Explaining the Law of Value - response to Julio

Jurriaan Bendien bendien at tomaatnet.nl
Wed Sep 24 19:20:42 MDT 2003


Julio wrote in an otherwise good post:

Marx doesn't conceive the law of value as a smooth, harmonious mechanism.
On the contrary, he makes it clear (somewhere else) that the law of value is
a turbulent process, beset with disproportions that pile up before they get
corrected, that even in its abstract and general form it contains the formal
possibility of crises, etc.

The law of value states that the value (not the price) of a tradable good or
service (a commodity) is established and regulated in the last instance by
the average socially necessary labour time for its production (a good
interpretation by John Eaton, although he only gets as far as an embodied
labour theory of value). The last instance occurs for example when the
commodity is not produced anymore, because the terms of exchange for that
commodity have declined adversely such that the price falls, making the
rewards of producing it too low, even if there is excess capacity for
producing it. Then unemployment goes up and people realise, yeah, it took
labour to produce that commodity, and now it no longer does so.

The "value" Marx talks about, is itself essentially an averaged price, an
aggregate price, or derived price, which under capitalism takes the form of
a "production price", and it is this production price which classical
political economy refers to as a "natural price". Surplus-profits are made
here, losses are made there, but the natural price is the production price,
which is an average (not necessarily an arithmetic average but a modal
average or an approximation of the modal average).  This production price
(cost price plus average profit) is the minimal condition of supply. You
might produce a commodity at a loss, and sell it, but you hope that within a
finite time, you will reach at least that minimal condition. If you know
what the market for a specific commodity is, you can more or less work out
what that production price is.

Now, normally, the "natural price" that is established depends crucially on
the terms of exchange (the terms of trade), and on how they are established
(given a certain cost structure of production and a certain structure of
consumer demand, and a certain power relationship between suppliers and
buyers), but Marx's argument is, that the ultimate regulator of the terms of
exchange is nevertheless labour-time, as related to the social organisation
of a society and reflected in cost prices.

This is why the working class is so essential to developing capitalism. If
you didn't need the working class to produce your goodies, then you could
just kill them and have a different theory of value, for example an
aesthetic theory of value, in which case we might trade according to "who is
the fairest of them all" as in a story by the brother Grimm, or Hans
Christian Anderson. But okay you need those good old working class dummies
to produce the goods in factories, while you get on with more important
things, and therefore you have to keep that labour theory of value somehow
in the back of your mind, even if you deny Marx's analysis, and fudge the
issue with all sorts of creative concepts such as "factors of production"
and "marginal utility" and so on.

However, in making this statement, Marx hasn't really said a lot yet. He
says essentially that the law of value is like a law of nature, a statement
of necessity, which abstractly answers the question of "how does a society
based on a universal market balance out social production and social needs,
and how is its developmental path established". It is a bit like saying that
"in order to exchange goods and consume them, you have to produce them
first" which is true, but it is almost a tautology, as least as far as the
rich are concerned, because their interest is essentially in creative
consumption of the product, and you show your humanity through creative
consumption. Being actually able to produce something is interesting only if
the product is not boring, and you do the labour freely and not under
compulsion, i.e. if you want to stop working and go for a holiday to Malibu,
then you do that.

But, says Marx, now we want to know how the law of value actually operates.
The law of value is not a "mechanism", it has nothing to do with mechanics,
it is more analogous to the law of gravity - what goes up must come down,
and as you know you can do these marvellous tricks with "suspension" of
gravity under certain conditions, in which case you get an orbit; but this
orbit is the balancing-out of gravity and centrifugal force. But in any
case, the law of gravity is not very interesting in itself, the applications
of the law are interesting, because, for example, if I go parachuting then I
can estimate, on the basis of that law plus distance from the ground, wind
resistance and air pressure etc. just exactly the time interval between
jumping and contacting the ground.

So essentially the real question for Marx is, what form does the law of
value actually take, how does it operate ? And it is only here that we can
talk of regulative mechanisms, institutionalised practice and specific terms
of exchange. Because to actually operate markets takes a lot of work, and
this work must be organised, and to organise it there are institutions, and
so on.
Unfortunately, this is usually where the Marxists stop. You will have a few
schools of thought like the Regulation Theorists, who get very preoccupied
with understanding how capitalism REPRODUCES itself institutionally, in
other words, how we can make capitalism maintain and perpetuate itself. They
get very good at specifying mechanisms, but they get lost as regards Marx's
political aim, which was the transition to socialism. For the transition to
socialism, you had to discover all the tendencies WITHIN capitalism which
anticipated the NEW society. But the Regulation Theorists do not do this,
they want to make capitalism work better, so, although selected insights by
that School are interesting, it is normally pretty useless for the purposes
of the socialists.

