] value and cost of production stand in no necessary relationship. Indeed, there is always only a momentary equilibrium of demand and supply owing to the previous fluctuation of demand and supply, [and] owing to the disproportion between cost of production and [the] exchange-value [of new products], just as this fluctuation and this disproportion likewise again follow the momentary state of equilibrium. This real movement, of which that law is only an abstract, fortuitous and one-sided factor, is made by recent political economy into something accidental and inessential. Why? Because in the acute and precise formulas to which they reduce political economy, the basic formula, if they wished to express that movement abstractly, would have to be: in political economy, law is determined by its opposite, absence of law. The true law of political economy is chance, from whose movement we, the scientific men, isolate certain factors arbitrarily in the form of laws." - Karl Marx, Comments on JamesMill, Éléments D'économie Politique (1844) [57] (note: this official English translation is not quite accurate).[108]
The structure of Marx's argument in Capital Vol. 3 is that there is a constant contradiction in capitalism between the inescapable labour-costs incurred to produce products, and the laws of price competition which create pressure to maximize the return on capital invested - a contradiction which must constantly be mediated in practice, bringing about the "real movement" of the production system (ideally, capitalists would prefer just to trade assets without the nuisance and trouble of hiring labor, but the assets have to be produced, that production requires labor, and therefore that labor has to be organized in a commercially effective way).[109]
The only way to transcend the scientific "arbitrariness" to which the young Marx already referred, was by understanding and theorizing the dynamics of the capitalist system as a whole, integrating all the different economic forces at work into a unified, coherent theory that could withstand the test of scientific criticism.[110] Thus, Marx's value theory offers an interpretation, generalisation or explanation concerning the "grand averages" of the relative price movements of products, and of economic behaviour in capitalist production as a social system, but it is not possible to deduce specific real product-prices from product-values according to some mathematical function, among other things because, to find labour-values, a relationship between product-prices and labour hours worked must already be assumed. What we can verify is:
No logical proof of a concept of economic value has ever been possible; the concept proved its utility only by coherently explaining the phenomena of value, and by its ability to predict how economic behaviour would empirically evolve. It is of course also possible that Marx's bold attempt at a unified grand theory - a Popperian "bold hypothesis" which he did not actually finish for publication himself - is partly correct and partly incorrect. The idealisations of the simpified "pure" model, which aim to identify the interaction of the main operative forces, may not adequately capture how things work out in empirical reality - it may tell us only "where to look" for an explanation. In this sense, Andrew Glyn commented:
"The world economy is too complicated and there are too many different causal factors. I don't believe, as I used to, that Marx's concepts should be applied too literally to economic data. I prefer the view of the Japanese Uno school that Marx's analysis should rather inform one's way of looking at the world and the questions one asks. The first volume of Capital, for example, provides a brilliant framework for understanding what is happening in China today."[112]
The empirical criticism is simply that there is no observable quantitative correspondence at all between changes in relative expenditures of labour-time, and changes in relative market prices of products, however measured (the measures are also contested, for example on the ground that qualitatively different kinds of labour cannot be compared and equated). This is undoubtedly the strongest criticism, but there exists as yet very little research to back it up.[113] Most critics have tried to refute Marx's theory with an elegant mathematical model, rather than actually looking at real data to see if the capitalist economy really behaves in the way Marx claims it does.[114]
Of course, Marx is not talking about all prices,[115] only about a theory of the formation of production prices of new output (which may deviate themselves from actual market prices, and may be observable only by comparing price aggregates during an interval of time). It is essentially an argument about the "deep structure" of product markets. One scientific difficulty in empirical research is that in order to compute an empirical proxy variable for the "labour-value" magnitude, a relationship between input/output price data and data on labour hours worked has to be inferred, from official statistics which themselves are calculated using many valuation and estimation assumptions, without it being very clear what the margin of error is likely to be.
These three lines of criticism lead the critics to the conclusion that Marx's law of value is metaphysical and theoretically useless. Everything he says can be restated in terms of prices, real or ideal, so what is the point then of any theory of "value"?
Austrian economics goes a step further by attributing no special objective meaning to price levels at all, which it considers a mere "statistical outcome" of comparisons between each party's ratios between the value of money (taken to be just another kind of a good) to values of goods being sold or purchased. The prices, therefore, are knowledge, which may (or may not) influence behaviour of economic agents differently in each particular case. However, this approach is inconsistent, insofar as nothing in their theory entitles the Austrians to aggregate prices at all; because each price expresses a unique subjective preference, adding up prices is like adding up apples and pears.
Marx himself thought that the concept of value was necessary to explain the historical origins, the development and mode of functioning of capitalism as a social system, under conditions where traded, priced assets were only a subset of total assets possessing a potential exchange-value.
If the economy just consisted of prices, Marx's theory would be unnecessary, but it doesn't just consist of prices. It consists also of socially related working people creating and distributing wealth among each other, property rights enforced by the state, and a large stock of untraded assets in use or stored.
