Law of value - AbsoluteAstronomy.com

General

The law of value is a central concept in Karl Marx

Karl Marx

Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...

's critique of political economy

Political economy

Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...

, first expounded in his polemic The Poverty of Philosophy
The Poverty of Philosophy
Misère de la philosophie, German title Das Elend der Philosophie, English title The Poverty of Philosophy, is a book by Karl Marx published in Paris and Brussels in 1847, where he lived in exile in 1843-1849...

(1847) against Pierre-Joseph Proudhon

Pierre-Joseph Proudhon

Pierre-Joseph Proudhon was a French politician, mutualist philosopher and socialist. He was a member of the French Parliament, and he was the first person to call himself an "anarchist". He is considered among the most influential theorists and organisers of anarchism...

, with reference to David Ricardo

David Ricardo

David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

's economics. 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.
Thus, the exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...

of commodities

Commodity (Marxism)

In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities, e.g...

(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

Labor theory of value

The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...

and value-form

Value-form

The value-form or form of value is a concept in Karl Marx’s critique of the political economy. It refers to a socially attributed characteristic of a commodity which contrasts with its tangible use-value or utility .The concept is introduced in the first chapter of Das Kapital where Marx argues...

Gold referent

In Das Kapital

Das Kapital

Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...

Marx normally thinks of that quantity 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

Gold

Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

(see also gold standard

Gold standard

The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...

). 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. 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.

Formalization

While Marx used the concept of the law of value in his works Grundrisse

Grundrisse

The Grundrisse der Kritik der Politischen Ökonomie is a lengthy manuscript by the German philosopher Karl Marx, completed in 1858. However, as it existed primarily as a collection of unedited notes, the work remained unpublished until 1939...

, A contribution to the critique of political economy, Theories of Surplus Value and Das Kapital

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

Marxian economics

Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...

. 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. 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.

Supply and demand

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.

Cost structures and price structures

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

Unequal exchange

Unequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...

took place). Moreover, if A and B are combined and used up to make product C, then product C is likely to be worth the equivalent of at least 105 hours of work (not yet including the work of actually making product C). For that reason, most market trade 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.

Terms of exchange

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. 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.

Field of application

The field of application of the law of value is limited to new output by producers of traded, reproducible labour-products, 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). 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

Differential and Absolute Ground Rent

Differential ground rent and absolute ground rent are concepts used by Karl Marx in the third volume of Das Kapital to explain how the capitalist mode of production would operate in agricultural production, under the condition where most agricultural land was owned by a social class of land-owners...

. 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.

Origins of the concept

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. 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.

Adam Smith

The basic idea of the law of value was expressed very clearly by Adam Smith

Adam Smith

Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

in The Wealth of Nations when he wrote:

Utz-Peter Reich comments:
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. 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. Thus Marx writes:

David Ricardo

The concept of the law of value was also stated by David Ricardo

David Ricardo

at the very beginning of his Principles of Political Economy and Taxation, as follows:

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.
However, 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. He tries to do this by starting off with simplifying assumptions and then gradually building up a complex theoretical structure.

Karl Marx

Marx's theory specifically aims to grasp capital

Capital (economics)

In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

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

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

Prices of production

Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...

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."

However, Marx noted both Adam Smith

Adam Smith

and David Ricardo

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. 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). 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. The effect was that their "labour theory of value" was disconnected from their theory of capital distributions.

Economic value as such

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.

Relations of production

In so doing they are subject to relations of production

Relations of production

Relations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...

. 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

Law

Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...

between people (social relations).
between people and their economic products (technical relations).
between economic products themselves (with or without trading prices; these are technical, economic or commercial relations, or, in general, value proportions).

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 mask

Character mask

A character mask in the Marxian sense is a character masked or disguised with a different character. The term was used by Karl Marx in various published writings from the 1840s to the 1860s, and also by Friedrich Engels...

s. 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 - but he was primarily concerned with the objectification of value through market trade, where objectified (reified) value relations rule human affairs (see value-form

Value-form

). 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.

The mystery of economic value

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

Abstract labour and concrete labour

Abstract labour and concrete labour refer to a distinction made by Karl Marx in his critique of political economy.- Origin :Marx first advanced this distinction in A Contribution to the Critique of Political Economy and is discussed in more detail in chapter 1 of Capital, where Marx writes:The...

