Law of value

The law of value is a concept in Karl Marx's critique of political economy. Most generally, it refers to a "regulative" principle of the economic exchange of the products of human work: the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labour-time which are currently socially necessary to produce them.

Thus, the exchange value of commodities is regulated by their value, where their value is a quantity of human labour (labor theory of value). In Das Kapital Marx normally thinks of that quantity as the ratio between the amount of labour required to produce a reproducible good, and the corresponding amount of labour required to produce a unit of gold.

While Marx used the concept of the law of value in his works Grundrisse, "A contribution to the critique of political economy", "Theories of Surplus Value" and Das Kapital, he did not explicitly formalise its full meaning, and therefore how it should be exactly defined remains to some extent a controversial topic in Marxian economics. Different economists dispute about how how the proportionality between exchange value and labour time should be mathematically understood.

Basic definition of the concept

Obviously, excess demand can raise the exchange-values of products traded, and excess supply can lower them; but if supply and demand are relatively balanced, the question arises of "what regulates" the settled exchange-ratios (or average price-levels) of products traded in that case, and this is what the law of value intends to explain. According to the law of value, the "trading ratios" of products reflect a real "cost structure of production", and this cost structure ultimately reduces to the socially average amounts of human labor-time currently required to produce different goods and services.

Simply put, if product A takes 100 hours of human work to produce in total, and product B takes 5 hours to produce, the normal trading-ratio of A and B will "gravitate" to a rate of around 1:20 (one of A is worth 20 of B), because A is worth much more than B. The trading ratio will never be 20:1, 1:5, 1:100, or 500:1 (unless there was an exceptional shortage or oversupply of these products, or unequal exchange took place). For that reason, most market trade is regular and largely predictable, rather than chaotic and arbitrary; norms of what products are worth relative to each other are mostly clearly known and established, even if people lack an exact knowledge of prices.

The field of application of the law of value is limited to "new output by producers of traded, reproducible labour-products", although it might indirectly influence trade in other goods or assets. Thus the law does "not" apply to all goods or assets in an economy. Primary products are a special case, which Marx discusses in his theory of Differential and Absolute Ground Rent. World market prices for primary products can at any time be strongly influenced by the yield of harvests and mines in different countries.

The concept of the law of value was already expressed by David Ricardo at the very beginning of his "Principles of Political Economy and Taxation", as follows:

At the most basic level, this law of value specified "labor-content" as the substance and measure of economic value, and it suggests that trade will - other things being equal - evolve "towards the exchange of equivalents" (insofar as all trading partners try to "get their money's worth"). At the basis of the trading process is the economising of human time, and "normal" trading ratios become known to, or accepted, by economic actors.

However, Marx's real concern is to understand and analyze "how" the law of value determines or regulates exchange, i.e. how the balancing of the production of outputs and the demand for them could be accomplished, in a society based on a universal market such as capitalism. He tries to do this by starting off with simplifying assumptions and then gradually building up a complex theoretical structure. His theory specifically aims to grasp capital "in motion", i.e. how, through the circulation and dynamics of capital, changing expenditures of social labor are reconciled with (or fail to be reconciled with) changing social needs. This is obviously an enormously complex undertaking, and Marx did not get much further than to specify the main tendencies and dynamics, and "pure cases".

Economic value as such

Economic value exists necessarily, according to Marx, because human beings as social and moral beings must co-operatively produce and economize their means of life to survive, and in so doing they are subject to relations of production. They know that their products have a socially accepted value, even if no trade occurs yet.

Three main kinds of relationships are involved which are objectively and empirically verifiable, and often formalised in law:

*between people (social relations).
*between people and their economic products (technical relations).
*between products themselves (with or without trading prices; these are technical, economic or commercial relations, or, in general, "value relations").

The attribution of value to labor-products, and therefore the economising of their use, occurs within these three types of relationships interacting with each other. In a community of independent private producers, their economic relations are necessarily expressed through the product-values of what they trade. Over time, most products acquire a normal exchange-value, meaning that what a product costs relative to other products remains fairly stable.

However, because these three types of relationships co-exist and interact objectively, as a given social fact, independently of particular individuals, it may appear that economic value is an "intrinsic" property of products, or alternately, that it is simply a characteristic that results from negotiations between market actors with different subjective preferences. Marx recognised that value has both objective and subjective aspects, but he is primarily concerned with the objectification of value, where objectified (reified) value relations rule human affairs.

When more and more of human requirements are marketised, and a complex division of labor develops, the link between value and labor-time becomes obscured or opaque, and economic value seems to exist only as an impersonal "market force" (a given structure of priced costs and sale-values) to which all people must adjust their behaviour. Human labor becomes dominated by the economic exchange of the "products" of that labor, and labor itself becomes a tradeable "abstract" value (see Abstract labour and concrete labour).

