Keen/Ernst Discussion

Steve.Keen at Steve.Keen at
Tue Oct 17 19:55:32 MDT 1995

John Ernst made 3 very valuable observations on my post,
and Scott's brief asides also raised a number of important
issues. I deal with them here at length, so if value
debates aren't you're thing, time to turn off (however,
if Marxian economics is, maybe you'd better continue

Topic (1) Marx's example on pp. 383-385 of the Grundrisse

John observes that:

"The comparison that Marx makes
between with two processes does, by example,
contradict much of modern Marxist thought. Note
that one machine has twice the value of the other
The workers, using the more valued machine,
produce three times as much output.  Generally,
this is not the picture painted of Marx's notion
of accumulation.  That is, Marx is
generally seen as holding fast to the
notion that the growth in machinery outstrips the
growth in output."

These comments caused me to examine that byzantine mass of
calculations a little more closely too. What I noticed was a
comment that, in one sense, goes to the heart of the problems
with the LTV.

In that example on p. 383 of the Grundrisse, Marx comments that
his first (low capital/labor ratio) capitalist has a lower
rate of surplus value that his second (high capital/labor
ratio) capitalist:

"Nevertheless, the surplus value on the labour which has been
employed is 13 1/3 in this second case, as against 10 in the
first; in the first, 4 days create 1 surplus day in 4 working
days; in the second, 4 days create 1 1/3 surplus days..." (p. 383)

He continues on the next page that

"But with the second capital, labour is more productive... It
creates more surplus time (relative surplus time, i.e.
determined by the development of the force of production). In
the first case, surplus time is 1/4, in the second, 1/3. It
therefore creates more use-values and a higher exchange-value
in the same amount of time..." (p. 384)

Now what is happening here is that:

(A) Marx is countenancing the possibility that technical
change can increase the rate of surplus value, s/v.

(B) He does this within the context I first pointed out (and
which John has forced me to examine more closely--for which
many thanks): "It also has to be postulated (which was not
done above) that the use-value of the machine significantly
greater than its value; i.e. that its devaluation in the
service of production is not proportional to its increasing
effect on production."

Now if increasing the ratio c/(c+v) can result in the
ratio s/v also rising, then there is no tendency for
the rate of profit s/(c+v) to fall! That tendency only
exists if s/v remains constant:

"the gradual growth of constant capital in relation to
variable capital muust necessarily lead to *a gradual fall in
the general rate of profit*, so long as the rate of
surplus-value, ... remain (sic) the same." (Capital Vol
III, p. 212)

Thus Marx's way of countenancing the possibility that
the use-value of the machine significantly greater than
its value" involved breaking the strict LTV concept that
the rate of surplus value is independent of the organic
composition of capital.

Marx's example pertains to two competing firms within the
one industry at the one time, one using "labor-intensive"
technology, the other, "capital intensive". In this sense
it pertains to technical change over time, rather than to
cross-industry comparisons. But is there anything
illegitimate in extending it to the cross-industry case,
at the one point of time? I would argue not, because there
is no social process countenanced my Marx that would lead
to equalisation of the rates of surplus value (since
capitalist competition equalises rates of profit, while
workers concern is with being paid their value, not how
much surplus value is extracted from them).

But if it is not a constant across all industries, and if in
fact the rate of surplus value is higher in industries
with a higher organic composition of capital, then there
is no transformation problem! Sectors with higher organic
compositions of capital have higher rates of surplus value,
and the effect of varying c/(c+v) ratios has no necessary
impact on the rate of profit s/(c+v).

Both the "oomph" and the agony of the LTV rest on this
relation of s to v, and the presumption that the ratio
s/v is independent of the ratio c/(c+v), both "statically"--
across sectors at the same point of time--and dynamically--
over time within the same sector. If those presumptions
are true, then you get the tendency for the rate of
profit to fall, and the primacy of values over prices
(along with the need to transform one to the other).