).

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. 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

Commodity fetishism

In Marx's critique of political economy, commodity fetishism denotes the mystification of human relations said to arise out of the growth of market trade, when social relationships between people are expressed as, mediated by and transformed into, objectified relationships between things .The...

or thingification (Verdinglichung or reification

Reification (Marxism)

Reification or Versachlichung, literally "objectification" or regarding something as a separate business matter) is the consideration of an abstraction, relation or object as if they had human or living existence and abilities, when in reality they do not...

) which culminates in what he calls fictitious capital

Fictitious capital

Fictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 29 of the third volume of Capital. Fictitious capital contrasts with what Marx calls "real capital" which is capital actually invested in physical means of production and workers, and...

. 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

Value theory

Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...

is banished from economics as a useless metaphysics

Metaphysics

Metaphysics is a branch of philosophy concerned with explaining the fundamental nature of being and the world, although the term is not easily defined. Traditionally, metaphysics attempts to answer two basic questions in the broadest possible terms:...

, 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.

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

Economic history

Economic history is the study of economies or economic phenomena in the past. Analysis in economic history is undertaken using a combination of historical methods, statistical methods and by applying economic theory to historical situations and institutions...

of trade

Trade

Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...

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.

Is it an equilibrium theory?

Some Marxists such as Thomas T. Sekine

Thomas T. Sekine

Thomas T. Sekine is a Japanese economist and is considered to be one of the most important theorists on the field of Marx's theory of value. His main work The Dialectic of Capital was published in 1986. He is a scholar of Kozo Uno.-Main Work:...

have interpreted Marx's law of value as a purely theoretical principle of market equilibrium which has no application to empirical reality. This raises the question of how we verify that it is a "law" at all. Others such as Paul Mattick

Paul Mattick

Paul Mattick Sr. was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions...

argued that Marx offered no theory of market equilibrium, only a dynamic theory of enlarged economic reproduction

Reproduction (economics)

In Marxian economics, economic reproduction refers to recurrent processes by which the initial conditions necessary for economic activity to occur are constantly re-created...

. 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.

Market equilibrium and social stability

Under capitalist conditions, balancing output and market demand depended on capital accumulation

Capital accumulation

The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...

occurring. 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
Relations of production
Relations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...

, 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

Paul Mattick

Paul Mattick Sr. was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions...

comments:

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

Capacity utilization

Capacity utilization is a concept in economics and managerial accounting which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity...

). 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

State (polity)

A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...

was essential in this, to provide an enforced legal framework for fair trade, currency stability and secure property rights
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

Jean-Baptiste Say

Jean-Baptiste Say was a French economist and businessman. He had classically liberal views and argued in favor of competition, free trade, and lifting restraints on business...

. 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, and the role of the state was indispensable (for the security of private property, currency stability and the enforcement of trading obligations).

The economic bicycle

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

Momentum

In classical mechanics, linear momentum or translational momentum is the product of the mass and velocity of an object...

, mass

Mass

Mass can be defined as a quantitive measure of the resistance an object has to change in its velocity.In physics, mass commonly refers to any of the following three properties of matter, which have been shown experimentally to be equivalent:...

, velocity

Velocity

In physics, velocity is speed in a given direction. Speed describes only how fast an object is moving, whereas velocity gives both the speed and direction of the object's motion. To have a constant velocity, an object must have a constant speed and motion in a constant direction. Constant ...

, kinetic energy

Kinetic energy

The kinetic energy of an object is the energy which it possesses due to its motion.It is defined as the work needed to accelerate a body of a given mass from rest to its stated velocity. Having gained this energy during its acceleration, the body maintains this kinetic energy unless its speed changes...

, gyroscopic forces, torque

Torque

Torque, moment or moment of force , is the tendency of a force to rotate an object about an axis, fulcrum, or pivot. Just as a force is a push or a pull, a torque can be thought of as a twist....

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

Unicycle

A unicycle is a human-powered, single-track vehicle with one wheel. Unicycles resemble bicycles, but are less complex.-History:One theory of the advent of the unicycle stems from the popularity of the penny-farthing during the late 19th century...