The result is that value and its source themselves becomes something of a mystery, and that "how" the attribution of value really occurs is no longer clear. The three relationships mentioned become mixed up, and are confused with each other, in commercial and economic discourse, and it appears that things and assets acquire an independent power to create value, even although value is a human attribution. Marx refers to this as commodity fetishism or thingification ("Verdinglichung" or reification) which culminates in what he calls fictitious capital. He regards it as an inevitable effect of commercial practice.

The end result is that value theory is banished from economics as a useless metaphysics, surviving only in the form of assumptions made about price behaviour (after all, we cannot talk about price aggregates without assuming some valuation principle or value criterion). Money-prices offer convenient quantifiable units of economic value, and no further inquiry into value is deemed necessary.

To solve the riddle of economic value, Marx argues, we must investigate the real historical "origins" of the conditions which give rise to the riddle in the first place, i.e. the real economic history of trade and the way that history has been reflected in human thought. Once we do this, value is no longer defined simply an attribute of products and assets, but as a "relation" between objects and subjects.

Is it an equilibrium theory?

Some authors have interpreted Marx's law of value as a theory of market equilibrium. However, Marx offered no theory of market equilibrium, only a dynamic theory of economic reproduction. In reality, markets were rarely in equilibrium anyway (that was more a hypothesis used by economists), and what explained the market behaviour of individuals and groups was precisely the "imbalances" between supply and demand.

Under capitalist conditions, balancing output and market demand depended on capital accumulation occurring. If profits were not made, production would stop sooner or later. A capitalist economy was therefore in "equilibrium" so long as it could reproduce its social relations of production, permitting profit-making and capital accumulation to occur, but this was compatible with all sorts of market fluctuations and disequilibria. Only when shortages or oversupply began to threaten the existence of the relations of production themselves, and block the accumulation of capital in critical areas (for example, an economic depression, a political revolt against capitalist property or against mass unemployment), a genuine "disequilibrium" occurred; all the rest was just ordinary market fluctuations.

So this kind of Marxian "equilibrium" was more a condition of "social stability", not a hypothetical and unverifiable perfect match between supply and demand under idealised, static conditions. In any case, real social needs and their monetary expression through market demand might be two very different things. A demand might exist without any buying power. Economic equilibrium was not created by a perfect match of supply and demand, but "by the social framework which permitted the balancing act to occur". The role of the political state was essential in this, to provide a legal framework for fair trade and secure property rights (see Kay & Mott 1982).

The difference between the equilibrium theories of neoclassical economists and Marx's theory of the regulation of trade can be illustrated with a simple analogy. It is extraordinarily difficult to stay in balance while sitting on an ordinary bicycle, if the bicycle is stationary; but as soon as forward motion is achieved, balance is usually also achieved (give or take a few close shaves, perhaps). That balance therefore exists only as a "motion" involving the rider, the bike and the ground. All of these are necessary. If we just focused on the rider and the bicycle only, and ignored the ground, we would miss an important factor, to our peril.

A physicist would no doubt explain all this in terms of momentum, mass, velocity, kinetic energy, gyroscopic forces, torque and the law of gravity. The law of value performs a similar function in economic science. It tells us that the trading pattern in a society does not behave chaotically or arbitrarily, but is regulated at the very least by the relative proportions of work effort involved. Exchange-value thus expresses a necessary relationship between the demand for a good, and the quantity of society's labour-time required to produce it. A community of private producers working independently of each other has no other way to adjust their production volume to each other, than via the trading-value of their products.

By contrast, what economists often concern themselves with is a question of this type: suppose the purpose of the bicycle is to be perfectly stationary, and the rider to sit on it while perfectly stationary. Under what conditions would the balancing act then be successful? What kind of bike would we need? What skills does the rider need? Which is interesting to speculate about.

Obviously, while riding the bicycle, a potential risk exists that it will crash or collide with something; balance may be lost momentarily, yet also quickly restored. But the point is, we learn little about the possibilities or conditions for such an imbalance or crash from only examining the necessary conditions for a balancing act on a stationary bicycle - except trivia such as that if balance is not achieved, the rider must fall to the ground. We have to study the whole phenomenon interacting in motion.

More sophisticated econometric models in fact do this, by identifying the quantitative effects of the interaction of many different economic "trends"; this is sometimes referred to as "dynamic equilibrium", but it is often no longer clear what exactly is being equilibrated, or what the equilibrium would consist in. It is more a theory of how to prevent the decline or collapse of the circulation of commodities, money and capital, or promote balanced growth on some definition.

Factors counteracting the law of value

The main factors counteracting the operation of the law of value, as a law governing the economic exchange of products, are:

*"structural" unequal exchange - alternative or competing sources of supply or demand are absent or blocked, distorting trading ratios in favour of those in a stronger market (or bargaining) position. In that case, the true value or cost of products may deviate greatly from actual selling prices for a prolonged time.