There are also these types like Ticktin, who are Cartesians, doubting the
operation of the law of value creatively, and there are types like Andre
Gunder Frank who said the law of value operated in the USSR, but they really
miss the real problem by a mile. It is quite funny because Ticktin attacks
Mandel, because Mandel says that if there was market activity to some extent
in the USSR then the law of value must operate to some extent, even if it
did not regulate production as a whole, in other words you had a certain
amount of cost-economies based on labour expenditures systematically related
to market prices. Ticktin just flatly denies there were ANY cost-economies
in labour expenditures in the USSR, it was all bureaucratic chaos, but that
wasn't the case, because if it was all chaos people would have died like
flies for 70 years continuously, and Russians aren't stupid. AG Frank says
the law of value operated and governed in the USSR, because the USSR was
part of the world market and so on, but he denies any difference between
administered prices, state allocations of resources according to political
criteria, and free market allocations. AG Frank makes you wonder "why bother
breaking with the capitalist world market at all through a state monopoly of
foreign trade ?" because according to him, even if you do, you are still
ruled by the law of value. What a bummer. And then of course you have the
capitalism-without-the-bourgeoisie theories of Tony Cliff and so on, where
you have capitalism without privately owned means of production and so on.

What is involved here is a confusion of different laws. One transhistorical
economic law is that "in order to consume, you must produce", even if it is
only foraging with a primitive division of labour between a man and his
wife. But the law of value applies to trade in labour products, and wherever
there is trade in labour products, there you have the law of value
operating.

Of course, we could conceive of a situation of super-imperialism. In that
case, people in country A just consume, but don't produce anything, simply
through appropriating a surplus from another country B where producers
produce much more than they consume. But that changes nothing, that just
means the bourgeoisie lives here, and the proletariat lives there. You might
ask, why would people in country B do that ? Well because if they don't,
they do not get any benefits from country A and the people from country A
will bomb country B. In that case, you might argue, economic allocations are
not based on the law of value, but on bombing. But if the relationship
between country A and country B is one of trade, be it on the basis of
unequal exchange, the law of value still operates, and this is easy to
demonstrate, because the trade is based on an exchange of differential
values, which reflect differential labour expenditures and differential
cost-economies in production.

You might object, well, there is no production in country A, because they
just consume. But it would be quite possible for country A to control the
currency supply of country B, for example, and relative prices would still
be regulated by cost economies in production in country B, in the final
analysis, since the transhistorical law that "in order to consume, you must
produce" still holds. People in country A will have the illusion that the
labour theory of value is false, because they only consume, there is no
labour there. But when there is a revolution in country B, then they
suddenly wake up, and realise they actually have to do something in order to
consume, apart from driving their car to the airport or driving their car to
the harbour to pick up deliveries from country B.

Okay, let's say we want to know more exactly the law of value operates.
First you have labour expenditures which produce a product. The product is
sold in the market within the context of a competitive battle which sets
prices, and then consumed. Price fluctuations gravitate towards a
"regulating price" and react back on the production process, so that
production expands here, and contracts there, according to price signals.
Therefore, it seems like the price signals are determining the supply of
output. But this is just going around in a circle, because what determines
these price fluctuations ?

Well, essentially cost-economies on the part of producers and consumers. We
could therefore e.g. argue that prices are established by consumers, that
the consumer is sovereign, as in neoclassical theory. The problem however
is, how is the consumer able to consume in the first place, how does he
obtain his consumption goods ? Because he has got money. Where did he get
the money from ? Because he worked and earnt an income. Where did that
revenue come from originally ? Well it represented a fraction of the
counter-value of the output being produced, obtained through trade of that
output for money. So you see, the transhistorical law that "in order to
consume, you must produce" still holds, trade still operates, therefore the
law of value still operates. All we are disputing about is "how do I get my
claim to my part of the products of labour."

Suppose you were to rewrite Das Kapital today for the modern reader. What
you could do, is start off with the concept of production price, and work
from there, i,e, from the concept of cost-price + average profit, and then
you trace out what establishes these cost-prices and what establishes the
average rate of profit, and from there, where profit originates from, what
sort of exchanges are involved, who exchanges what for what. According to
Geoffrey Hodgson, there are no production prices, but that is just
terminological dispute. Anwar Shaikh calls them "regulating prices". It all
boils down to the same thing. The only dispute is about which terms of
exchange are dominant, but if we are just talking about cultural differences
we get nowhere - we have to talk about cost-economies, and these reduce to
labour-expenditures. The "culture" just refers to how people are bamboozled
into accepting specific cost-economies. For example, the Americans can
bamboozle the rest of the world into thinking that Americans need two or
three cars per household, and that the rest of the world should subsidise
that lifestyle. This is a cultural issue, which involves a confidence trick
used to set terms of exchange, and if you don't fall for the trick, you get
bombed.

Jurriaan






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