, 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

Dynamic equilibrium

A dynamic equilibrium exists once a reversible reaction ceases to change its ratio of reactants/products, but substances move between the chemicals at an equal rate, meaning there is no net change. It is a particular example of a system in a steady state...

", 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".

15 factors counteracting the law of value

Just like the law of gravity, the law of value can interact with other phenomena which modify its effects.

A list of them

The 15 main factors counteracting the operation of the law of value, as a law governing the economic exchange of products, are:

the non-existence of regular trade or an established, stable market for products, so that a dominant social valuation and generally accepted trading norms do not rule the terms of trade for products; in this case there is no consensus on what products are worth, or it is unknown, and products will trade on all kinds of different terms which could vary greatly.

structural unequal exchange
Unequal exchange
Unequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...

- alternative or competing sources of supply or demand are absent or blocked, distorting trading ratios in favour of those in a stronger market (or bargaining) position. In that case, the true value or cost of products may deviate greatly from actual selling prices for a prolonged time.
other restrictions on trade and what people may do with resources (legal, technical, protectionism
Protectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

etc.).
taxation and subsidies to producers by government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

(subsidies less indirect taxes paid can be a significant addition to the value of gross product).
disparities in currency exchange rates.
monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

pricing where firms drive up prices because they control the supply of most of the market demand (perhaps because they own brands or patents), or temporarily lower prices to increase market share.
large-scale speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...

driving up prices.
administered prices set by a state authority or a monopolist.
the large-scale use of credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

economy to acquire goods and services produced, without corresponding increases in production occurring.
non-market allocation of resources, including gifts and grants
countertrade (forms of barter
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...

).
accumulation of fictitious capital
Fictitious capital
Fictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 29 of the third volume of Capital. Fictitious capital contrasts with what Marx calls "real capital" which is capital actually invested in physical means of production and workers, and...

(bubble economies).
dumping
Dumping (pricing policy)
In economics, "dumping" is any kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market...

of surplus goods at dumping prices.
wars and disasters which create abnormal scarcities and demands for goods and services.
illegal (criminal) or "grey" transactions (including pirated and counterfeited goods).

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".

Limits of price-value divergences

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.

Law of value in capitalism

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.

Production prices

Thus, the capitalist mode of production

Capitalist mode of production

In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...

is a type of economy in which both inputs and output

Output

Output is the term denoting either an exit or changes which exit a system and which activate/modify a process. It is an abstract concept, used in the modeling, system design and system exploitation.-In control theory:...

s of production have become marketed goods and services (or commodities

Commodity (Marxism)

). In such an economy, Marx argues, what directly regulates the economic exchange of new labour-products is their prices of production

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 (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).

Price-value divergences

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

Surplus value

Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...

produced by enterprises could be realized as profit.

Capitalist economic exchange, Marx argues (contrary to David Ricardo

David Ricardo

's theory), is not a simple exchange of equivalents. It aims not to trade goods and services of equivalent value, but instead to make money from the trade (this is called capital accumulation

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. In an overall sense, Marx argues the substance of this impost is the unpaid surplus labour

Surplus labour

Surplus labour is a concept used by Karl Marx in his critique of political economy. It means labour performed in excess of the labour necessary to produce the means of livelihood of the worker . According to Marxian economics, surplus labour is usually "unpaid labour"...

performed by the working class

Working class

Working class is a term used in the social sciences and in ordinary conversation to describe those employed in lower tier jobs , often extending to those in unemployment or otherwise possessing below-average incomes...

; part of society can live off the labour of others due to their ownership of property.

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.

Competition between producers

If capital accumulation

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

Productivity

Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...

by every means at their disposal and maximise surplus labour

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

Value added

In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...

in what they produce, which depends crucially on productivity

Productivity

. Marx comments:
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. In business, if you don't go forward, you go backward. That was, in Marx's view, the "revolutionary" aspect of capitalism.

However, competition inexorably gives rise to market monopolies, which may constrain further significant advances in productivity and innovation. The negative influence of the tendency of the rate of profit to fall

Tendency of the rate of profit to fall

The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...

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. Thus, market prices for outputs will gravitate towards prices of production

Prices of production

which themselves are constrained by product-values expressible in quantities of labour-time.

Law of value and crises

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).