*other restrictions on trade and what people may do with resources (legal, technical, protectionism etc.).

*taxation and subsidies to producers by government

*disparities in currency exchange rates.

*monopoly pricing where firms drive up prices because they control the supply of most of the market demand.

*large-scale speculation driving up prices.

*administered prices set by a state authority or a monopolist.

*the large-scale use of "credit economy" to acquire goods and services produced, without corresponding increases in production occurring.

*non-market allocation of resources, including gifts and grants

*countertrade (forms of barter).

*accumulation of fictitious capital (bubble economies).

*dumping of surplus goods at dumping prices.

*wars and disasters which create abnormal scarcities and demands for goods and services.

*illegal (criminal) or "grey" transactions (including pirated and counterfeited goods).

All of these phenomena occur to some degree or other in any real economy. Hence the effect of the law of value would usually be "mediated" by them, and would manifest itself only as a tendency. However, there are many indications that Marx believed the future would see an increasingly "purified" capitalism. That is, obstructions to market expansion would be cleared away through privatisation and removal of legal or technical restrictions on the expansion of trade, and that would in turn mean that the law of value would impose itself "more", not less. Thus, the socially average real production costs would then influence the trading ratios in economic exchange more, not less; the allocation of goods would be determined more by private costs and private profits.

Law of value in capitalism

Marx argues that as economic exchange develops, and markets expand, the law of value is "modified" in its operation.

Thus, capitalism is a type of economy in which both inputs and outputs of production have become marketed goods and services (or commodities). In such an economy, Marx argues, what directly regulates the economic exchange of new labour-products is their prices of production, i.e. cost-price + average profit. In pre-capitalist societies, where many inputs and outputs often weren't "priced" goods, such an expression would be meaningless. The corollary is the free movement (or at least mobility) of labour and capital among branches of industry.

Another way of saying the same thing, is that "sale at production prices becomes the normal precondition of supply" for new outputs produced (although in particular cases, fluctuating market prices might be above or below the production price). This means two things: the average price for which a commodity sells will typically diverge to some extent from the labour-value it represents, and that the exchange values realised in trade reflect not only a physical production cost, but also a "mark-up" or surplus-value in excess of that cost. Usually this is in a range of perhaps 8-15% of capital invested (net) or about 10-40% of product market-prices, depending on the case.

Capitalist economic exchange, Marx argues, is not a simple exchange of equivalents. It aims not to trade goods and services of "equivalent" value, but instead "to make money from the trade" (this is called capital accumulation). The aim is to "buy as cheaply as possible, and sell as dear as possible", under the constraint that everybody has the same objective. The effect is that the whole cost-structure of production "permanently includes profit as an additional impost". In an overall sense, Marx argues the substance of this impost is the unpaid surplus labour performed by the working class; part of society can live off the labour of others due to their ownership of property.

In this situation, output "values" produced by enterprises will typically deviate from output "prices" realised. Market competition for a given demand will impose a ruling price-level for a type of output, but the different competing enterprises producing it will take more or less labour to produce it, depending on productivity levels and technologies they use. Consequently, output values "produced" by different enterprises (in terms of labour-time) and output prices "realised" by them will typically diverge (within certain limits). That divergence becomes a critical factor in capitalist competition, under conditions where the average price-levels for products are beyond anyone's control.

If capital accumulation becomes the dominant motive for production, then producers will do everything they can to cut costs, increase sales and increase profits. Since they mostly lack control over the ruling market prices for their inputs and outputs, they try to increase productivity by every means at their disposal and maximise surplus labour. Because the lower the unit-costs of goods produced by an enterprise, the greater the margin will be between its own production costs and the ruling market prices for those goods, and the larger the profits that can be realised as result when goods are sold. Producers thus become very concerned with the value added in what they produce, which depends crucially on productivity.

This leads to constant attempts to improve production techniques to cut costs, and hold down labour-costs, but ultimately also to a decline in the labor-content of commodities. Therefore, their "values" will also decline over time; more and more commodities are produced, for a larger and larger market, at an increasingly cheaper cost. Marx claims that this trend happens "with the necessity of a natural law"; producers had no choice about doing what they could in the battle for productivity, if they wanted to maintain or increase sales and profits. In business, if you don't go forward, you go backward. That was, in Marx's view, the "revolutionary" aspect of capitalism. However, competition inexorably gives rise to market monopolies, which may constrain further significant advances in productivity and innovation.

In a developed capitalism, the development or decline of the different branches of production occurs through the continual entry and exit of capital, basically guided by profitability criteria, and within the framework of competition. Thus, supply and demand are reconciled, however imperfectly, by the incessant movements of capital. Yet, Marx argues, this whole process is nevertheless still regulated by the law of value; ultimately, relative price movements are determined by comparative expenditures of labour-time. Thus, market prices for outputs will gravitate towards prices of production which themselves are constrained by product-values expressible in quantities of labour-time.

