All right. I am going to have one more go at this, and then, as they say in the Soaps, I am going to move on with my life. Chris says that as of now he has never heard a good reason why people reject Marx's value theory. Of course, that is a bit vague. "Marx's value theory" may mean "Marx's version of the Labor Theory of Value," which is how I interpret the remark. But it may also mean, more generally, Marx's claim that capital rests on the exploitation of the working class. Chris and I agree about the latter. I am pretty sure he means the former.
Now, I have written a whole book and a serious mathematical article about this subject, so I could simply refer to them [as I do periodically on this blog], but I am unaware of anyone who has actually answered my critique and analysis [except John Roemer, a brilliant Marxist mathematical economist, but that is a somewhat different story], so I am going to tell that story again right here, without the math, and wait for a serious direct engagement with my argument. Settle down and get a cup of coffee. This is going to take a while, but hey, this is my blog, and I really care about this stuff. Those who find it boring may wish to spend the time reading economic statistics on the website of the Bureau of Labor Statistics, always a fun site to visit. Here we go.
Adam Smith in 1776 argued that in the primitive state of things, before the accumulation of stock or the appropriation of land, commodities would exchange in proportion to the amount of labor it took to produce them [I told you this was going to take a while.] But he understood that once you took account of the fact that some commodities require a good deal of capital to produce, in the form of tools, factories, etc., whereas others require much less capital and a lot more labor ["labor intensive" rather than "capital intensive," as later economists learned to say], this simple "Labor Theory of Value" would not be correct. Forty-one years later, David Ricardo came up with brilliant solutions to the problems both of accumulated stock and of land. Never mind land -- that is a great story but beside the point here. Ricardo noted that tools and raw materials and buildings and such, which are needed for the production of commodities, are all the products of labor expended in earlier production cycles. Today's tool, needed as input into the making of a car, is last year's output of the toolmaker. So we can view the tool as embodying a certain amount of the tool-maker's labor, which is then carried forward and bestowed on, or embodied in, the car that is made with its aid. Indeed, everything that we use in this cycle of production to make commodities, save for the new fresh labor expended now by workers, can be thought of as simply so much embodied labor carried forward from previous cycles. Now, of course, last year, when the toolmaker made the tool now being used to make the car, he or she used tools and materials that were themselves the products of even earlier cycles of production, and so forth backwards ad infinitum. But this does not pose a problem, Ricardo correctly intuited [without any actual mathematics to back him up], because the infinite number of bits of fresh labor expended at various times in the past form a series that converges to a finite sum! [This is all easy enough to prove mathematically. You can look it up in the appendix to my book, Understanding Marx.]
So Ricardo said, commodities will not exchange in proportion to the amounts of new, fresh, direct labor that their production require. But they will exchange in proportion to the amounts of labor directly or indirectly required for their production. In short, commodities will exchange in proportion to the amounts of labor embodied in them.
As soon as had he made this genuinely brilliant breakthrough, Ricardo realized that it was not quite correct. To be sure, if the ratio of new, fresh labor to old embodied labor is the same in each line of production [if, to use Marx's language, the organic composition of capital is the same in all lines of production], then commodities will indeed exchange in proportion to the amounts of dead and living labor required for their production -- they will exchange at their labor values. But, if some industries are capital intensive, using lots of dead labor embodied in machines, such as semi-automated oil refineries, and others are labor intensive, using relatively little embodied labor and lots of living labor, such as sweatshop-style clothing production, then competition in the free market will make prices diverge from their labor values, and the Labor Theory of Value will be wrong.
Ricardo never solved this problem and was still puzzling over it when he died. Fast forward a half century to Marx. Marx believed he had a solution to Ricardo's problem, but he also thought there was an ever deeper problem that neither Ricardo nor Smith before him had even seen. What is more, Marx thought he had a very deep and important solution to this unrecognized problem, a solution that would demonstrate the fundamental fact that capitalism rests on the exploitation of the working class. Therefore, he wrote all of Volume One of Capital without even discussing Ricardo's problem, leaving that for Volume Three.