Smith's hidden hand

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.

Al Greenspan's puzzle

In his Bundesbank speech on January 13, 2004, US Federal Reserve chairman Alan Greenspan

Alan Greenspan

Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...

, stated:

This was a reference to Adam Smith

Adam Smith

's Wealth of Nations (1776) where Smith wrote:

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

Adam Smith

really consists of. 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. 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.

George Soros and the reflexivity of economic value

Another "take" on the law of value, from an investor's perspective, is by George Soros

George Soros

George Soros is a Hungarian-American business magnate, investor, philosopher, and philanthropist. He is the chairman of Soros Fund Management. Soros supports progressive-liberal causes...

:

In the real world, investors are constantly juggling between actual market prices and hypothetical (ideal

Real prices and ideal prices

Real prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour , and computed prices which are not actually charged or paid in market trade, although they may facilitate trade...

) 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.

The economist gets on his bike

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.

Modification of the law of value in the world market

Marx believed that the operation of the law of value was not only modified by the capitalist mode of production

Capitalist mode of production

, but also in the world market (world trade, as contrasted with the home market or national economy).

Productivity differentials

The main reason for this was the existence of different levels of the intensity and productivity

Productivity

of labour in different countries, creating for example a very different cost structure in different countries for all kinds of products. 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 value

Exchange value

In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...

s realised in the trade between A and B. More labour could, in effect, exchange for less labour (an "unequal exchange

Unequal exchange

Unequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...

" in value terms) for a prolonged time. In addition, the normal rate of surplus value

Surplus value

Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...

could be different in different countries. 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. The differential in labour valuations becomes a source of profit (see also global labor arbitrage

Global labor arbitrage

Global labor arbitrage is an economic phenomenon where, as a result of the removal of or disintegration of barriers to international trade, jobs move to nations where labor and the cost of doing business is inexpensive and/or impoverished labor moves to nations with higher paying jobs...

German debate

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. One aim of this debate was to move beyond crude Ricardian

David Ricardo

interpretations of comparative advantage

Comparative advantage

In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

or comparative costs in explaining the pattern of world trade. To some extent similar debates took place in the USA.
In particular, when the volume of intra-industry trade

Intra-industry trade

Intra-industry trade refers to the exchange of products belonging to the same industry. The term is usually applied to international trade, where the same kinds of goods or services are both imported and exported.-Examples:...

(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

Ideology

An ideology is a set of ideas that constitutes one's goals, expectations, and actions. An ideology can be thought of as a comprehensive vision, as a way of looking at things , as in common sense and several philosophical tendencies , or a set of ideas proposed by the dominant class of a society to...

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).

Uneven development

The operation of the law of value in the world market might however seem rather abstract, in view of the phenomena of unequal exchange

Unequal exchange

Unequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...

, differences in accounting norms, protectionism

Protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

, debt-driven capital accumulation

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

Superprofit

Superprofit , is a concept in Karl Marx's critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers.-The origin of the concept in Marx's Capital:...

for the beneficiaries of the trade.

Jayati Ghosh

Jayati Ghosh

Jayati Ghosh was educated at Delhi University, Jawaharlal Nehru University , and the University of Cambridge. Her 1984 doctoral thesis at Cambridge University was titled "Non capitalist land rent: theories and the case of North India" under the supervision of Mr T Byres.She is now Professor of...

writes:
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

Third World

The term Third World arose during the Cold War to define countries that remained non-aligned with either capitalism and NATO , or communism and the Soviet Union...

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

Terms of trade

In international economics and international trade, terms of trade or TOT is /. In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports...

for manufactured products.

Global production prices

The postulate of the law of value does however lead to the Marxian historical prediction that global prices of production

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

International Financial Reporting Standards

International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

. Thus globalisation means that incipiently the "levelling out of differences in rates of profit" through competition begins to operate internationally. Trading ratios and exchange-values for products sold globally would thus become more and more similar, in the long term.

Hamburger example

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

Big Mac index

The Big Mac Index is published by The Economist as an informal way of measuring the purchasing power parity between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries...

of The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...

, 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

Purchasing power parity

In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...

, the Norwegian burger is worth about $4.93 and the Ukrainian burger is worth about $5.25. VAT

Vat

Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...

