By 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.