Per Bylund’s “Is it Money because it is redeemed in Tax Payments?”: A Post Keynesian Response

The Austrian economist Per Bylund has recently written this challenge to advocates of MMT/Neochartalism:

Bylund, Per. 2023. “Is it Money because it is redeemed in Tax Payments?: A Response to Kelton and Wray,” Quarterly Journal of Austrian Economics 25.4: 147–165.

In this article, in reply to an argument by the MMT economist Stephanie Kelton, Bylund argues that fiat money cannot have value only because it is used to pay government taxes:

“If the [sc. fiat] currency is valued because (and only because) it is needed to pay the taxes owed to the government, then this does not also explain why actors would value it much beyond their tax liabilities. If the government requires me to pay taxes of $100,000 in its currency in year X, I have no reason to demand that currency beyond the $100,000 I owe. The exception to this would be if the currency is already the common medium of exchange and therefore valued for its (expected) purchasing power with respect to other goods. But that is not the chartalist argument, which, at least as Kelton states it, is that the currency would be worthless were it not for taxes.” (Bylund 2023: 150).

Some modern advocates of MMT have indeed argued that only taxes levied by the state and the need to pay those taxes in the state-issued, monopoly fiat money drive the demand for, and value of, that fiat money and its use as a general medium of exchange in modern nations.

Bylund has here put his finger on some of the more extreme, dogmatic and unconvincing claims of the most recent advocates of Modern Monetary Theory, who appear to argue that there is no role for modern fiat money’s current acceptability as a general medium of exchange, and its historical role as a general medium of exchange in the short-term and long-term past, in explaining its persistence as money.

Bylund is correct in rejecting this particular MMT view here, and has some reasonable criticisms of L. Randall Wray. Bylund is also correct that legal tender laws, government coercion, and state monopoly issue are all factors in the modern widespread use of fiat currencies as money (Bylund 2023: 161–162), although not in defending Carl Menger’s theory of the origin of money as the monocausal or fundamental explanation of money’s origin, which is actually contradicted by the historical evidence that is more in line with the MMT view (see also here).

The value of, and demand for, and general use of modern fiat money is not simply caused by the need to pay taxes in the state-issued currency.

But long before Austian-school economists like Per Bylund made this critique of MMT, Post Keynesian economists made the same criticism, as well as much more cutting critiques of MMT.

In what follows, I first review what Post Keynesians have said in criticism of the taxes-drive-money theory of MMT, and, secondly, the much better view of Abba Lerner on how we should understand modern fiat money as being “a creature of the state.” It can be seen that the Post Keynesian view and the views of Abba Lerner are not refuted by Per Bylund’s critique.

1. Post Keynesian Critiques of the Taxes-drive Money Theory
The view that only taxes drive the value of, or demand for, pre-1930s money or modern state-issued fiat money has been rejected by Post Keynesians such as S. Rossi (1999), P. Mehrling (2000: 402), C. Gnos and L.-P. Rochon (2002), L.-P. Rochon and M. Vernengo (2003), and E. Febrero (2009: 539–530), and the Monetary Circuit Theorists A. Parguez and M. Seccareccia (2000: 120).

Rossi (1999) already rejected the view of L. Randall Wray that modern governments can control the general purchasing power of fiat money (Rossi 1999: 484).

Moreover, Febrero (2009) argued that fiat money being fundamentally required for clearing between private banks is actually a major source of its acceptability as general money, especially in nations that do not operate as MMT envisages such as the Eurozone. Febrero also held that, historically, “private money precedes state money” (Febrero 2009: 538), so that even this view has supporters within modern Post Keynesian economics.

Parguez and Seccareccia (2000: 120) – who advocate Monetary Circuit Theory (which has strong similarities to Post Keynesianism) – argued the following in opposition to MMT:

“As we have defended in our historical discussion, viable monetary systems existed during periods of economic history when taxes were quite insignificant. What matters, therefore, was not whether tax liabilities were of any significance but rather whether, largely through the legal system, the state endorsed existing banks by allowing them to issue debts on themselves. For very long historical periods, state money had been quite negligible in relation to the circulation of bank liabilities. By linking the existence of money exclusively to that of taxes, neochartalists are led to find money in societies where there are heavy taxes levied in natura. Taxes can more easily be levied if there is a state-imposed unit of account which would serve as money (Wray 1998). Ironically, such a definition of money as a pure unit of account is very close to the Walrasian conception of numéraire money in which it is the (state) auctioneer that chooses a numéraire before efficient trading takes place!

The state can endorse central and/or private bank liabilities, but it cannot impose the value of money” (Parguez and Seccareccia 2000: 120).

In a discussion to some extent similar to that above, the Post Keynesians Rochon and Vernengo (2003) concluded in a 2003 paper that, while modern money is certainly fiat money and “chartal” in the sense of being issued by the state, MMT was wrong to regard government taxes as the only, or main, cause of the existence of modern fiat money.

Rochon and Vernengo argued that modern European states actually faced a long and difficult struggle to impose state-issued money on the respective private sectors of their nation-states. They point out that, before the 19th century, domestic taxes were actually quite limited to excise duties on certain goods and tariffs on imports, and that income taxes were either non-existent or quite low (Rochon and Vernengo 2003: 63). Within nation states in the later Middle Ages and Early Modern period, there was in fact a plethora of foreign coins, private bank notes, bills of exchange and even foreign state currencies that competed within the domestic markets with the national state-issued currency (Rochon and Vernengo 2003: 63; see also Desmedt and Piégay 2007: 124). Worse still, in the Middle Ages and well into the Early Modern Period, the state did not have a monopoly on coercive payments like taxes, because there were tax-like payments demanded by the local churches, the landed gentry and the Catholic Church (Desmedt and Piégay 2007: 124). In the Middle Ages many people paid “taxes” in the form of payments in kind and forced labour (corvée), not money (Desmedt and Piégay 2007: 124).