If you drop that presumption--as Marx was effectively
doing in these pages from the Grundrisse--then there is
neither oomph nor agony to the LTV. If increasing c
can also increase s/v, then there is no reason why
this increasing force on the rate of profit should
be less than the decreasing force of the rising
c/(c+v). (The fact that Marx does get an increasing
s/v and a falling s/(c+v) in his example is just an
artefact of the numbers he chose). Hence no secular
trend to a falling rate of profit.

But likewise, the Sraffian approach to simultaneous
valuation--which presumes a uniform rate of profit across
all sectors--no longer does any harm, because that critique
was predicated on the assumption of a uniform rate of
surplus across industries--which this example implies
can be dropped once we postulate "that the use-value
of the machine significantly greater than its value;
i.e. that its devaluation in the service of
production is not proportional to its increasing
effect on production."

In summary, if you allow the c/(c+v) ratio to affect
the s/v ratio, then it doesn't matter what you say
creates surplus value: labor alone, machinery alone, or
the two in concert. Whichever way you put it, the outcome
is that production generates a surplus, and from that
point on you analyse capitalism.

This of course shifts the focus of critique of capitalism
from problems of the production of surplus--which is
where the "classical" LTV focusses attention--to the
problems of the realisation of surplus, or of
effective demand, as John put it.

(2) The use-value of labor-power

John said:

|2. I agree with you that the use value of labor-power
|is labor.   Labor is an activity.  For Marx, that
|means value creation and not as you say the TRANSFER
|of value.  At first, our disagreement on this
|point may, to others, seem merely a matter of words.
|But you and I know that your next step is to equate
|the next step you want to make.  Since Marx says
|the value of machinery is transferred in the
|production process, machines like labor CREATE

Not quite, in three senses:

(A) I am quite happy with saying that labor creates
value, rather than transfers it. "Create" is clearly the
more semantically correct term, because the production
process involves creation of something new from pre-
existing inputs, both human and commodity.

But there is a sense in which both words can be used:
the labor process both creates value and transfers
value. The creation aspect is the manufacture of new
commodities, and in that process labor creates new
commodities of the value of v+s. Thus v+s is gross
creation, while s is net creation. Semantically, in
net terms, one can say that s is created while v is

(B) The verbal equation ("transfer=create") is not
how I make the argument that machines create value.
That turns up in (C):

(C) What is the measure of the amount of value that
labor creates, according to Marx? It is the use-value
of labor, and this equates to the number of socially
necessary hours of abstract labor in the working day.
What is the cost of this value creation to the capitalist?
It is the exchange-value of labor-power, which corresponds
to a subsistence bundle of commodities, which themselves
took a quantity of socially necessary hours of labor to

The difference between the value created (the quantitative
measure of the use-value of labor-power) and the value
which the capitalist must outlay to hire labor (the
quantitative measure of the exchange-value of labor-power)
is the source of surplus-value, which is all the capitalist
wanted from the laborer.

Clearly, the value existing in a machine is not "transferred"
to new commodities: instead, new commodites are created
(in concert with labor) which embody the value that
once existed in the machine. So in the semantic sense I
used above, machines both create value and transfer value.
But what Marx claims is that the amount created equals
the amount transferred.

This is the same thing as saying that the value created by
the machine equals its depreciation. Now what Marx was
countenancing in the cite from Grundrisse above what that
"its devaluation in the service of production is not
proportional to its increasing effect on production." How
does he express this, in terms of his use-value/exchange-value

"that the use-value of the machine significantly
greater than its value"

Clearly (at least to me!), this means that Marx's
conventional treatment of machinery has been to assume
that the use-value of the machine is no greater than its
exchange-value. But this contradicts the tenet from which
he devines that labor-power is a source of surplus:

"The former determines the exchange value of the labour power, 
the latter is its use-value. The fact that half a [working] 
day's labour is necessary to keep the labourer alive during 24 
hours, does not in any way prevent him from working a whole 
day. Therefore, the value of labour power, and the value which 
that labour power creates in the labour process, are two 
entirely different magnitudes." (Capital I, p. 188)

So in the case of labor-power, use-value and exchange-value
are two entirely different magnitudes, whereas in the case
of machinery, they are equal?