In economic crises, Marx suggests, the structure of market prices is more or less suddenly readjusted to the evolving underlying structure of production values. Another way of saying this is, that the law of value will ultimately assert itself, by forcing a change in relative prices, in conformity with real production costs. In turn, this implies that although production values and market prices can diverge significantly from each other (in particular, because there exists no "perfect competition" - competition involves also blocking competitors), there are also limits to the possible discrepancies (because ultimately competitors will bring down artificially inflated prices, and goods continually sold below value would eventually put producers out of business).

mith's hidden hand

Neo-classical economics holds that, left to themselves, markets will balance supply and demand relatively quickly. If equilibrium does not exist, it will exist in the future, provided obstacles to market functioning are cleared away.

In his "Bundesbank" speech on January 13, 2004, US Federal Reserve chairman Alan Greenspan, stated:

This was a reference to Adam Smith's "Wealth of Nations" (1776) where Smith wrote:

Marx's theory of how the law of value operates in capitalism aims to reveal what the "hidden hand" of markets theorised by Adam Smith really consists of. It aims to explain how it comes about, that the markets get "a life of their own", by showing "what drives the markets", and how the market-balancing process actually occurs.

But it can do so only by distinguishing between a domain of "value-relations" and a domain of "price-relations", and between "potential" values and "actual" prices realised; after all, a process is involved whereby products move into markets, are sold for a price, and then move out of markets; this can be rationally understood only by assuming a "temporal continuity" (or conservation) of product-values "through successive exchanges".

Another "take" on the law of value, from an investor's perspective, is by George Soros:

In the real world, investors are constantly juggling between actual market prices and hypothetical (ideal) prices, based on assumptions about what the objective value of a good (its "real worth") is likely to be, now and in the future. A difficulty here is that the majority of objects of value in a society "at any time" don't have any actual market price, because they are not being traded. Thus, "value relations" between those objects objectively exist, but at best these can only be "approximated" or "estimated" in price terms.

Marx tries to model the market outcomes macro-economically with regard to new outputs from "production", assuming that values and prices will diverge, the argument being that this divergence will create a "systematic pattern of economic behaviour" by producers and investors. He is not interested in the circus-act of a clown balancing on a stationary bicycle, but in the bicycle ride.

Modification of the law of value in the world market

Marx believed that the operation of the law of value was not only modified by the capitalist mode of production, but also in the world market (world trade, as contrasted with the home market or national economy). The main reason for this was the existence of different levels of the intensity and productivity of labour in different countries, creating for example a very different cost structure in different countries for all kinds of products.

Products that took 1 hour of labour to make in country A might take 10 hours to make in country B, a difference in production costs which could strongly influence the exchange values realised in the trade between A and B. More labour could, in effect, exchange for less labour (an "unequal exchange" in value terms) for a prolonged time. In addition, the normal rate of surplus value could be different in different countries. Obviously, traders would try to use this differential to their advantage, with the usual motto "buy cheap, sell dear". The result, some Marxists argue, is an "international transfer of value", from countries with a weaker bargaining position to those with a stronger one: products produced in country A with undervalued labour are acquired for a low price and resold in country B where labour is more highly valued, for a much higher price. The differential in labour valuations becomes a source of profit.

Among German Marxists, Marx's fragmentary remarks on the law of value in a world market setting stimulated an important theoretical debate in the 1970s and early 1980s. One aim of this debate was to move beyond crude Ricardian interpretations of comparative advantage or comparative costs in explaining the pattern of world trade. To some extent similar debates took place in the USA (cf. Anwar M. Shaikh's work), France (Samir Amin) and in Japan (cf. e.g. Makoto Itoh's work available in English).

In particular, when the volume of intra-industry trade (IIT) between countries grows (i.e. the same kinds of products are both imported and exported by a country, e.g. cars, wine, beer, clothes, vegetables), and when different branches of the same multinational import and export between countries with their own internal price regime, international comparative advantage theories do not apply. Nowadays, Marxian scholars argue, comparative advantage survives mainly as an ideology justifying the benefits of international trade, not as an accurate "description" of that trade (some economists however draw subtle distinctions between comparative "advantages" and comparative "costs", while others switch to the concept of competitive advantage).

The operation of the law of value in the world market might however seem rather abstract, in view of the phenomena of unequal exchange, differences in accounting norms, protectionism, debt-driven capital accumulation and gigantic differences in currency exchange rates between rich and poor countries. These phenomena can create very a significant distortion in world trade between market prices for goods, and the real production costs for those goods, resulting in superprofit for the beneficiaries of the trade.