Rochon and Vernengo (2003: 64) argue that in Early Modern Europe it was not domestic taxes of the state driving the acceptance of the local state-issued money, because, firstly, the tax burden was too light, and, secondly, it was actually the Venetian ducat, Dutch guilder, and eventually the British pound sterling (which were all originally gold or silver coins) that won a great degree of acceptance within many other nations as against the domestic state-issued money, precisely from their roles in international trade and as proto-foreign exchange reserves (which was of course backed up by the state power and military power of the Venetian, Dutch and British empires).

It was not the state, but merchants, bankers, and money changers who preferred the currencies used in international trade that drove the widespread use of the Venetian ducat, Dutch guilder, and British gold guineas and later gold sovereigns.

Rochon and Vernengo (2003: 65) conclude that it was only in the 19th century that modern states succeeded in dominating the money used within their nation-states and displacing foreign currencies and private bank notes. It was only then that a monopoly, or near monopoly, by the state on national money was achieved, in the sense that nearly all prices, contracts and debts were denominated and paid in the national unit of account.

As we can see from this review, the Post Keynesian view on money does not put the emphasis on state taxes as the only cause of the value of modern money.

2. Abba Lerner’s Theory
Abba P. Lerner wrote a foundational article inspiring Modern Monetary Theory called “Functional Finance and the Federal Debt” (1943).

Moreover, Lerner wrote a now classic article called “Money as a Creature of the State” (1947), and he makes an argument there that is quite different from some modern advocates of MMT:

“Money, as I have said in an article of that name in the Encyclopaedia Brittanica, is what we use to pay for things. The basic condition for its effectiveness is that it should be generally acceptable. Its transformability into gold and the guarantee of this possibility of gold backing (or any other kind of backing) are nothing but historical accounts of how acceptability came to be established in certain cases. These were possibly the only ways in which general acceptability could be established prior to the development of the well-organized sovereign national states of modern times. General acceptability had to be transferred in some such way from something which had already acquired it in the course of history. But if general acceptability could be established in any other way these historical methods would no longer be necessary or relevant.

This is just what has happened. The modern state can make anything it chooses generally acceptable as money and thus establish its value quite apart from any connection, even of the most formal kind, with gold or with backing of any kind. It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done. Everyone who has obligations to the state will be willing to accept the pieces of paper with which he can settle the obligations, and all other people will be willing to accept these pieces of paper because they know that the taxpayers, etc., will accept them in turn. On the other hand if the state should decline to accept some kind of money in payment of obligations to itself, it is difficult to believe that it would retain much of its general acceptability. Cigarette money and foreign money can come into wide use only when the normal money and the economy in general is in a state of chaos. What this means is that whatever may have been the history of gold, at the present time, in a normally well-working economy, money is a creature of the state. Its general acceptability, which is its all-important attribute, stands or falls by its acceptability by the state” (Lerner 1947: 313).

“Before the tax collectors were strong enough to earn for the state the title of creator of the money, the best the state could do was to tie its currency to gold or silver which had a stability of their own that antedated the appearance of the state. By that policy extreme inflations were made impossible, and in a small country even small inflations (relatively to other countries) would be checked by the disappearance of the money in an outward flow of gold. By the same policy a limit was set to depressions” (Lerner 1947: 314).

As we can see here, Lerner never denied that, historically, money was tied to units of gold and silver.

Abba Lerner in essence argued that it was only when, in the 1930s, the link between state money and gold was finally abolished that modern states had the power to declare whatever paper currency they wished to be money within their own states.

Money became a total “creature of the state” only then, and, although Lerner did invoke taxes as a major explanation for fiat money’s acceptability today, his view does not necessarily exclude other causes of modern fiat money’s value as a medium of exchange. Lerner quite plainly admitted that the “[g]eneral acceptability [of money] had to be transferred in some such way from something which had already acquired it in the course of history.”

Lerner seems to have accepted that modern fiat money has value both because of the state’s demand that its fiat money be used in tax payments, fines etc., and that historically its money had been used as a general medium of exchange with purchasing power throughout the economy in the short-term past and long-term past before the link with gold was severed. At the very least, the latter view is compatible with his arguments in “Money as a Creature of the State,” and certainly would not be rejected by modern Post Keynesians.

I would note that Per Bylund makes a reasonable point in his article when he points out the following:

“Wray also overlooks the important fact that the government currency has a legacy of being real money. Paper notes, whether issued by private banks or the central bank, used to be accepted because they were redeemable in precious metal. The name of those notes—dollars—was kept after the gold standard was abandoned incrementally through political decrees. Also, this process of replacing gold with mere paper not only consisted of increasingly undermining the dollar’s redeemability, but was accompanied by legal changes that supported the transition” (Bylund 2023: 162).

But, as we have seen above, Abba Lerner – who could be regarded as a founding father of MMT – would not have disagreed with this at all.

3. Conclusion
In short, while Per Bylund can score some points against MMT, his article has no force against the better Post Keynesian theories of the history and nature of money, and particularly the much more reasonable and defensible views of Abba Lerner, whose article “Money as a Creature of the State” (1947) is in line with the historical evidence.

The MMT view that only state taxes and the need to pay taxes in state-issued fiat money drive the demand for, and value of, that fiat money and its use as a general medium of exchange is wrong. There are other factors such as legal tender laws, government coercion, state monopoly issue, and the historical role that our money had as a general medium of exchange before the link with gold was severed.

Another problem with MMT is that it neglects the role of endogenous money in a historical sense: modern Western capitalism has been exceptionally good at expanding the money supply by private-sector “credit money” such as bills of exchange, promissory notes, negotiable cheques, private banknotes and “bank money” (or “deposit money” created by banks on their books).

Even in the modern world of fiat money, most money is “broad money” that mostly consists of “demand deposits” and other bank accounts at private-sector banks denominated in the national fiat currency, but, normally, such money creation is credit-driven: most money, being “broad money,” is created by private banks and its quantity is determined by the private demand for it. This is the essence of endogenous money.

As Nicholas Kaldor argued,

“This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth. With a purely metallic currency, where the supply of money is given irrespective of the demand for credit, the ability of the system to expand in response to profit opportunities is far more narrowly confined.” (Kaldor 1972: 1250).