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).

Marx on the law of value

In his letter to Louis Kugelmann

Louis Kugelmann

Louis Kugelmann, or Ludwig Kugelmann was a German gynecologist, social democratic thinker and activist, and confidant of Marx and Engels. Kugelmann married Gertrud Oppenheim . They had a daughter Franziska Kugelmann Louis Kugelmann, or Ludwig Kugelmann (February 19, 1828, Lemförde - January 9,...

of July 11, 1868, Karl Marx

Karl Marx

commented gruffly:

Frederick Engels on the law of value

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

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. 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, commodity production was at best only a specific branch of production, not all of production.

The law of value in non-capitalist societies

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").

Joseph Stalin

In his famous pamphlet Economic Problems of Socialism in the USSR, Joseph Stalin

Joseph Stalin

Joseph Vissarionovich Stalin was the Premier of the Soviet Union from 6 May 1941 to 5 March 1953. He was among the Bolshevik revolutionaries who brought about the October Revolution and had held the position of first General Secretary of the Communist Party of the Soviet Union's Central Committee...

argued that the law of value did operate in the socialist economy of the USSR. After all, Marx had stated in Das Kapital

Das Kapital

that:

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

Featherbedding

Featherbedding is the practice of hiring more workers than are needed to perform a given job, or to adopt work procedures which appear pointless, complex and time-consuming merely to employ additional workers. The term "make-work" is sometimes used as a synonym for featherbedding.The term...

of employees), and where there was often no clear relationship between salary-levels, work performance and actual output. Supporters of the theory of state capitalism

State capitalism

The term State capitalism has various meanings, but is usually described as commercial economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or...

in the USSR and scholars such as Andre Gunder Frank

Andre Gunder Frank

Andre Gunder Frank was a German-American economic historian and sociologist who promoted "dependency theory" after 1970 and "World Systems Theory" after 1984...

have also believed that the law of value operated in Soviet-type societies. 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.

Ernest Mandel

According to Ernest Mandel

Ernest Mandel

Ernest Ezra Mandel, also known by various pseudonyms such as Ernest Germain, Pierre Gousset, Henri Vallin, Walter , was a revolutionary Marxist theorist.-Life:...

, 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. 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

Ernesto "Che" Guevara , commonly known as el Che or simply Che, was an Argentine Marxist revolutionary, physician, author, intellectual, guerrilla leader, diplomat and military theorist...

adopted a similar view in socialist Cuba

Cuba

The Republic of Cuba is an island nation in the Caribbean. The nation of Cuba consists of the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city...

; 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 Generally, the New Left

New Left

The New Left was a term used mainly in the United Kingdom and United States in reference to activists, educators, agitators and others in the 1960s and 1970s who sought to implement a broad range of reforms, in contrast to earlier leftist or Marxist movements that had taken a more vanguardist...

adopted the idea that true socialism

Socialism

Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...

would involve the abolition of the law of value, since commodity production

Commodity production

Commodity production is the production of wares for sale. It is a type of production in which products are produced not for direct consumption by the producers, as in subsistence production, but are surplus to their own requirements and are produced instead specifically with the intention of sale...

would be abolished - goods and services would be allocated according to need, and primarily according to non-market principles.

John Weeks

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

Capitalist mode of production

. 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. Other Marxists (including Ernest Mandel

Ernest Mandel

Ernest Ezra Mandel, also known by various pseudonyms such as Ernest Germain, Pierre Gousset, Henri Vallin, Walter , was a revolutionary Marxist theorist.-Life:...

and the Japanese scholar Kozo Uno

Kozo Uno

was a Japanese economist and is considered to be one of the most important theorists on the field of Marx's theory of value. His main work Principles of Political Economy was published in 1964. Among his scholars are Thomas T. Sekine and Makoto Itoh.-Thought:...

) followed Marx & Engels in believing that the law of value emerges and develops from simple exchange. 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

Historical materialism

Historical materialism is a methodological approach to the study of society, economics, and history, first articulated by Karl Marx as "the materialist conception of history". Historical materialism looks for the causes of developments and changes in human society in the means by which humans...

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.

Heinz Dieterich's equivalence economy

In contemporary Venezuela

Venezuela

Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...