(3) "Sound and fury"

It is indeed true that Marxists react "with such sound and
fury as [I] attribute the power of value creation to 
machinery?" Indeed, that is the reaction whenever *anyone*
suggests it, even though, as Scott observed:

"Isn't the value creating power of machines a form of 
congealed labor power waiting to be consumed by the 

I have often paraphrased my view as the argument that
capitalists can exploit congealed labor as easily as
they can living labor. I think the resistance to this
notion--which I agree has its religious overtones--
comes partly out of the mistaken belief that attributing
value-creating power to machinery is tantamount to
attributing value-creating power to the capitalist.

(4) The Economic Laws of motion

The LTV has led Marxists to focus on a supposed problem
in the creation of surplus value as the fundamental
weakness of and source of crises in capitalism. Meanwhile,
other critical schools of thought have focused,
effectively, on problems in the realisation of surplus.
The issue of disproportionality belongs here, as does
that of effective demand, and credit.

My revisionist picture is consonant with these schools.
There ain't no problem in generating surplus--the problems
arise when it comes to turning those commodities into
money. Here, the use-value/exchange-value logic, which
was to me so useful in explaining why *any* input to
production is a potential source of surplus, now
becomes a means to understand why that surplus will
be so difficult to realise:

(A) Primacy of use-value

Whereas exchange-value is all the capitalist really
wants, production involves the generation of use-values.
For exchange-value to be realised out of them, they
must be use-values on at least 2 levels:

(a) They must in fact be useful;
(b) Production must equal demand for them;

while, given expanded reproduction:

(c) aggregate demand must be expanding.

All 3 issues are discussed by Marx in the Grundrisse
when he discusses three "barriers" which restrict the "general 
tendency of capital" (p. 416) to expand incessantly, leading 
to crises and overproduction.  At the level of the "entirely 
superficial" (Ibid., p. 404), the commodity must fulfill a 
need: "Its first barrier, then is consumption itself--the need 
for it..." At the market level, exchange-value will be exactly 
realized only if the mass of any one commodity produced equals 
total demand for the product, hence "as use-value, the product 
contains a barrier ... which, however, is measured not by the 
need of the producers but by the total need of all those 
engaged in exchange" (Ibid., p. 405). At the level of the 
economy, and in a setting of expanded reproduction, the new 
value created must be met by a matching expansion of aggregate 
demand, "since ... capital has created a new value in the 
production process, it seems indeed as if no equivalent were 
available for it... As new value and as value as such, 
however, it seems to encounter a barrier in the magnitude of 
available equivalents, primarily money... The surplus value 
now requires a surplus equivalent" (Ibid., p. 405).

(B) Credit

Marx's analysis of money and credit in Vol I is simplistic.
But in Vol III and Theories of Surplus Value Parts II & III,
he once again turns to the use-value/exchange-value analysis
to reach the conclusion that money, credit, and to some
extent productive assets (such as minerals in an
undeveloped mine) differ from all other commodities in
that their exchange-value is determined, not by their
value, but by their use-value.