So Post Keynesian economics really should put the emphasis not only on the power of state to determine what is money (which, since the 1930s, is very important and the dominant factor), but also in a historical sense on the dynamic power of capitalism to create new forms of “credit money” and endogenously expand the money supply.

BIBLIOGRAPHY
Bylund, Per. 2023. “Is it Money because it is redeemed in Tax Payments?: A Response to Kelton and Wray,” Quarterly Journal of Austrian Economics 25.4: 147–165.
https://qjae.mises.org/article/77380-is-it-money-because-it-is-redeemed-in-tax-payments-a-response-to-kelton-and-wray

Dequech, David. 2013–2014. “Is Money a Convention and/or a Creature of the State? The Convention of Acceptability, the State, Contracts, and Taxes,” Journal of Post Keynesian Economics 36.2: 251–273.

Desmedt, Ludovic and Pierre Piégay. 2007. “Monnaie, état et production: apports et limites de l’approche néo-chartaliste,” Cahiers d’économie politique / Papers in Political Economy 52: 115–133.

Febrero, Eladio. 2009. “Three Difficulties with Neo-Chartalism,” Journal of Post Keynesian Economics 31.3: 523–541.

Gnos, Claude and Louis-Philippe Rochon. 2002. “Money Creation and the State: A Critical Assessment of Chartalism,” International Journal of Political Economy 32.3: 41–57.

Kaldor, N. 1972. “The Irrelevance of Equilibrium Economics,” Economic Journal 82: 1237–1252.

Keynes, J. M. 1958 [1930]. A Treatise on Money. Volume 1. The Pure Theory of Money. Macmillan & Co. Ltd, London.

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Mehrling, Perry. 2000. “Modern Money: Fiat or Credit?, Journal of Post Keynesian Economics 22.3: 397–406.

Murphy, R. P. 2020. “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy,” Quarterly Journal of Austrian Economics 23.2: 232–251.

Nesiba, Reynold F. 2013. “Do Institutionalists and Post-Keynesians share a common Approach to Modern Monetary Theory (MMT),” European Journal of Economics and Economic Policies 10.1: 44–60.

Parguez, Alain and Mario Seccareccia. 2000. “The Credit Theory of Money: The Monetary Circuit Approach,” in John Smithin (ed.), What is Money?. Routledge, London. 101–123.

Rallo, Juan Ramón. 2020. “Georg Friedrich Knapp was not a ‘Chartalist,’” History of Political Economy 52.4: 773–793.

Rochon, Louis-Philippe and Matias Vernengo. 2003. “State Money and the Real World: Or Chartalism and its Discontents,” Journal of Post Keynesian Economics 26.1: 57–67.

Rossi, Sergio. 1999. Review of Wray’s Understanding Key to Full Employment and Price Stability, Kyklos 52.3: 483–485.

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability. Edward Elgar, Cheltenham.

Radhika Desai on the Labour Theory of Value: A Refutation

I was challenged by a person in the comments section to engage with the work of the Marxist Radhika Desai.

So, after looking over a list of Radhika Desai’s articles and books, I found this chapter which partly deals with Marx’s Labour Theory of Value (LTV):

Desai, Radhika. 2016. “The Value of History and the History of Value,” in T. Subasat (ed.), The Great Financial Meltdown: Systemic, Conjunctural or Policy Created?. Edward Elgar Publishing, Inc., Northampton, MA. 136–158.

Marx’s Labour Theory of Value (LTV) is at the heart of his economics, so establishing what interpretation of the LTV that Radhika Desai supports is a very good way to assess how properly she understands Marx.

First of all, Desai appears to argue that the marginal revolution of the 1870s that gave birth to Neoclassical economics was supposedly a direct response to Karl Marx’s economic theories (Desai 2016: 138). This is just plain nonsense.

William Stanley Jevons already sketched the basic ideas of diminishing marginal utility as early as October 1862 in a talk to the British Association for the Advancement of Science, held at Cambridge (Jevons 1866), long before Marx ever published volume 1 of Capital in 1867. I don’t see any evidence at all that William Stanley Jevons, Alfred Marshall, Léon Walras, and Carl Menger – the founders of modern Neoclassical theory – even knew of Karl Marx or his work in the 1870s, or were directly inspired by an opposition to Marxist ideas when they developed the concepts of subjective utility, diminishing marginal utility, and the foundational ideas of Marginalism.

On page 138 of Desai’s chapter, we appear to get her own view on Marx’s LTV:

“Secondly, Marx’s labor theory of value served Marxist economics as little more than an incantation. Operationally, Marx’s theory is rejected because it allegedly suffers from a ‘transformation problem’, unable to consistently transform values into prices. Nothing could be more ironic: Marx rooted his understanding of value production in his critique of Say’s Law (and of Ricardo’s adherence to it) and his insistence that money played an independent role in the economy. For Marx ([1894] 1981: 264–269), values and prices did not exist as two separate systems and there was never any question of ‘transformation’ or ‘translation’, but one of understanding their dynamic relationship. The temporal single-system interpretation (Kliman 2007; Freeman in Freeman and Carchedi 1996) which points this out has generally been met with silence. It is as though, when faced with the choice between Marx’s value and neoclassical prices, Marxist economists cannot break their umbilical tie to the latter, despite their political commitment to Marxism; the spirit may be willing but the flesh is weak” (Desai 2016: 138).

So here Radhika Desai seems to declare her allegiance to the Temporal Single System Interpretation (TSSI) of Marxism.

First, Radhika Desai’s statement that for Marx “there was never any question of ‘transformation’ or ‘translation’” of values into prices is an insanely false statement, since Marx discusses in detail the process in which values of commodities are transformed into prices of production in Chapters 9 and 10 of volume 3 of Capital! The related aspect of the “Transformation Problem” – how different industries with different organic compositions of capital could sell commodities at their labour values when they tend to have an average rate of profit under capitalist competition – was also a fundamental debate within Marxist circles during the 1880s and 1890s.