, the German socialist economist Heinz Dieterich

Heinz Dieterich

Heinz Dieterich or Heinz Dieterich Steffan is a German sociologist and a political analyst residing in Mexico. He is better known for his leftist ideals...

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

Socialism of the 21st century

Socialism of the 21st century is a political term and a slogan coined by Heinz Dieterich in 1996. It was used by Hugo Chávez during a speech at the World Social Forum of 2005 and it has been publicised actively by Dieterich worldwide since 2000, especially in Latin America.-Bolivarian...

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

Grundrisse

of the "time-chit" theory of allocating goods proposed by 18th and 19th century utopian socialists such as John Francis Bray

John Francis Bray

John Francis Bray was a radical, Chartist, writer on socialist economics and activist in both Britain and hisnative America in the 19th century. He was hailed in later life as the 'Benjamin Franklin' of American labor.- Life :...

and John Gray 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

Efficiency

Efficiency in general describes the extent to which time or effort is well used for the intended task or purpose. It is often used with the specific purpose of relaying the capability of a specific application of effort to produce a specific outcome effectively with a minimum amount or quantity of...

and social justice

Social justice

Social justice generally refers to the idea of creating a society or institution that is based on the principles of equality and solidarity, that understands and values human rights, and that recognizes the dignity of every human being. The term and modern concept of "social justice" was coined by...

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

National accounts

National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...

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. 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.

Criticism

Traditionally, criticism of Marx's law of value has been of three kinds: conceptual, logical, and empirical.

Objective/subjective

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

Value-form

). Marx regarded the law of value as analogous to an objective physical law

Physical law

A physical law or scientific law is "a theoretical principle deduced from particular facts, applicable to a defined group or class of phenomena, and expressible by the statement that a particular phenomenon always occurs if certain conditions be present." Physical laws are typically conclusions...

, 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

Subjective theory of value

The subjective theory of value is an economic theory of value that identifies worth as being based on the wants and needs of the members of a society, as opposed to value being inherent to an object....

, i.e. a personal valuation determined by personal preferences and marginal utility

Marginal utility

In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...

; only prices are objective. One of the first Marx-critics to argue this was the Austrian Eugen von Bohm-Bawerk

Eugen von Böhm-Bawerk

Eugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of the Austrian School of economics.-Biography:...

.

However, many prices are not objective either - they are only ideal prices

Real prices and ideal prices

used for the purpose of calculation, accounting and estimation, not actually charged or applying directly to any real transaction. 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.

Cost structures and price structures

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

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

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

Macroeconomics

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

aggregations as such. 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.

Ecologists

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. However, Marx himself never denied this; he was merely referring to the bourgeois valuation scheme, originating from commercial trade.

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. 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.

Ecologists also note that Marxist theories of value caused large-scale environmental problems in the industrialization of the Soviet Union

Soviet Union

The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

China

Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

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 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
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...

. He never dealt systematically with socialist economics, amongst other things because he lacked an evidential basis for theorizing about that.

Logical criticism

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.

Transformation problem

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

Prices of production

, sometimes called the transformation problem

Transformation problem

In 20th century discussions of Karl Marx's economics the transformation problem is the problem of finding a general rule to transform the "values" of commodities into the "competitive prices" of the marketplace...

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. 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. Marx is left saying "e pur si muove".

Uniform rate of profit?

But although this is often overlooked by economists 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; 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. Thus Marx writes:

Aggregate identities

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

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 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. The divergence between total product-values and total product-prices on the whole was, he 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 national accounts

National accounts

, a similar idea is simply assumed by definition: if output prices fetched during an interval of time are added up according to a standard valuation procedure, it is claimed we can obtain a measure of the total value of new output (gross product) by deducting throughput (intermediate) costs from the result. This procedure is no scientific "proof"; it says only that the measure "means what it means", it is what it is. That is, if we define total income, total output sales and total expenditure in a specific way, and if we include and exclude certain transaction flows, then an accounting reconciliation can show, that each of them is equal in value to the others. That mathematical equality however exists only because of the definitions (the categorizations) used; it does not exist as such in reality, it is an abstraction from reality which depends on numerous assumptions. In the real world, ultimately nothing stays constant except the progress of time, which we can measure with clocks; 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.

