Prompted by a comment from Jerry Brown, I should like to return to the subject of the Labor Theory of Value. To many people who identify themselves as Marxists, the Labor Theory of Value plays somewhat the same role in their belief structure as is played by the doctrine of the Incarnation for Christians – if you give it up, you can no longer really claim to be one of the faithful. It is obvious from what I said in my recent series of posts on Marx that I do not share this view and although I have written about this before, I think it is important enough to return to the subject and spell out my views at greater length.
As I explained in my series of posts, what came to be called the Labor Theory of Value started life in the writings of Adam Smith as his attempt to explain what determined the customary or usual prices at which commodities sold in the marketplace. Smith was well aware that fluctuations in supply and demand would cause daily prices in the market to vary, but he noted that experienced buyers and sellers would learn that there was a usual or customary price for corn or cloth on which they could rely. He called this price the natural price of the commodity, or, using an 18th-century synonym, its value. He was here introducing an idea that much later on came to be called the equilibrium price for a commodity. Smith then offered a very primitive explanation for the determination of the natural price or value of a commodity, namely the amount of labor it cost its producer. Smith had thus given birth to the idea of a labor theory of equilibrium price or, as he referred to it, a Labor Theory of Value.
Smith was aware of, but not able to come up with a solution for, several serious problems with this primitive theory. It fell to David Ricardo to solve the problem of rent or the price paid for the use of land and also to propose a brilliant solution for the problem of the accumulation of stock, what today we call capital. His notion of embodied labor enabled him for the first time to put forward a full-scale labor theory of equilibrium price or Labor Theory of Value. But there was a problem with this idea, brilliant as it was, and Ricardo knew it. The problem was that if different lines of industry exhibited varying proportions of capital and labor, then equilibrium prices would deviate from the quantities of labor embodied in the outputs.
It was at this point that Marx began his theoretical work. He believed he had a solution tgo Ricardo’s problem, but he chose to postpone discussion of it until volume 3 of Capital because he believed he had found a deeper problem in the traditional theory whose solution would reveal the mystified and ideologically concealed truth that capitalism rests on exploitation, not on free and equal exchange in the marketplace. The problem, to put it quite simply, was that the classical political economists had no explanation for the emergence of profit. The key to Marx’s solution of this problem was his distinction between labor and labor – power, and with it the introduction of the category of surplus labor value, which, Marx claimed, is the real source of profit and the demonstration of the fundamental fact that capitalism rests on the exploitation of the working class.
No sooner had Marx put forward this dramatic critique and transformation of the classical theory of the political economists than economics as a discipline underwent a triple revolution. More or less simultaneously but independently of one another, Stanley Jevons in England, Carl Menger in Switzerland, and Leon Walras in France introduced the notion of marginal productivity, on the basis of which they undertook to explain equilibrium prices solely by referring to the relationship between demand and supply, putting entirely to one side any question of the quantity of labor directly or indirectly required for the production of commodities.
Smith and Ricardo became, in effect, curiosities put in a museum of outmoded ideas. Marx did not suffer the same fate. Quite to the contrary, he developed an intellectual following and then, mirabile dictu, a political following of revolutionaries who succeeded in taking over two of the largest countries in the world. The Labor Theory of Value ceased to be a brilliant but problematic explanation of the determination of equilibrium price in a capitalist market system, and became the esoteric doctrine of the Priesthood of the Temple. In some parts of the world, questioning the Labor Theory of Value got you stigmatized as a heretic, an unbeliever, even – God forbid – a liberal. In other places, it could get you killed.
Now I am, as I observed on the front page of this blog, an atheist. I do not believe in the Jewish God. I do not believe in the Christian God. I do not believe in the Muslim God. And I also do not believe in the divine revelation of the Labor Theory of Value. I do believe that capitalism rests on the exploitation of the working class, not as an article of faith but as the conclusion of a lifetime of study and consideration. I call myself a Marxist simply to express in a single word my admiration for the student of society who first articulated and defended this simple but fundamental fact of the modern world.
One might be tempted to say dismissively or disparagingly, “oh well, if that is all you mean when you call yourself a Marxist, all manner of people could say that without calling themselves Marxists.” They could, I suppose, but they don’t. It is quite remarkable how hard the world’s greatest Nobel laureate economists work to avoid acknowledging that capitalism rests on the exploitation of the working class, and if I were an old-fashioned Marxist, I might even say that it is no accident that the same people cannot bring themselves in their writings to utter the word “Marx.”