Secondly, Radhika Desai’s claim that the Temporal Single System Interpretation (TSSI) of Marx has “generally been met with silence” is also false.

Here is a selection of critiques of TSSI, mostly by fellow Marxists:

Laibman, David. 2000. “Rhetoric and Substance in Value Theory: An Appraisal of the New Orthodox Marxism,” Science & Society 64.3: 310–332.

Mongiovi, G. 2002. “Vulgar Economy in Marxian Garb: A Critique of Temporal Single System Marxism,” Review of Radical Political Economics 34.4: 393–416.

Mohun, S. 2003. “On the TSSI and the Exploitation Theory of Profit,” Capital & Class 81: 85–102.

Mohun, Simon and Veneziani, Roberto. 2009. “The Temporal Single-System Interpretation: Underdetermination and Inconsistency,” MPRA Paper No. 30452, 18 June 2009
http://mpra.ub.uni-muenchen.de/30452/1/MPRA_paper_30452.pdf

Moseley, Fred. “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices”
https://www.academia.edu/27678884/Marxs_Concept_of_Prices_of_Production_Long_Run_Center_of_Gravity_Prices

Veneziani, R. 2004. “The Temporal Single-System Interpretation of Marx’s Economics: A Critical Evaluation,” Metroeconomica 55: 96–114.

For example, Fred Moseley above has shown that the definition of “prices of production” as used in Andrew Kliman’s TSSI is actually different from the authentic concept as understood by Marx.

Thirdly, I have already dealt with the absurd re-interpretation of Marx called the Temporal Single System Interpretation (TSSI) here in these posts:

“Kliman’s Explanation of Marx’s Labour Theory of Value,” March 31, 2015.

“Mongiovi on Temporal Single System Marxism,” May 16, 2015.

“Nitzan and Bichler on the Temporal Single System Interpretation (TSSI),” June 3, 2015.

Any interested person can read these posts to see that the TSSI simply re-defines labour values, contrary to Marx’s original theory, as equal to price by definition. The TSSI has reduced Marxist theory to an empirically empty tautology. It has no explanatory power and adds nothing of any importance to economic science.

If Radhika Desai supports the TSSI, then she is just another Marxist who doesn’t even defend the authentic versions of the LTV as found in volume 1 and volume 3 of Capital.

BIBLIOGRAPHY
Desai, Radhika. 2016. “The Value of History and the History of Value,” in T. Subasat (ed.), The Great Financial Meltdown: Systemic, Conjunctural or Policy Created?. Edward Elgar Publishing, Inc., Northampton, MA. 136–158.

Jevons, William Stanley. 1866. “Brief Account of a General Mathematical Theory of Political Economy,” Journal of the Statistical Society of London 29.2: 282–287.

Per Bylund versus Carl Menger on Taxes driving the Value of Money

The Austrian economist Per Bylund has recently written this challenge to advocates of MMT/Neochartalism:

Bylund, Per. 2023. “Is it Money because it is redeemed in Tax Payments?: A Response to Kelton and Wray,” Quarterly Journal of Austrian Economics 25.4: 147–165.

Bylund rejects the view that fiat money only has value and is used as a general medium of exchange because governments demand it as the legal means of payment for state taxes, and demands that advocates of Modern Monetary Theory (MMT) respond to his critique.

Now certainly the recent view within MMT that only taxes cause state fiat money to have value and be the general medium of exchange (and nothing else) is too extreme an idea, and has been rejected even by some Post Keynesian economists (e.g., Rochon and Vernengo 2003), there are, quite remarkably, passages in the work of Carl Menger – the founder of the Austrian School – that actually give some credence to that view, but in the context of the paper money issued by the Austro-Hungarian empire in the late 19th century.

The fundamental passages come in Carl Menger’s Lectures to Crown Prince Rudolf of Austria (1876):

“Payments abroad in Austrian currency and Austrian bills of exchange will not be accepted at all or only with a considerable surcharge; and with the diminishing reputation of the currency – which doubtless is of great, if not the greatest, influence – the reputation of the state as a whole diminishes; therefore, it can reasonably be argued that an uncertain, disorderly currency is a vital deficiency of a state, because it makes itself deeply felt in all of economic life and its progress.

Therefore we must strive especially for a sound currency, and to do this successfully, we must first of all find out the reasons why our paper money is unsound.

Let us first consider the unfortunate condition of our state notes and its causes.

The state note is the paper money which is issued by government and has acquired the status of money only because citizens are entitled to pay their taxes with it (Menger 1994 [1876]: 142). ….

In any country with a well-ordered monetary system, the quantity of state notes in circulation must be fixed, and the government should then resolve not to exceed this quantity under any circumstances by issuing more notes. State notes derive their value only from the fact that they may be used for paying taxes; a fairly small quantity of them is sufficient for this purpose; an issue of notes in excess of this requirement will certainly have harmful consequences, since the notes are thereby devalued and must then have their terms of exchange fixed by decree” (Menger 1994 [1876]: 143).

In the 1870s, the period during which Lectures to Crown Prince Rudolf of Austria was written, Austria (as part of the Austro-Hungarian Empire) was on a silver standard in which the state currency was the Austro-Hungarian florin/gulden (with a weight standard of 11.111 grams of fine silver under the 1857 Vienna Monetary Treaty), which was also divided into 100 kreuzers after 1857. The official central bank of the Austro-Hungarian Empire also printed banknotes that in theory should have been convertible into silver coins.

But on 25 April 1859, during Second Italian War of Independence (1859), the convertibility of Austrian central banknotes into silver coins had been suspended and was never re-instated, so that these banknotes were effectively a form of inconvertible paper currency (a state of affairs noted by Menger 1994 [1876]: 137).

It seems also that the imperial government of the Austro-Hungarian empire issued its own currency notes via the Treasury separate from those of the central bank, so that there were two inconvertible paper currencies in use in the empire. It is these “state notes” that Menger was referring to in the quotation above.

