27 October, 2020

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Something The Old Moor Only Dimly Perceived

By Kumar David

Prof. Kumar David

Prof. Kumar David

It is near universally thought that Marx subscribed to the Labour Theory of Value (LTV) which originated with Scotsman Adam Smith and was formalised by Englishman David Ricardo, scion of a Jewish family of Portuguese origin. Marx is partly to blame for this misconception though there are warnings enough scattered throughout his opus that he was moving far beyond the simple but useable LTV framework. The problem is that in Vol. I of Kapital, Marx strictly confined himself to a study of value created in production. Only posthumously published Vol. II extended the investigation to exchange and to the circulation and reproduction of capital; that is integration of production and exchange towards a whole-system model. Vol. III, a mess of notes that poor Engels struggled with for the rest of his life, is about credit, finance, banking and an unnecessary recondite issue on which Marx wasted much time – the so called Transformation Problem.

Profound thinkers on new ground do not see all implications, only posterity digs out much of it – Lord Kelvin, President of the Royal Society said in 1883 that “X-rays will prove to be hoax”, Henry Ford’s banker opined in 1903 that the automobile would never surpass the horse and carriage, and to cap it I quote Einstein (1932) “there is mot the slightest indication that nuclear energy would ever be available”. So it is no surprise that the concepts I deal with in this essay surfaced only recently. I have benefited from Michael Heinrich’s Introduction to Capital though he does not reach the logical conclusion of crafting the alternative for which I have coined the term Money Theory of Value (MTV) in this essay. David Harvey’s Companion to Marx’s Capital Volume 2 – misnomer as it deals with Vol. III as much as II – also helped. Though Harvey does not deal with value theory he does discusses Marx’s approach to credit, reproduction and finance which discourses support what I say. Of course I have simplified this presentation considerably to make it accessible to a wide readership.

The Labour Theory of Value

Basic LTV is easy to explain; it says all value is created by labour, or to be precise socially necessary labour engaged in production in an ideal capitalist system. (All science postulates an ideal system – perfect gas, free space, two-body problem – to create theory). Productive labour transfers the value of raw materials, machinery and energy (m-m-e) to the product; it also adds a value equal to its own wage and furthermore creates an additional value called surplus or profit. LTV is about value in a goods production economy; hence works of art, rare finds etc are excluded. Ricardo related land value to the marginal profitability (rent) of lands of different quality, but it would take me much too far a field to include the Ricardo-Marx theory of land value in this piece.

Ok back to basics. Let’s use an illustration: Plant A uses m-m-e of Rs 80m (m for millions) per year and pays annual wages of Rs 20m. Say the output sells for Rs 120m (20% profit on outlay), LTV says that productive labour transferred Rs80m of m-m-e value to the output, created a value equal to its own wage of Rs 20m which also is crystallised in product value, and furthermore created a surplus (profit) of Rs 20m. All encapsulated in the total output value of Rs 120m.

To be universal we must of course advance our concepts from concrete labour [plant by plant, or activity (tailoring) by activity (welding)] to abstract social labour, which is labour as a universal or general category. Political economists of Marx’s genre need these abstracted (generalised) categories.

This is rudimentary LTV shorn of complications such as ‘Is this plant of above or below average productivity?’ etc. Note that ‘m’, ‘m’ and ‘e’ are themselves generated, in like fashion, by the exercise of labour. Hence working back all the way to origins, all value is created by labour. Ricardo, well aware of the implications, preferred not to make a fuss about the source of surplus (he was a stockbroker), while Marx shouted it out from the roof tops calling it surplus-value created by the worker, exploitation, and so on. Morally and qualitatively LTV is fine, but don’t ask too much of it quantitatively. The problem is that if you isolate analysis plant by plant you run into contradictions. Consider another plant B turning out the same goods as A, but technically less sophisticated (labour intensive). Say the m-m-e of B is Rs 60m but wages are Rs 40m – less technology, more labour. Assume a uniform labour market where workers are paid the same wage everywhere and create surplus value similarly. Then the ratio of wages to surplus is assumed to be 1:1 in both A and B. Then the surplus (profit) created in B should be Rs 40m. In which case the profitability of the Rs 100m outlay in plant B is 40%.

This is a contradiction – not that the low tech plant is more profitable, which is inconsistent but a different matter. The incongruity I refer to is that the rate of profit across the system is different depending on the m-m-e to wages (capital to labour) ratio in production. Capital will migrate, industry to industry, technology to technology, seeking the most profitable locale; a new equilibrium will be established. An underlying average rate of profit prevails across the whole system; fluctuations like waves on the sea only seek to restore a system wide average or equilibrium. The equilibrium profit rate depends on history and on the play of the class struggles, but that too is another long narrative. For similar reasons LTV rejects supply-demand interplay as the determinant of prices. Supply and demand explain price fluctuations (like waves on the sea) but the underlying determinant (the depth to the sea bed) of value (price) is cost, the socially necessary labour congealed in a commodity.