The relevant sections (Progress Press Editions) are Vol.
III pp. 352-356, TSV II pp. 294, TSV III pp. 457-59. Read
them and you will see Marx concluding that, for example,
in the case of a undeveloped mine, the exchange-value
paid for it is its expected use-value of being a source
of income:

"Ricardo never uses the word value for utility or usefulness or 
"value in use". Does he therefore mean to say that the 
"compensation" is paid to the owner of the quarries and coalmines 
for the "value" the coal and stone have before they are removed from 
the quarry and the mine--in their original state? Then he 
invalidates his entire doctrine of value. Or does value mean here, 
as it must do, the possible use-value and hence the prospective 
exchange-value of coal or stone?" (Marx 1861 Part II, p. 249)

Or deciding that, in the case of loaned money capital:

"What, now, does the industrial capitalist pay, and what is, 
therefore, the price of the loaned capital?... What the buyer of an 
ordinary commodity, buys is its use-value; what he pays for is its 
value. What the borrower of money buys is likewise its use-value as 
capital; but what does he pay for? Surely not its price, or value, 
as in the case of ordinary commodities." (Marx 1894,  p. 352.)

This means that money, credit and asset prices, etc., are
valued upon an entirely different basis than reproducible
commodities, which inevitably leads to crises.

(C) The special status of labor-power

Labor is not a commodity, as Jim reminded us in his comment on
my previous post. Yet to argue that the wage equals the
value of labor-power is to argue that, when it comes to
the capitalist-worker exchange, the worker is treated no
differently than inanimate commodities. I argue that this
is a reason to expect that, on average, the wage will
exceed the value of labor power (with the degree of course
being to some extent a function of the trade cycle).

[I mean Jim J here, by the way, not Jim M!]
This leads easily to a class struggle view of wage formation,
as captured in Goodwin's 1967 predator-prey model of the
trace cycle. But it makes little sense within a perspective that
sees labor as the only source of surplus, which is why I
think that Marxists have done so little to develop the

If, on the other hand, you regard production in general
as a source of surplus, then the worker/capitalist bargain
over the wage can be seen as a struggle over the
apportionment of surplus. The upper limit of the struggle is
that workers get the lot, in which case capitalists make no
profit and, of course, a crisis will ensue; the lower limit
is that the worker gets none of it--and therefore is
treated as a simple commodity, in which case labor unrest
and a different form of crisis.

(5) Statics vs dynamics

John says:

|  By attributing value creating properties to things, it
|  seems to me that you remain within the realm of statics.
|  That is, I'm not sure how you capture the movement from
|  one period of production to the next. (Here my own
|  ignorance of your work may play no small role.)  How does
|  revaluation take place as techniques change?  What is the
|  role of "moral depreciation"?

I find dynamics infinitely easier from my perspective, as
it happens. The starting point is that production generates
a surplus. The question is whether the dynamics of income
distribution and capital accumulation will be sufficient
to realise that surplus.

The answer is that the two processes--the production of
surplus and its realisation--will never be in balance. The
system will always be in a state of either over or
underproduction, generating cyclical behaviour which,
under some circumstances, may lead to a complete collapse
as in a Great Depression. I have done a one-commodity model
of this--as an extension of Goodwin's model and a rendition
of Minsky's "Financial Instability Hypothesis"--which has
been published in the most recent issue of the Journal of
Post Keynesian Economics (Vol. 17 No. 4.). You might like
to check it out.


Finally, Scott's observations on the bourgeois tendency
to obscure the distinction between use-value and
exchange-value were made in response to Jim's 
dismissive remarks on a previous post. As I said to
Jim (and wrongly headed the reply to John), his
appreciation of my views is so far off the mark that
I won't bother considering his comments until after
he's had a look at detailed presentations of my views.

I therefore find it ironic that he apparently thinks I
am amongst those who muddy the distinction between the
two. I agree with Scott's comments: this merging of
use-value into exchange-value was the basis of the
conservative response to Marx's challenge. It of
course commenced much earlier, with the Mercantilist
theory of value; but by and large the way that Marx
turned what I call the objective approach to value
into the basis for a critique of capitalism gave a
major spur to those developing the subjective theory
of value, where the use-value of a commodity (its
utility) determines the price of that same commodity
(via the equating of marginal utility to marginal

Steve Keen

     --- from list marxism at ---

More information about the Marxism mailing list