Astonishingly, Menger states that the “state note is the paper money which is issued by government and has acquired the status of money only because citizens are entitled to pay their taxes with it [my emphasis]” and that these state notes “derive their value only from the fact that they may be used for paying taxes” [my emphasis], in direct contradiction to the view defended by Per Bylund. Ouch!

It’s as if Carl Menger has taken the hapless Per Bylund to the woodshed and schooled him in economic theory!

Despite all this, I admit that there are indeed problems with the dogmatic view in modern MMT that only taxes drive the value of money, but I will leave a discussion of this for a subsequent post.

BIBLIOGRAPHY
Menger, Carl. 1994 [1876]. Carl Menger’s Lectures to Crown Prince Rudolf of Austria (ed. by Erich W. Streissler and Monika Streissler; trans. Monika Streissler and David F. Good), E. Elgar, Aldershot.

Rochon, Louis-Philippe and Matias Vernengo. 2003. “State Money and the Real World: Or Chartalism and its Discontents,” Journal of Post Keynesian Economics 26.1: 57–67.

Marx’s Capital, Volume 3, Chapter 10: A Critical Summary

Chapter 10 of volume 3 of Capital is called “Equalization of the General Rate of Profit through Competition. Market Prices and Market Values. Surplus Profit,” and it discusses the equalization of profit rate and the formation of prices of production.

Brewer (1984: 139) argues that the chapter in the manuscript used by Engels was in the form of a “a preliminary draft rather than a polished final version,” which is certainly evident when you read the chapter.

Marx begins by noting that some industries have a composition of capital equal to, or close to, the average composition of capital in the economy as a whole (the total social capital). In these industries, “the price of production of the produced commodities coincides exactly or approximately with their [sc. labour] values as expressed in money” (Marx 1909: 203).

Marx thinks all prices are driven towards their “prices of production” which can be expressed by this formula:

k + kpʹ
where k = cost price
and p = average rate of profit (Marx 1909: 204).

Marx also thinks that the “average rate of profit” is “nothing else but the percentage of profit in that sphere of average composition, in which the profit is identical with the surplus-value” (Marx 1909: 204). However, none of this follows unless prices do actually equal labour values in the sector with an average composition of capital. But Marx seems to miss that in that sphere cost prices of factor inputs will be “prices of production” as well, which means that the price of output commodities will deviate from labour values.

Marx now states two of his aggregate identities:

“Now, this average rate of profit is nothing else but the percentage of profit in that sphere of average composition, in which the profit is identical with the surplus-value. Hence the rate of profit is the same in all spheres of production, for it is apportioned according to that one of the average spheres of production in which the average composition of capitals prevails. Consequently the sum of the profits of all spheres of production must be equal to the sum of surplus-values, and the sum of the prices of production of the total social product equal to the sum of its values. But it is evident that the balance between the spheres of production of different composition must tend to equalise them with the spheres of average composition, no matter whether this average composition is exact or only approximate. Again, there are tendencies toward equalisation between the more or less similar spheres, and these tendencies seek to bring about the ideal average, which does not really exist, so that there is a trend toward crystallisation around the ideal. In this way the tendency necessarily prevails to make of the prices of production merely changed forms of value, or to make of profits but mere portions of surplus-value, which are assigned, however, not in proportion to the surplus-value produced in each special sphere of production, but in proportion to the mass of capital employed in each sphere of production, so that equal masses of capital, whatever may be their composition, receive equal aliquot shares of the total surplus-value produced by the total social capital” (Marx 1909: 204).

We must remember that in volume 3 of Capital, Marx argued that the “law of value” only ultimately and indirectly explains prices, and defended three aggregate equalities:

(1) the sum of surplus value = sum of profits;

(2) the sum of values = sum of prices, and

(3) the value rate of profit = the money rate of profit.

As I noted in the last post, Ladislaus von Bortkiewicz demonstrated that two of the three aggregate equalities above fail, and that the sum of surplus value = sum of profits quality cannot be defended unless under very special assumptions (see Bortkiewicz 1906; 1907a; 1907b; 1907c; English translations in Bortkiewicz 1949 and 1952; see also here).

Worse still, the idea that the value rate of profit equals the money rate of profit is impossible. If, as Ian Steedman has argued, commodity prices (including cost prices) do not equal labor value, then the formula S/(C + V) cannot explain the money rate of profit (Steedman 1977: 31).

To return to Chapter 10, Marx argues that competition moves social capital between branches of production, so that profit rates are equalized, as more commodities are produced in sectors with higher profit rates. Later on in the chapter Marx explains this process:

“Now, if the commodities are sold at their values, then, as we have shown, considerably different rates of profit arise in the various spheres of production, according to the different organic composition of the masses of capital invested in them. But capital withdraws from spheres with low rates of profit and invades others which yield a higher rate. By means of this incessant emigration and immigration, in one word, by its distribution among the various spheres in accord with a rise of the rate of profit here, and its fall there, it brings about such a proportion of supply to demand that the average profit in the various spheres of production becomes the same, so that values are converted into prices of production. This equilibration is accomplished by capital in a more or less perfect degree to the extent that capitalist development is advanced in a certain nation, in other words to the extent that conditions in the respective countries are adapted to the capitalist mode of production. As capitalist development proceeds, it develops also its own peculiar conditions and subjects to its specific character and its immanent laws all the social requirements on which the process of production is based.

The incessant equilibration of the continual differences is accomplished so much quicker, 1), the more movable capital is, the easier it can be shifted from one sphere and one place to another; 2) the quicker labor-power can be transferred from one sphere to another and from one local point of production to another. The first condition implies complete freedom of trade in the interior of society and the removal of all monopolies with the exception of those which naturally arise out of the capitalist mode of production. It implies, furthermore, the development of the credit-system, which concentrates the inorganic mass of the disposable social capital instead of leaving it in the hands of individual capitalists. Finally it implies a subordination of the various spheres of production to the control of capitalists. This last implication is of itself included in the assumption that it is a question of a transformation of values into prices of production in all capitalistically exploited spheres of production. But this equilibration meets great obstacles, whenever numerous and large spheres of production, which are not operated on a capitalistic basis (such as farming by small farmers), are interpolated between the capitalist spheres and interrelated with them. A great density of population is also a requirement.