In our example economy, if the natural rate of profit is say 20%, then the selling price of plant B output will have to be Rs 120m and the surplus added by the labour-power on which Rs 40m was expended is only Rs 20m. Observe that in (modern) plant A however, labour-power costing Rs 20m continues to add Rs 20m of surplus. The hard link between labour time and value, when value is interpreted as prices, is broken. Value measured in a labour time paradigm must give way to a money and price paradigm. The former is only a stepping stone to a more complex conceptual framework.

But bear with me for a moment, another moral of the story is that LTV should not be used plant by plant, but over the whole economy. To simply, it is legitimate to replace plant A by $80b (b for billion) m-m-e, $20b wages and $20b surplus, and to postulate a model a little larger than Lanka but all capitalist, that is the rural and informal sectors are insignificant. Then mutatis mutandis the previous example is meaningful with the whole economy replacing plant A.

A Money Theory of Value

What linkages consolidate plant-by-plant activity into a whole-system? This is where Vol. II which deals with exchange, and with the circulation and reproduction of capital, has impact. There is no such thing as an isolated unit of production; materials, machinery, energy and labour come from elsewhere in the economy; commodities sell into a market. Isolated production is an oxymoronic absurdity existing only on Robinson Crusoe’s island. Vol. I & II together form an integrated system. Vol. I deals with value in production, II adds exchange and the circuits of capital. Vol. III injects average profit, interest rates and finance capital in a massive unfinished conceptual extension.

We are now close to but have still not come to a Money Theory of Value (MTV). Previously we extended LTV to a generalised economy-wide version – call it Generalised LTV. But we still need to shift paradigm from a labour and time value framework, to a money-price framework. As we follow Marx into wide-ranging discourses, notes, comments and thoughts scattered throughout his political economy opus (three volumes of Kapital, three volumes of Theories of Surplus Value, a few shorter but seminal works, and a mass of notes published under the name Grundrisse about 50 years after his death) something very striking takes shape – especially in Vols. II and III of Kapital. Marx increasingly focuses on capital per se; (i) credit as a key to expansion – the reproduction problem; (ii) interest rates (How are they set? Here alone he concedes determination by supply-demand); (iii) division of the social surplus between landlords (rent), finance capitalists (interest seekers and bankers) and profit of productive capitalists; and (iv) he becomes preoccupied with finance capital and with “fictitious capital” – the grandfather of today’s loony derivatives and hedges.

Underlying this diverse range of inquiries is the seminal role of money; that is credit, interest, and money creation by banks and state. Amazingly, this was long before central banks emerged – the Fed was created in 1913. Marx was getting deeply into money as a universal commodity; money was sharing with labour the position of primary determinant of the capitalist economic order. He sees money as the universal commodity via which all exchange is mediated and influenced (not a convenient medium of exchange only). He realises that value is discernible only in a market where all commodities, labour power included, are exchanged for and via this universal commodity. Surely he is evolving a Money Theory of Value which integrates Generalised LTV as a conceptual building block; but he did not complete this theoretical leap explicitly. The value of a commodity is now redefined as its exchange vale, which is its market price, which in turn is its average cost of production plus the prevailing equilibrium rate of profit (the average rate of surplus-value in the economy or the average rate of social exploitation).

Today global finance, in its worst crisis in 85 years (testified to by the sleepless nights of quantitative-easers Janet Yellan, Mario Dragi, Haruhiko Kuroda and Mark Carney) headlines the central role of money-per-se in keeping capitalism afloat. Linking money-per-se in finance capital, with labour as value creator in production, underpins a nexus between MTV and globally Generalised LTV. Marx was probing this one hundred and fifty years ago, but distant epistemological horizons, he but dimly perceived.

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Latest comments

  • 0
    1

    All man-made economic system of governance is falling apart and the evolution of Islamic Finance / Economy will be the ultimate choice; first to individual Muslims and then spread to communities and states.

    The main principle of Islamic finance is its adherence to interest or riba-free financial transactions, while other principles like; participatory financing, equity based financing, profit & Loss sharing (including risk sharing) ruling out the fixed return, prevention of gharar (uncertainty), prohibition of speculation and gambling. Within these principles, Islamic financial contracts are designed to facilitate financing according to Islamic norms prevent the abuse of financial power.

    Money is sterile; it doesn’t beget more money the way cows beget more cows. Money exists not by nature but by law. The most hated sort of wealth accumulation is usury, which makes a gain out of money itself and not from the natural process. For money was intended to be used in exchange but not to increase at interest and the term interest, which means the birth of money from money is applied to the breeding of money; because the offspring resembles the parent.

    Economic justice requires a viable economic system supported by an efficient monetary system. Interest based banking has proved to be inefficient as it fails to equitably distribute wealth which is necessary for the well being of mankind. On the other hand Islamic finance is efficient and ensures equitable distribution of wealth thus laying foundation for an inflation free economy and socially responsible financial system.