The problem, to put it as simply as possible, is this: Why is there any profit at all in a capitalist system? How do capitalists turn a profit? Look, Marx said. Let us suppose we have a dead simple capitalist system in which each line of production exhibits the same ratio of living to dead labor. In other words, assume a system in which there is equal organic composition of capital in all lines, so that commodities exchange at their labor values, as Ricardo correctly said. In this system, capitalists, like everyone else, buy their inputs into production at their labor value [by hypothesis] and sell their output also at its labor value. How on earth do they make any profit?
There were some economists, so-called, in Marx's day who had been puzzled by this, and had come up with some really dumb answers, which Marx has a lot of innocent fun ridiculing. Some said the solution was that the capitalists total up their costs and tack on ten percent for profit. But, Marx noted, since the capitalists from whom they buy their inputs do the same thing, that doesn't really explain the origin of profit. One hapless chap with the implausible name "Nassau Senior" [there was no Nassau Junior] suggested that all the profit came from the last hour of production, all the previous hours being required just to pay for the costs of the inputs. hence, he concluded triumphantly, if the then current proposal to reduce the work day from twelve hours to ten hours was put into effect, capitalists would make no profit at all.
In a famous passage in Capital, from which I took the title of one of my books, Marx put the problem in this deliciously ironic fashion: "Our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use-value possesses the peculiar property of being a source of value, whose actual consumption, therefore, is itself an embodiment of labour, and consequently, a creation of value. The possessor of money does find on the market such a special commodity in capacity for labour or labour-power." [Opening paragraph of Chapter VI of Volume One of Capital.]
The solution to the puzzle of the origin of profit, Marx says, lies in the distinction between labor-power, or the capacity to labor, and labor itself, the effort and time expended by workers in the production process. In a capitalist system, workers are treated in the marketplace like any other producers of a commodity that they offer for sale. And like all other commodity producers, they are compelled by the workings of competition to sell their commodity at its labor-value. But what is the labor value of any commodity? It is simply the amount of living and dead labor required to produce it. So the labor-value of labor-power is just the amount of living and dead labor embodied in it.
How much is that? Well, it is however much labor it takes to produce the food, clothing, and shelter that the worker needs to stay alive and go to work the next day. Like any prudent commodity producer, the worker must set aside a little for depreciation. In his or her case, that means raising children. who will. When the adult worker is worn out and dies, the children can step into the production process as labor-power sellers as soon as they are able, say at age twelve.
How much embodied labor is actually required by the worker in the form of food and clothing and necessaries? Well, Marx says quite correctly, less than the number of hours of new living labor that worker can perform. And here is the solution to the mystery of profit. The capitalist [let us suppose just to out some numbers on it] pays the worker an amount of money equal to six hours of labor -- which is to say, the capitalist pays the worker a wage with which they worker can buy the necessary food and clothing and such, which stuff embodies six hours of labor The capitalist has paid the worker a fair wage -- he has paid the worker a wage equal to the cost of production of the worker's product, labor power, just as the capitalist has paid the tool manufacturer and the iron ore salesman and all the other input providers a price equal to the labor value of their goods. . But the worker is required to labor for twelve hours [assuming Nassau Senior has his way]. And those extra six hours of labor are embodied in the capitalist's output, which of course he owns since he has paid for all the inputs at their fair market value. So when the capitalist comes to sell his output, he pockets the money equivalent of those extra six hours of labor, and there is his profit. The capitalist has found a commodity, in Marx's words, "whose actual consumption, therefore, is itself an embodiment of labour, and consequently, a creation of value."
Let us call the extra six hours of labor performed by the worker surplus labor. The first six hours of labor is necessary labor, because it is required to reproduce the labor consumed in the production process -- in other words, it is required to keep the worker alive for another day of work. What relation does this surplus labor bear to the profit that the capitalist makes in each cycle of production and sale of what is produced? Well, it will come as no surprise, I would imagine, to learn that the profit appropriated by the capitalist just exactly equals the surplus labor performed by the workers. In short, profit is nothing but surplus labor-value.