The second condition implies the abolition of all laws which prevent the laborers from moving from one sphere of production to another and from one local center of production to another; an indifference of the laborer to the nature of his labor; the greatest possible reduction of labor in all spheres of production to simple labor; the elimination of all craft prejudices among laborers; and last, not least, a subjugation of the laborer under the capitalist mode of production.” (Marx 1909: 230–231).

In those industries with an average composition of capital, there exists a profit rate that is equal to the average rate of profit for prices of production (Marx 1909: 203–204). Surplus value is therefore redistributed between branches of production.

Marx now asks the question: “How is this equalization of profits into an average rate of profit brought about, seeing that it is evidently a result, not a point of departure?” (Marx 1909: 205). The estimates of value in money prices can only be made when commodities actually exchange (Marx 1909: 205). Marx’s theory predicts that, if commodities are sold at their real values, the “rates of profit in the various spheres of production would differ considerably” (Marx 1909: 205).

Marx now imagines a hypothetical scenario of simple commodity production where labourers own their means of production and exchange their goods with each other, without capitalists. The labourers’ incomes from exchange of commodities at their values would, according to Marx, include the value of their means of production and payment for the socially-necessary labour time required to produce them (Marx 1909: 207–208).

Marx then states:

“The exchange of commodities at their values, or approximately at their values, requires, therefore, a much lower stage than their exchange at their prices of production, which requires a relatively high development of capitalist production.

Whatever may be the way in which the prices of the various commodities are first fixed or mutually regulated, the law of value always dominates their movements. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.

Aside from the fact that prices and their movements are dominated by the law of value it is quite appropriate, under these circumstances, to regard the value of commodities not only theoretically, but also historically, as existing prior to the prices of production. This applies to conditions, in which the laborer owns his means of production, and this is the condition of the land-owning farmer and of the craftsman in the old world as well as the new. This agrees also with the view formerly expressed by me that the development of product into commodities arises through the exchange between different communes, not through that between the members of the same commune. It applies not only to this primitive condition, but also to subsequent conditions based on slavery or serfdom, and to the guild organisation of handicrafts, so long as the means of production installed in one line of production cannot be transferred to another line except under difficulties, so that the various lines of production maintain, to a certain degree, the same mutual relations as foreign countries or communistic groups.

In order that the prices at which commodities are exchanged with one another may correspond approximately to their values, no other conditions are required but the following: 1) The exchange of the various commodities must no longer be accidental or occasional, 2) So far as the direct exchange of commodities is concerned, these commodities must be produced on both sides in sufficient quantities to meet mutual requirements, a thing easily learned by experience in trading, and therefore a natural outgrowth of continued trading, 3) So far as selling is concerned, there must be no accidental or artificial monopoly which may enable either of the contracting sides to sell commodities above their value or compel others to sell below value. An accidental monopoly is one which a buyer or seller acquires by an accidental proportion of supply to demand.

The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).

So here Marx is effectively admitting that the theory of value in the text of volume 1 – that commodities tend to exchange at their pure labour values which are anchors for the price system – was a historically contingent phenomenon existing in the “lower stage … of capitalist production” and before the emergence of a higher stage of capitalism where Ricardo’s prices of production are the anchors for the price system, though he had nowhere stated this in the introduction or text of volume 1, but left his readers with the impression that his “law of value” applied to real-world commodity exchange in 19th century capitalism.

This passage in Chapter 10 was seized on by Friedrich Engels in his “Supplement and Addendum to Volume 3 of Capital” (Engels 1991 [1895]), originally published in May 1895 for the Neue Zeit. In his supplement, Engels attempted to answer critics who charged that volume 3 of Capital contradicted the “law of value” in volume 1 (which was that reproducible commodities have prices that tend to equal their labour values). The whole point of Engels’ supplement is to explain the “law of value” as a theory of price determination in volume 1 of Capital and defend it from the charge that it was a wholly abstract concept (or “ideal or logical” concept as argued by Werner Sombart) or a “necessary fiction.”

Engels’ solution is to explain Part one of volume 1 of Capital as referring to the pre-modern word of commodity exchange:

“Proceeding from this determination of value by labour-time, commodity production as a whole, and with it the manifold relationships in which the different aspects of the law of value make themselves felt, now develops as presented in Part One of Capital Volume 1; ....

To sum up, Marx’s law of value applies universally, as much as any economic laws do apply, for the entire period of simple commodity production, i.e. up to the time at which this undergoes a modification by the onset of the capitalist form of production. Up till then, prices gravitate to the values determined by Marx’s law and oscillate around these values, so that the more completely simple commodity production develops, the more do average prices coincide with values for longer periods when not interrupted by external violent disturbances, and with the insignificant variations we mentioned earlier. Thus the Marxian law of value has a universal economic validity for an era lasting from the beginning of the exchange that transforms products into commodities down to the fifteenth century of our epoch. But commodity exchange dates from a time before any written history, going back to at least 3500 B.C. in Egypt, and 4000 B.C. or maybe even 6000 B.C. in Babylon; thus the law of value prevailed for a period of some five to seven millennia. We may now admire the profundity of Mr Loria in calling the value that was generally and directly prevalent throughout this time a value at which commodities never were sold nor could be sold, and which no economist will ever bother himself with if he has a glimmer of healthy common sense!” (Engels 1991 [1895]: 1036–1038).

Engels also stated that the “transition to metal money” – especially gold and silver flowing into the Old World but mined in far distant counties – began to obscure exchange at pure labour values (Engels 1991 [1895]: 1037).

But Engels’ explanation of volume 1 of Capital here is comical, since Marx, in volume 1, never makes any such qualifications or limitations to the law of value. In fact, in volume 1, Marx states that money prices depend on the labour value embodied in units of gold or silver, so that long-run prices are determined by abstract socially-necessary labour time needed to produce relevant units of the money commodity (Marx 1906: 108, 111). But Marx says nothing about the rise of commodity money overthrowing his law of value in modern capitalist production. At no point does Marx in volume 1 limit the “law of value” – that real-world reproducible commodities tend to exchange at their labour value – to the “beginning of the exchange that transforms products into commodities down to the fifteenth century of our epoch.”