    • 2
      1

      Usual ‘Islam is the answer’ shit.

    • 0
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      Hmmm…..not so sure……..for each man; each race; each nation; begets money in different ways……For Example, Westerners produce money from creating things (after they destroyed their natural habitats, and hence have no other way forwards)……and Muslims, in this current age, are the beneficiaries of the Western money because they have the oil that Europeans need to create things.

      Unless we go Isis way and worship the Koranic fundamentals, that relegate women away from e.g. managing business enterprise, to a life of begetting children…. and the whole world is of one thinking pattern for one Allah virtual superpower…….and everybody has been forced to see the Allahmic light……..then we have to forget about cars, and buildings, and computers, and aeroplanes…..and go instead with camel trading and gold standards for commercial enterprise because a Caliph happens to like gold crowns. And the Caliph will go to war with another Caliph because he wants more gold.

      But I agree it is time to socialize all wealth, and tone down the capitalistic enterprise, sans Islamic fundamentalist concepts (maybe a bit of it to keep things in order).

  • 0
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    KD,

    It is complicated, but this is what I understood:

    Plan A uses more machinery. Plan B hires more human beings.

    (Both Plan A and B emerged from cold countries that didn’t know how to warm themselves up without destroying the environment and traditional livelihood ….and also didn’t know how to consolidate after natural disasters, and also their constant wars).

    Plan A was the original creator of output prices and consumerism (consumerism, for the rich). Through Plan A, emerged plan B (consumerism for the masses).

    Plan A and B both generate the same profits (if established at the same instant).

    But in the long run (say in about 5 years), Plan B of greater human manpower, seems to be temporarily more profitable to the entrepreneur, because Plan A’s greater reliance on machinery and energy creates a society of higher economic standard and demand, and hence keeping up to the standard and demands diminish the value of the profits.

    In this era, Plan A is a construction of the excess machinery and excess energy producing industries, and the educations facilities and brain power that has already been (and is being created) for the creation of these industries, for over [30%] of the planet, and in perpetual expansion to sustain these industries. It is also a large part of the global monetary index.

    Plan B (human power) will eventually and detrimentally, affect value of m-m-e, and pull down machinery/energy monetary index (and thereby raw materials index), unless Plan A comes back into place.

    Once Plan A is in place, more human beings will be out of work, and mass consumerism will be reduced because of reduced mass purchasing power, thus creating the need, yet again for Plan B.

    Guess the challenge is how to balance out Plan A and B.

    In Sri Lanka, it seems that Lankan Elite want to live by the Western Plan A monetary standard, and yet use Plan B mass manpower to achieve this end (at the destruction of our traditional way of life and farm and forest land).

    In USA, Bernie Sanders should be able to compromise Plan A and B to be more effective for the working class, via greater socialism plan.

  • 0
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    Ms Ramona you are quite entitled to your appraisal of enterprises A and B. However, as you probably see, this is not quite what my piece is about. It discusses how the market value (price) of commodities is formed – a purely theoretical inquiry without any judgement about the goodness of different enterprises.

    The piece says that LTV holds that value depends on labour contained. In that case a difficulty arises between A and B because they contain different amounts of labour but sell at the same price (same commodity). Then we say “necessary” labour only to resolve the problem and half of B’s labour is unnecessary according to the market.

    Still we have the problem that in different industries making different products that NEED different ratios of capital and labour, we will have disproportional amounts of value if the rate of profit across the economy is to be the same. Either commodities sell at cost of production + standard profit, OR at cost of capital + value created by labour contained.

    But Marx seems to have been moving beyond this contradiction by dropping simple LTV as the measure of value (and price) and moving to a a different viewpoint where the capitalist money system was the formative factor of value in a capitalist economy but not entirely divorced from labour content.

    • 0
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      Kumar David,

      Thanks for the clarification(although it is complex).

      Surely capitalist money system doesn’t come from thin air, and is a creation of m-m-e, LVT and the other factors.

      Guess, according to Marx, capital in capitalism needs to remain a constant (irrespective of how it was first created), otherwise the whole system goes through what it has always gone through – collapses, all kinds of dips and curves and rises, crippling and keeping those who do well, in perpetual anxiety that their time would come sooner or later.

      Once you try to make it fair towards labor, another place with a different labor scale will be sorely affected. Any effort to bring equilibrium to capital will be hampered by another country’s desire (or group of people’s desire), to live differently according to what they perceive of their abilities (or their perceived superiority).

      If socialistic countries attempt to come together in a common alliance (where the money they contain remain a constant, with an agreed upon fluctuation index), capitalism will come to a true equilibrium.

      Guess the old Moor(Marx?) never dreamt that his trading system (Muslims?) would take on vulgar proportions of the Westerners.

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