Jayati Gosh writes:

Quotation|"While developing countries as a group more than doubled their share of world manufacturing exports from 10.6 per cent in 1980 to 26.5 per cent in 1998, their share of manufacturing value added increased by less than half, from 16.6 per cent to 23.8 per cent. By contrast, developed countries experienced a substantial decline in share of world manufacturing exports, from 82.3 per cent to 70.9 per cent. But at the same time their share of world manufacturing value added actually increased, from 64.5 per cent to 73.3 per cent." [http://www.networkideas.org/themes/trade/may2002/print/prnt110502_Exports_Developing_Countries.htm]

That is, the value and physical volume of manufactured exports by developing countries increased gigantically more than the actual "income" obtained by the producers. Third world exporters might have got mighty rich, but the reality is that third world nations relatively speaking received less and less for what they produced for sale in the world market, even as they produced more and more; this is also reflected in the international terms of trade for manufactured products.

The postulate of the law of value does however lead to the Marxian historical prediction that "global" prices of production will be formed by world competition among producers "in the long term". That is, the conditions for producing and selling products in different countries will be equalised in the long run through market integration; this will be reflected also in International Financial Reporting Standards. Thus globalisation means that incipiently the "levelling out of differences in rates of profit" through competition begins to operate "internationally". Trading ratios and exchange-values for products sold globally would thus become more and more similar, in the long term. This hypothesis can obviously be empirically tested by means of international price comparisons.

A comment by Marx on the law of value

In his letter to Louis Kugelmann of July 11, 1868, Karl Marx commented gruffly:

Quotation|"As for the "Centralblatt", the man is making the greatest concession possible by admitting that, if value means anything at all, then my conclusions must be conceded. The unfortunate fellow does not see that, even if there were no chapter on ‘value’ at all in my book, the analysis I give of the real relations would contain the proof and demonstration of the real value relation. The chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science. Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products. Where science comes in is to show how the law of value asserts itself. So, if one wanted to ‘explain’ from the outset all phenomena that apparently contradict the law, one would have to provide the science before the science. It is precisely Ricardo’s mistake that in his first chapter, on value, all sorts of categories that still have to be arrived at are assumed as given, in order to prove their harmony with the law of value.On the other hand, as you correctly believe, the history of the theory of course demonstrates that the understanding of the value relation has always been the same, clearer or less clear, hedged with illusions or scientifically more precise. Since the reasoning process itself arises from the existing conditions and is itself a natural process, really comprehending thinking can always only be the same, and can vary only gradually, in accordance with the maturity of development, hence also the maturity of the organ that does the thinking. (...) The vulgar economist has not the slightest idea that the actual, everyday exchange relations and the value magnitudes cannot be directly identical. The point of bourgeois society is precisely that, a priori, no conscious social regulation of production takes place. What is reasonable and necessary by nature asserts itself only as a blindly operating average. The vulgar economist thinks he has made a great discovery when, faced with the disclosure of the intrinsic interconnection, he insists that things look different in appearance. In fact, he prides himself in his clinging to appearances and believing them to be the ultimate. Why then have science at all? But there is also something else behind it. Once interconnection has been revealed, all theoretical belief in the perpetual necessity of the existing conditions collapses, even before the collapse takes place in practice. Here, therefore, it is completely in the interests of the ruling classes to perpetuate the unthinking confusion. And for what other reason are the sycophantic babblers paid who have no other scientific trump to play except that, in political economy, one may not think at all!" [http://www.marxists.org/archive/marx/works/1868/letters/68_07_11.htm]

A comment by Frederick Engels on the law of value

Quotation|"...the Marxian law of value holds generally, as far as economic laws are valid at all, for the whole period of simple commodity production — that is, up to the time when the latter suffers a modification through the appearance of the capitalist form of production. Up to that time, prices gravitate towards the values fixed according to the Marxian law and oscillate around those values, so that the more fully simple commodity production develops, the more the average prices over long periods uninterrupted by external violent disturbances coincide with values within a negligible margin. Thus, the Marxian law of value has general economic validity for a period lasting from the beginning of exchange, which transforms products into commodities, down to the 15th century of the present era. But the exchange of commodities dates from a time before all written history — which in Egypt goes back to at least 2500 B.C., and perhaps 5000 B.C., and in Babylon to 4000 B.C., perhaps to 6000 B.C.; thus, the law of value has prevailed during a period of from five to seven thousand years." (source: Supplementary Afterword to Das Kapital Volume 3). [http://www.marxists.org/archive/marx/works/1894-c3/supp.htm#law]

The law of value in non-capitalist societies

There has been a long and drawn-out debate among Marxists about whether the law of value also operates in non-capitalist societies where production is directed by the state authorities.