To return to Chapter 10, Marx proceeds to the distinction between the concepts of “market value” and “individual value”:

“We shall also have to note a market value, which must be distinguished from the individual value of the commodities produced by the various producers… The individual value of some of these commodities will be below the market-value, that is to say, they require less labor-time for their production than is expressed in the market-value, while that of others will be above the market-value. We shall have to regard the market-value on one side as the average value of the commodities produced in a certain sphere, and on the other side as the individual value of commodities produced under the average conditions of their respective sphere of production and constituting the bulk of the products of that sphere. It is only extraordinary combinations of circumstances under which commodities produced under the least or most favorable conditions regulate the market-value, which forms the center of fluctuation for the market-prices which are the same, however, for the same kind of commodities. If the ordinary demand is satisfied by the supply of commodities of average value, that is to say, of a value midway between the two extremes, then those commodities, whose individual value stands below the market value, realise an extra surplus-value, or surplus-profit, while those, whose individual value stands above the market-value cannot realise a portion of the surplus-value contained in them.

It does not do any good to say that the sale of the commodities produced under the most unfavorable conditions proves that they are required for keeping up the supply. If the price in the assumed case were higher than the average market-value, the demand would be greater. At a certain price, any kind of commodities may occupy so much room on the market. This room does not remain the same in the case of a change of prices, unless a higher price is accompanied by a smaller quantity of commodities, and a lower price by a larger quantity of commodities. But if the demand is so strong that it does not let up when the price is regulated by the value of the commodities produced under the most unfavorable conditions then these commodities determine the market-value. This is not possible unless the demand exceeds the ordinary, or the supply falls below it. Finally, if the mass of the produced commodities exceeds the quantity which is ordinarily disposed of at average market-values, then the commodities produced under the most favorable conditions regulate the market-value. These commodities may be sold exactly or approximately at their individual values, and in that case it may happen that the commodities produced under the least favorable conditions do not realise even their cost prices, while those produced under average conditions realise only a portion of the surplus-value contained in them. The statements referring to market-value apply also to the price of production, if it takes the place of market-value. The price of production is regulated in each sphere, and this regulation depends on special circumstances. And this price of production is in its turn the center of gravity around which the daily market-prices fluctuate and tend to balance one another within definite periods. (See Ricardo on the determination of the price of production by those who produce under the least favorable conditions.)” (Marx 1909: 210–211).

Here the “market-value” is not the price determined by supply and demand, but the value of commodities as determined by the average quantity of labour need to produce that commodity throughout the sector as a whole. Since different firms have different levels of productivity and technology, the “individual value” of any given commodity may differ from the average “market-value” owing to the different technical conditions of productivity in the individual firm that produces it.

Though Marx conducts a great deal of his following discussion in the rest of chapter in terms of “market value,” as we can see in the last quotation, it is clear Marx thinks that “prices of production” are the real-world anchors for the price system.

Marx now returns to how his “law of value” is still valid:

“No matter what may be the way in which prices are regulated, the result always is the following:

1) The law of value dominates the movements of prices, since a reduction or increase of the labor-time required for production causes the prices of production to fall or to rise. It is in this sense that Ricardo (who doubtless realised that his prices of production differed from the value of commodities) says that ‘the inquiry to which he wishes to draw the reader’s attention relates to the effect of the variations in the relative value of commodities, and not in their absolute value.’

2) The average profit which determines the prices of production must always be approximately equal to that quantity of surplus-value, which falls to the share of a certain individual capital in its capacity as an aliquot part of the total social capital.” (Marx 1909: 211).

Marx’s analysis of supply and demand in the remainder of the chapter is confusing and difficult to understand (Brewer 1984: 141–142).

Marx’s definition of the intersection of supply and demand is as follows:

“The real difficulty consists in determining what is meant by balancing supply and demand.

Demand and supply balance one another, when their mutual proportions are such that the mass of commodities of a definite line of production can be sold at their market-value, neither above nor below it. That is the first thing we hear.

The second is this: If the commodities are sold at their market-values, then supply and demand balance.

If demand and supply balance, then they cease to have any effect, and for this very reason commodities are sold at their market-values. If two forces exert themselves equally in opposite directions, they balance one another, they have no influence at all on the outside, and any phenomena taking place at the same time must be explained by other causes than the influence of these forces.” (Marx 1909: 223).

Brewer (1984: 141) argues that Marx thinks that “‘supply’ and ‘demand’ are defined as the quantities supplied and demanded when price equals market-value,” but also notes that Marx may have been inconsistent in his definitions of these concepts (a consequence presumably of the fact that large parts of volume 3 of Capital as published by Engels are from a draft of 1864–1865). According to Marx’s theory, the following is the case:

(1) Supply and demand do not determine “normal prices” (“prices of production”) but only the fluctuations around normal prices, and supply and demand do not determine what Marx calls the “market value.”

(2) if demand for a given commodity whose price is equal to the market value exceeds supply, then the price rises above the market value.

(3) if supply of a given commodity whose price is equal to the market value exceeds demand, then the price must fall below the market value. (Brewer 1984: 141–142).

Capitalist competition drives high prices caused by excess demand back to the market value.

At the end of the chapter, Marx states what he thinks is his original contribution to the subject:

“The price of production includes the average profit. We call it price of production. It is, as a matter of fact, the same thing which Adam Smith calls natural price, Ricardo price of production, or cost of production, and the physiocrats prix nécessaire, because it is in the long run a prerequisite of supply, of the reproduction of commodities in every individual sphere. But none of them has revealed the difference between price of production and value. We can well understand, then, why these same economists, who always resist a determination of the value of commodities by labor-time, by the quantity of labor contained in them, always speak of prices of production as centers, around which market-prices fluctuate. They can afford to do that, because the price of production is an utterly external and, at first glance, meaningless form of the value of commodities, a form as seen in competition and thus reflected in the mind of the vulgar capitalist, and consequently in that of the vulgar economists.