Any price-accounting, calculation and aggregation could not even occur without the 7 concepts of value equivalence, value comparability, value transferred, conserved value, value used up, depreciated or destroyed (in general, reduction of value), value increase and newly created value. Any economist has to assume such basic categorical distinctions in some or other form, even if they are not made explicit in arguments about prices, or revealed by the price-form itself. By analogy, in mathematics, the validity of an equation assumes that the numbers used in it are part of a number set defined in the last instance by the categorical distinctions of number theory which imply operational rules for the use of numbers.
More simply, one can say that if a price expresses a valuation we cannot do without a concept of value. At most we can say that the price is the valuation, which is what economists typically do. But this leads to logical and explanatory problems, insofar as prices can then be explained only in terms of prices. As soon as prices cannot be explained anymore in terms of other prices, the economist is forced to resort to "extra-economic" factors outside his own science. Marx did not have that problem, because his theory is based on the social relationships between people, and the social-institutional framework within which they operate.
According to primitive economics, all prices are of the same kind and differ only quantitatively; they only express more or less money, and can only go up or down.[116] For Marx, this idea was not only false, but totally absurd, since different kinds of prices can assume different valuation principles, contractual obligations, conditionalities, inclusions/exclusions as well as relationships between economic actors. We can compute dozens of different prices for the same good, depending on what valuations assumptions we make; these prices refer to qualitatively different conditions. Marx noted that the forms prices take are highly variegated, and he drew a sharp distinction between real prices and ideal prices. Marx stated explicitly that price relationships can be such, that they do not reflect the true value relationship at all.[117] That is why businessmen assumed a theory of value, even if they were not aware that they were doing it. The scientific theory merely made explicit what they were implicitly assuming for the purpose of doing business.
Marx asked questions like: if supply and demand are equal, what then explains the price-level? If goods trade at their real value, what explains the increase of value occurring in production? If competition settled a particular average profit rate, why that average level, and not any other? Price theory ended up in an infinite regress here, of explaining prices by other prices by other prices, and so on. But as soon as it was admitted that prices were the monetary expression of exchange-value in the trading process, one had to explain where that exchange-value came from, and how it was established. And that required a theory of economic value and trade.
The economists assumed all sorts of things about an economy and economic actors, in order to build models of price behaviour; Marx thought those assumptions themselves needed to be looked at and theorised consistently. However, his critics claim that his own approach has hidden assumptions as well, and that these assumptions contradict the empirically observable reality of human action. In the letter by Marx cited above, Marx anticipated this criticism, which he regarded as very shallow.[118]
For thousands of years, people believed that the sun revolved around the earth (after all, we can observe how the sun rises in the East and sets in the West) until science revealed that just the opposite was the case. It is perfectly possible not only to participate in market trade without much knowledge of markets and their overall effects, but also to participate in markets with a false or one-sided interpretation of what is really going on in the exchanges. In this sense, Marx warns that market trade can stimulate all sorts of delusions about what relationships are really involved.
It is true that Marx often examined economic relationships abstractly, in the "purest" or "simplest" cases, "other things being equal", knowing very well that in empirical reality those relationships were modified by all sorts of influences. But this is a perfectly legitimate scientific procedure in theorizing, and typically he argued that, if one couldn't explain the simplest cases of an economic phenomenon, one couldn't explain all its variations either; in fact one couldn't explain anything at all. One can show, step by step, how the purest expression of a scientific law is modified by various circumstances, to the point where the intrinsic necessity of events is understood. That is indeed what Marx tried to do, although he never completed what he intended (ill health, overwork, exhaustion and poverty got in the way).[119]
In his book Debunking Economics: The naked Emperor of the Social Sciences,[120] the Australian economist Steve Keen has attempted to counter Marx's theory (in his view Marx's pre-1857 view, specifically) from a post-Keynesian perspective, by arguing that machines can add more product-value over their operational lifetime than the total value of depreciation charged during those asset lives. For example, the total value of sausages produced by a sausage machine over its useful life might be greater than the value of the machine. Depreciation, he implies, was the weak point in Marx's social accounting system all along. Keen argues that all factors of production can add new value to outputs.
This raises the question of how we know which part of the new value is due directly to the worker, which part is due to the pork, and which part is due directly to the machine (or indirectly to any worker involved in the production of that machine) - none of which of course can produce products without the others, unless we suppose full automation.
Marx remained insistent that only human labour could create net new value, and that machines did not create any new value by themselves; instead human beings conserved the value of machines, and transferred their value to the new products. Therefore, logically, machines could contribute no more value than was implied by the labour it took to make them, or perhaps more precisely, by their current value in society. This value should of course be distinguished from that part of the output price charged as depreciation costs, i.e. a distinction should be drawn between depreciation in value terms and depreciation in price terms. The replacement costs of fixed equipment are influenced by developments in productivity within industries producing the equipment, developments which may be reflected in price-levels only with a certain time-lag.
That aside, Marxist economists such as Ernest Mandel have argued that owners of new, more productive fixed equipment (which the owners may monopolize with the aid of patents) can obtain extra income from its use, representing effectively an economic rent (so-called "technological rents").[121] Whatever view one takes, it is clear depreciation raises complex issues, because depreciation write-offs often do not reflect the "real" loss of value of a fixed asset, but rather the maximum value permitted by governments and auditors to be written off for tax purposes (for more discussion, see the OPE-L ("Outline of Political Economy") list [58] and Marx and Surplus Value ([59]).