Stochastic analysis

Product-values in Marx's sense quite simply cannot be directly observed, only inferred from the actual behaviour of trading relations. 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

Value-form

of commodities and the price-form. 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

Das Kapital

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, but the assets have to be produced, that production requires labour, and therefore that labour has to be organized in a commercially effective way).

Limitations of proofs

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. 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:

how systems of exchange have functioned in history.
to what extent production-costs and the ruling profit rates actually determine market prices for products.
the relationship between hours worked and outputs produced.
whether the capitalist production system does indeed evolve historically in the way predicted by value theory.

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

Andrew Glyn

Andrew John Glyn, was a United Kingdom-based economist, University Lecturer in Economics at the University of Oxford and Fellow and Tutor in Economics in Corpus Christi College. A Marxist economist, his research interests focussed on issues of unemployment and inequality.He was Associate Editor:...

commented:

Empirical criticism

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. 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. Of course, Marx is not talking about all prices, 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.

Responses to criticism

These three lines of criticism lead the critics to the conclusion that Marx's law of value is metaphysical

Metaphysics

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

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.

Why is a value theory needed?

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.

What is the economy?

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.

Accounting assumptions

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

Number theory

Number theory is a branch of pure mathematics devoted primarily to the study of the integers. Number theorists study prime numbers as well...

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.

The price form

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. 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. He noted that the forms prices take are highly variegated, and he drew a sharp distinction between real prices and ideal prices

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. 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.

Infinite regress

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

Trade

Theoretical assumptions

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

Praxeology

Praxeology is the study of human action. Praxeology rejects the empirical methods of the natural sciences for the study of human action, because the observation of how humans act in simple situations cannot predict how they will act in complex situations...

. In the letter by Marx cited above, Marx anticipated this criticism, which he regarded as very shallow.

The sun and the earth

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.

Pure cases & ceteris paribus clauses

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).

Steve Keen and the machine

In his book Debunking Economics: The naked Emperor of the Social Sciences, the Australian economist Steve Keen

Steve Keen

Steve Keen is a Professor in economics and finance at the University of Western Sydney. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics and Marxian economics as inconsistent, unscientific and empirically unsupported...

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

Depreciation

Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

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

Factors of production

In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...

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

Automation

Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization...

.

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

Price

-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

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

Ernest Mandel

Ernest Ezra Mandel, also known by various pseudonyms such as Ernest Germain, Pierre Gousset, Henri Vallin, Walter , was a revolutionary Marxist theorist.-Life:...

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

Economic rent

Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....

(so-called "technological rents"). 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

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

purposes (for more discussion, see the OPE-L ("Outline of Political Economy") list http://ricardo.ecn.wfu.edu/~cottrell/OPE/archive/0103/0091.html and Marx and Surplus Value (http://www.debunking-economics.com/Marx/index.htm).

General

Gold referent

Formalization

Supply and demand

Cost structures and price structures

Terms of exchange

Field of application

Origins of the concept

Adam Smith

David Ricardo

Karl Marx

Economic value as such

Relations of production

The mystery of economic value

Is it an equilibrium theory?

Market equilibrium and social stability

The economic bicycle

15 factors counteracting the law of value

A list of them

Limits of price-value divergences

Law of value in capitalism

Production prices

Price-value divergences

Competition between producers

Law of value and crises

Smith's hidden hand

Al Greenspan's puzzle

George Soros and the reflexivity of economic value

The economist gets on his bike

Modification of the law of value in the world market

Productivity differentials

German debate

Uneven development

Global production prices

Hamburger example

Marx on the law of value

Frederick Engels on the law of value

The law of value in non-capitalist societies

Joseph Stalin

Ernest Mandel

Che Guevara

John Weeks

Heinz Dieterich's equivalence economy

Criticism

Objective/subjective

Cost structures and price structures

Austrian economics

Ecologists

Logical criticism

Transformation problem

Uniform rate of profit?

Aggregate identities

Stochastic analysis

Limitations of proofs

Empirical criticism

Responses to criticism

Austrian economics

Why is a value theory needed?

What is the economy?

Accounting assumptions

The price form

Infinite regress

Theoretical assumptions

The sun and the earth

Pure cases & ceteris paribus clauses

Steve Keen and the machine

See also