In his famous pamphlet "Economic Problems of the USSR", Joseph Stalin argued that the law of value "did" operate in the socialist economy of the USSR. After all, Marx had stated in Das Kapital that:

Supporters of the theory of state capitalism in the USSR and scholars such as Andre Gunder Frank likewise believed that the law of value operated in Soviet-type societies. However, it is not always clear what they mean by the law of value, beyond the vague idea that the direct producers remain dominated by their own products, or that labour costs remain important, or that Soviet-type societies remained influenced by the world market.

According to Ernest Mandel, the law of value, as a law of exchange, did influence non-capitalist societies "to some extent", inasmuch as exchange and trade persisted, but because the state directed the bulk of economic resources, the law of value no longer "ruled" or "dominated" resource allocation. The best proof of that was, that there was mostly no clear relationship at all anymore between the exchange-value of goods traded, and what it really cost to produce them; accounting information, insofar as it was valid, might in fact be unable to show anything about the real nature of resource allocation. Insofar as social priorities ensured that people got what they needed, that was a good thing; but insofar as resources were wasted because of a lack of sensible cost-economies, it was a bad thing. Cost-accounting is, of course, no more "neutral" than profit-accounting; a lot depends on what costs are included and excluded in the calculation.

Che Guevara adopted a similar view in socialist Cuba; if more resources were directly allocated to satisfy human needs, instead of commercially supplied, a better life for people would result. Guevara organised an interesting conference at which the theoretical issues were debated (see Silverman 1971).

Some Marxist authors, such as John Weeks, have argued that the law of value is "unique" to an economy based on the capitalist mode of production. They reject the claim by Engels that the law of value is associated with the entire history of economic exchange (trade), and modified when all inputs and outputs of production have become marketed commodities.

Other Marxists (including Ernest Mandel and the Japanese scholar Kozo Uno) followed Engels in believing that the law of value emerges and develops from simple exchange. Here, it is argued that, if the law of value was unique to capitalism, it becomes impossible to explain the development of precapitalist commodity exchange or the evolution of trading processes in a way consistent with historical materialism and Marx's theory of value. So a better approach, it is argued, is to regard the application of the law of value as being "modified" in the course of the expansion of trade and markets, including more and more of production in the circuit of capital. In that case, a specific society must be investigated to discover the regulating role that the law of value plays in economic exchange.

Criticism

Traditionally, criticism of Marx's law of value has been of three kinds:

*conceptual
*logical
*empirical

(1) The "conceptual criticism" concerns the concept of value itself. For Marx, value was an objectified social characteristic of labour-products, exchanged in an economic community, given the physical reality that products took a definite amount of society's labour-time to produce. A product had a value, regardless of what any particular person might think about it, priced or unpriced. Critics however argue that economic value is something purely subjective, determined by personal preferences and marginal utility; only prices are objective. One of the first Marx-critics to argue this was the Austrian Eugen von Bohm-Bawerk.

However, many prices are not objective either - they are only "ideal" prices used for the purpose of calculation, accounting and estimation, not actually charged or applying directly to anything real. Yet, these notional prices can nevertheless influence economic behaviour. Economists then debate about when a price can be said to be "objective". Objectivity of prices, could be taken to mean e.g. only that the prices are "empirically observable", not that they are independent from subjective values. But many prices are not empirically observable either, they exist only as a numerical idea.

In almost all cases, cars will sell for more than carrots, but why? If value is subjective, all we can say is that people value cars more than carrots, or that cars are more in demand than carrots. Marx argues by contrast that cars and carrots have different objective costs of production, reducible to different amounts of labour-time. So cars will "always" cost more than carrots; one car will trade for, or be worth, quite a few tons of carrots, at least in the normal situation.

Against this view, one could also argue that objective amounts of "comparable resources" (such as energy, land, water, etc), necessary to manufacture a car, are much larger than resources necessary for growing a carrot, explaining why the cost (and, hence, minimal price) of a car is larger than the cost of a carrot. In other words, it is the total input costs (including costs of labour), not the amount of labour per se, which create the difference in costs (and, therefore minimal equilibrium prices) of the goods. Marx however argues in the first chapters of Das Kapital that most of such costs (i.e. insofar as they refer to reproducible goods) are again reducible to direct and indirect costs in human labour time.

Austrian economics explicitly rejects the "objectivity" of the values of goods as logically and conceptually unsound. On this view, we cannot validly say that products took a certain amount of labour, energy and materials to make, and compare them on that basis. It follows that the Austrian school thinks most contemporary economic theory is invalid, as it relies in one way or another on the aggregation and comparison of actual and ideal prices. This is forcefully argued by Friedrich von Hayek who therefore was skeptical about the objectivity of macroeconomic aggregations as such. However, this raises the question of "what is the explanatory power of Austrian economics", if all we can say about a realised price that it expresses a subjective preference, given that there are billions of subjective preferences which are all different. How can we explain in that case why the Austrian economist is not "subjective" at all about his own bank account, since he wants his money to be there, regardless of any "subjective preference" by anybody else?.