This, in essence, is Marx's Labor Theory of Value. The key, Marx tells us, is the distinction between labor-power and labor. So what is wrong with it? [Never mind the problem of unequal organic composition of capital -- that is a complication that must await the settling of the status of the basic theory.] Remember please, I am not disagreeing with Marx that profits come out of the hides of the workers. Not at all. I am simply saying that his theoretical analysis of this fundamental fact is wrong, that a different theoretical analysis is required. The new analysis does not let the capitalists off the hook. Not a bit of it.
Now we come to my contribution to this debate. When I published it, in the article "A Critique and Reevaluation of Marx's Labor Theory of Value," I was unaware that anyone had ever put forward these arguments before. The afore-mentioned John Roemer pointed out that a year earlier, a Spanish economists, Josip Vegara, had published a book in which he proved something similar. Sigh. So much for my Nobel Prize in Economics. Anyway.
Let us ask a question that it never occurred to anyone to ask: How much iron does it take, directly or indirectly, to produce a bushel of corn or a car or a shirt? In short, what is the iron value of a bushel of corn or a car or a shirt? We might equally ask, How much corn does it take to make a ton of iron, a car, or a shirt? In short, what is the corn value of each of these commodities? And, while we are at it, let us ask what the iron value or corn value is of a day's labor.
Now, this sounds crazy, right? Smith did not talk like this, Ricardo did not talk like this. And Marx certainly did not talk like this. Well, maybe so, but if we ask this peculiar question, here is what we find:
1. So long as the system as a whole produces some sort of physical surplus in each cycle over and above what is required to run the system for another year, it is mathematically necessary that the iron value of a unit of iron will be less than one unit of iron, that the corn value of one unit of corn will be less than one unit of corn, that the X-value of one unit of X will be less than one unit of X for any X that is a required input in to all lines of production, directly or indirectly. In order for this to be true, it is not necessary that there be a surplus of X in the system each year. If we are calculating iron values, it is certain that the iron value of a unit of iron will be less than 1 even if there is no surplus of iron itself produced in the system.
2. No matter which commodity we choose as the "substance of value" -- be it labor, iron, corn, or whatever -- all the propositions that Marx states about labor value will be true for that commodity as well -- for iron values, corn values, etc. Because it takes less than one unit of iron to produce one unit of iron, whenever the capitalist uses a unit of iron there will be some "surplus iron value" embodied in the product being produced. The sum total of all that surplus iron value will exactly equal the profit appropriated by the capitalist, measured in units of iron value. The same is true for corn or any other factor of production. if an economic system exhibits equal iron-organic composition of capital -- which means that in each line of production there is the same ratio of direct to indirect iron inputs -- then the prices of commodities will be strictly proportional in that system to the iron-values of the commodities.
3. AND ALL OF THIS IS TRUE, EVEN THOUGH THERE IS NO PLAUSIBLE DISTINCTION BETWEEN IRON AND IRON POWER OR CORN AND CORN POWER. THEREFORE, MARX IS WRONG WHEN HE SAYS THAT THE DISTINCTION BETWEEN LABOR AND LABOR POWER IS THE KEY TO THE EXPLANATION OF THE ORIGIN OF PROFIT IN A CAPITALIST SYSTEM.
So if Marx's Labor Theory of Value is wrong, what is the correct analysis? In my article, I offered an answer which I think has some merit, but I do not want to summarize that here because this has gone on long enough.
One final word, before, as I promised, I move on with my life. Marxism is not a religion. There is no catechism, no official teaching of the Marxist Church to which one must subscribe in order to be allowed to call oneself a Marxist. Marx was a great social scientist, a great philosopher, and also, as it happens, a great writer. But he was not the Second Coming [or even the First]. So let us once for all time set aside debates about who is and who is not a true Marxist. There is more important work to be done.