(2) The "logical criticism" revolves around the idea that Marx is unable to reconcile the domain of value relations and the domain of price relations, showing exactly how value "magnitudes" correspond to price "magnitudes". Various arguments are made to show that Marx's theory of value is "logically" incoherent. The most famous of these is the controversy about Marx's prices of production, sometimes called the transformation problem in which it is argued that total output value must equal total output prices, and total profits must equal total surplus value, so that the distribution of particular output values and output prices can then be "inferred" from each other, via mathematical functions and a tidy accounting sum, assuming the same rate of profit on capital invested by all sectors.

However, product-values in Marx's sense themselves can only be "expressed" as trading ratios, prices, or quantities of labour-time, and therefore this whole exercise is fruitless. As soon as we admit that prices may fluctuate above or below values for all kinds of reasons, the quantitative relationship between values and prices is at best probabilistic, not a fixed function of some type. Value theory offers an interpretation, generalisation or explanation concerning relative price movements, and of economic behaviour in capitalism as a social system, but it is not possible to deduce specific real prices from values according to some mathematical function. What we "can" verify is, to what extent production-costs and the ruling profit rates actually determine market prices.

(3) The "empirical criticism" is simply that there is no observable quantitative correspondence at all between changes in relative expenditures of labour-time, and changes in relative market prices, however measured. This is undoubtedly the strongest criticism, but there exists very little research to back it up. Most critics have tried to refute Marx's theory with a mathematical model, rather than actually looking at real data to see if the capitalist economy behaves in the way Marx claims it does. Of course, Marx is not talking about "all" prices, only about a theory of the formation of "production prices of new output" (which may deviate themselves from actual market prices, and may be observable only by comparing price "aggregates" during an interval of time).

These three lines of criticism lead the critics to the conclusion that Marx's law of value is metaphysical and theoretically useless. Everything he says can be restated in terms of prices, real or ideal, so what is the point then of any theory of "value"?

Austrian economics goes a step further by attributing no special objective meaning to price levels at all, which it considers a mere "statistical outcome" of comparisons between each party's ratios between the value of money (taken to be just another kind of a good) to values of goods being sold or purchased. The prices, therefore, are "knowledge", which may (or may not) influence behaviour of economic agents differently in each particular case. However, this approach is inconsistent, insofar as nothing in their theory entitles the Austrians to aggregate prices at all; "because" each price expresses a unique subjective preference, adding up prices is like adding up apples and pears.

Clearly Marx himself thought that the concept of value was necessary to explain the historical origins, the development and mode of functioning of capitalism as a social system, under conditions where traded, priced assets were only a subset of total assets possessing a potential exchange-value. If the economy just consisted of prices, Marx's theory would be unnecessary, but it doesn't just consist of prices. It consists also of working people creating and distributing wealth among each other.

Marx asked questions like: if supply and demand are equal, what then explains the price-level? If goods trade at their real value, what explains the increase of value occurring in production? If competition settled a particular average profit rate, why that average level, and not any other? Price theory ended up in an infinite regress here, of explaining prices by other prices by other prices, and so on. But as soon as it was admitted that prices were the monetary expression of exchange-value in the trading process, one had to explain where that exchange-value came from, and how it was established. And that required a theory of economic value and trade.

The economists "assumed" all sorts of things about an economy and economic actors, in order to build models of price behaviour; Marx thought "those assumptions themselves" needed to be looked at and theorised consistently. However, his critics claim that his own approach has hidden assumptions as well, and that these assumptions obviously contradict the empirically observable reality of human action. In the letter by Marx cited above, Marx anticipated this criticism, which he regarded as very shallow. For thousands of years, people believed that the sun revolved around the earth (after all, we can "observe" how the sun rises in the East and sets in the West) until science revealed that just the opposite was the case. It is perfectly possible not only to participate in market trade without much knowledge of markets and their overall effects, but also to participate in markets with a "false" or "one-sided" interpretation of what is really going on in the exchanges. In this sense, Marx warns that market trade can stimulate all sorts of delusions about what relationships are really involved.

A Californian perspective: Jim Devine on the Law of Value

In an essay available on-line (see below), Prof. James Devine provides an interesting argument which suggests that critics of Marx's law of value are really barking up the wrong tree. Their arguments are based on an interpretation of Marx as a "minor post-Ricardian" who tried to deduce a "labour theory of price". But, he argues, Marx's intent was something else. Devine cites Charles Andrews's book "From Capitalism to Equality" as an example of a modern US analysis using the concept of the law of value [http://www.laborrepublic.org/] .

teve Keen and the machine

In his book "Debunking Economics", Steve Keen has attempted to counter Marx's theory from a post-Keynesianian perspective, by arguing that machines can add more product-value over their operational lifetime than the total value of depreciation charged "during those asset lives". For example, the total value of sausages produced by a sausage machine over its useful life might be greater than the value of the machine. Depreciation, he implies, was really the weak point in Marx's social accounting system all along. It raises the question of how we know which part of the new value is due exclusively to the machine, and which part is due to the worker - neither of which of course can produce products without the other, unless we suppose full automation.

Marx wrestled with the problem of depreciation, but he remained insistent that only human labour could create net new value; machines did not create any new value by themselves; instead human beings conserved the value of machines, and transferred their value to the new products. Therefore, logically, machines could contribute no more value than was implied by the labour it took to make them, or perhaps more precisely, their "current" value in society. This value should of course be distinguished from that part of the output price charged as depreciation costs, i.e. a distinction should be drawn between depreciation in "value" terms and depreciation in "price" terms. That aside, Marxist economists such as Ernest Mandel have argued that owners of new, more productive fixed equipment (which the owners may monopolize with the aid of patents) can obtain extra income from its use, representing effectively an economic rent (so-called "technological rents"). Whatever view one takes, it is clear depreciation raises complex issues, because depreciation write-offs often do not reflect the "real" loss of value of a fixed asset, but rather the maximum value permitted by governments and auditors to be written off for tax purposes (for more discussion, see the OPE-L ("Outline of Political Economy") list [http://ricardo.ecn.wfu.edu/~cottrell/OPE/archive/0103/0091.html] .

ee also

*labor theory of value
*value theory
*exchange value
*Use value
*Socially necessary labour time
*Real prices and ideal prices
*prices of production
*Cost-of-production theory of value
*capital accumulation
*primitive accumulation of capital
*capitalist mode of production
*capital controversy
*Abstract labour and concrete labour

References

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*Richard Westra & Alan Zuege (eds.), "Value and the world economy today - Production, Finance and Globalization". Houndmills: Palgrave Macmillan, 2003.
*Thomas T. Sekine, "The Necessity of the Law of Value, its Demonstration and Significance". [http://econpapers.repec.org/paper/fthyorkca/91-4.htm]
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*Ed Chilcote, "Classical Theories of Reproduction and Accounting" [http://www.gre.ac.uk/~fa03/iwgvt/files/97Chilcote.rtf]
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*Paul Cockshott, Ian Wright et al. Information, Money and Value [http://www.dcs.gla.ac.uk/~wpc/reports/info_book.pdf]
*Bertram Silverman, "Man and Socialism in Cuba; The Great Debate". New York: Atheneum, 1971.
*Tilla Siegel, "Kapitalismus als Weltsystem".
*Tilla Siegel, "Politics and Economics in the Capitalist World Market: Methodological Problems of Marxist Analysis", in: "International Journal of Sociology", Vol. XIV, no. 1., Spring 1984.
*Klaus Busch, "Die Multinationalen Konzerne".
*Klaus Busch, Gunther Grunert, and Walter Tobergte, "Strukturen der Kapitalistischen Weltoekonomie".
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*John Weeks, "International Exchange and the Causes of Backwardness", in "Latin American Perspectives VI" (Spring 1978)
*John Weeks, "Capital and exploitation". Edward Arnold.
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*James Heartfield, "The Economy of time" [http://www.heartfield.pwp.blueyonder.co.uk/economy.pdf]
*Jim Devine, "Is Marx's "Labor Theory of Value" True? What's LoV Got to Do with It?" [http://myweb.lmu.edu/jdevine/notes/Law-of-Value.html]
*Steve Keen, "Debunking Economics; The Naked Emperor of the Social Sciences". London: Zed Press, 2005. [http://www.debunking-economics.com/]
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*Patrick Julian Wells, "The rate of profit as a random variable". Phd dissertation, School of management, Open University, London 2007
*Alfredo Saad Filho interview on value theory, "Marx's idea of value". [http://www.socialistworker.co.uk/article.php4?article_id=6598]
*Andrew J. Kliman, "The law of value and laws of statistics: sectoral values and prices in the US economy, 1977--97". Cambridge Journal of Economics, 2002, vol. 26, issue 3, pages 299-311.
*Ulrich Krause, "Money and Abstract Labour : On the Analytical Foundations of Political Economy". Translated by Peter Burgess. Edited by Jon Rothschild. Verso.
*Samir Amin, "The Law of Value and Historical Materialism". New York: Monthly Review Press, 1978
*Wissenschaftlicher Streit um die MODIFIZIERTEN DURCHSETZUNGSFORMEN DES WERTGESETZES AUF DEM WELTMARKT [http://www.apronsknie.de/mxks/files/ag/Value.Weltmarkt.html]