Our analysis resulted in the discovery that the market-value (and everything said concerning it applies with the necessary modifications to the price of production) implies a surplus profit for those who produce in any particular sphere of production under the most favorable conditions. With the exception of crises, and of over-production in general, this applies to all market-prices, no matter how much they may deviate from market-values or market-prices of production. For the market-price signifies that the same price is paid for commodities of the same kind, although they may have been produced under very different individual conditions and may have considerably different cost-prices.” (Marx 1909: 234).

Finally, Marx notes that certain capitalists can avoid the market competition which drives prices towards prices of production and so they can earn “surplus profit”, a profit above the average rate (Marx 1909: 234).

BIBLIOGRAPHY
Bortkiewicz, L. von. 1906. “Wertrechnung und Preisrechnung im Marxschen System I,” Archiv für Sozialwissenschaft und Sozialpolitik 23: 1–50.

Bortkiewicz, L. von. 1907a. “Wertrechnung und Preisrechnung im Marxschen System II,” Archiv für Sozialwissenschaft und Sozialpolitik 25: 10–51.

Bortkiewicz, L. von. 1907b. “Wertrechnung und Preisrechnung im Marxschen System III,” Archiv für Sozialwissenschaft und Sozialpolitik 25: 445–488.

Bortkiewicz, L. von. 1907c. “Zur Berichtigung der grundlegenden theoretischen Konstruktion von Marx im 3. Band des ‘Kapital,’” Jahrbücher für Nationalökonomie und Statistik 34: 319–335.

Bortkiewicz, L. von. 1949. “On the Correction of Marx’s Fundamental Theoretical Construction in the Third Volume of Capital,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 197–221.
https://mises.org/library/karl-marx-and-close-his-system

Bortkiewicz, L. von. 1952. “Value and Price in the Marxian System,” International Economic Papers 2: 5–60.

Brewer, Anthony. 1984. A Guide to Marx’s Capital. Cambridge University Press, Cambridge.

Engels, F. 1895. Supplement to Capital, Volume III https://www.marxists.org/archive/marx/works/1894-c3/supp.htm

Engels, F. 1991 [1895]. “Supplement and Addendum to Volume 3 of Capital,” in Karl Marx, Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London. 1027–1047.

Heinrich, Michael. 2012. An Introduction to the Three Volumes of Karl Marx’s Capital (trans. Alexander Locascio). Monthly Review Press, New York.

Marx, Karl. 1909. Capital. A Critique of Political Economy (vol. 3; trans. Ernst Untermann from 1st German edn.). Charles H. Kerr & Co., Chicago.

Marx, Karl. 1991. Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London.

Steedman, Ian. 1977. Marx after Sraffa. NLB, London.

Marx’s Labour Theory of Value: A Concise Refutation

As an advocate of Post Keynesian economics, I reject Marx’s economic theories in the three volumes of Capital because they are founded on the false Labour Theory of Value (LTV).

Here is a concise case against the LTV, although I limit myself only to some of the most serious criticisms of the theory:

(1) Marx’s Argument for the LTV is Logically Flawed: Marx does not prove it is a real Empirically-Relevant Concept
In chapter 1, volume 1 of Capital, Marx assumes that, when one commodity exchanges for another, this entails an equality:

“Let us take two commodities, e. g., corn and iron. The proportions in which they are exchangeable … can always be represented by an equation in which a given quantity of corn is equated to some quantity of iron: e. g., 1 quarter corn = x cwt. [hundredweight] iron. What does this equation tell us? It tells us that in two different things—in 1 quarter of corn and x cwt. of iron, there exists in equal quantities something common to both. The two things must therefore be equal to a third, which in itself is neither the one nor the other. Each of them, so far as it is exchange value, must therefore be reducible to this third. ….

Along with the useful qualities of the products themselves, we put out of sight both the useful character of the various kinds of labour embodied in them, and the concrete forms of that labour; there is nothing left but what is common to them all; all are reduced to one and the same sort of labour, human labour in the abstract.” (Marx 1906: 44–45).

First, one must immediately ask: what exchange ratios is Marx talking about here?

Is the equation “1 quarter corn = x hundredweight of Iron” completely abstract and not meant to apply to the real-world? If it is utterly abstract, Marx cannot provide any empirical proof that labour value actually exists in the real world.

Or does the equation refer to exchange ratios in real-world 19th century capitalism?

Marx’s argument assumes that in his exchange relation the two commodities are exchanging at their true labour values, but in volume 3 of Capital, Marx abandons the idea that real-world reproducible commodities tend to sell at their labour values.

But, if Marx thinks commodities do not usually sell at their labour values, then the argument in chapter 1 of volume 1 cannot refer to real-world prices!

So Marx’s argument in volume 1 of Capital is completely invalid: there is no empirical proof provided.

Secondly, later in the same Chapter Marx makes this admission:

“Lastly, nothing can have value, without being an object of utility. If the thing is useless, so is the labour contained in it; the labour does not count as labour, and therefore creates no value.” (Marx 1906: 48).

This means that having utility (a use-value) and being demanded by buyers are necessary conditions for any commodity having a labour value. It follows logically that labour-power cannot be the only thing that creates value in commodities, since “being an object of utility” is also a necessary condition.

Thirdly, why should human labour have a special status when animal labour has been – and in some countries still is – a fundamental factor of production?

As Piero Sraffa later noted,

“There appears to be no objective difference between the labour of a wage earner and that of a slave; of a slave and of a horse; of a horse and of a machine, of a machine and of an element of nature (?this does not eat). It is a purely mystical conception that attributes to human labour a special gift of determining value. Does the capitalist entrepreneur, who is the real ‘subject’ of valuation and exchange, make a great difference whether he employs men or animals? Does the slave-owner?” (Sraffa, unpublished note, D3/12/9: 89, quoted in Kurz and Salvadori 2010: 199).

Fourthly, Marx never explains how to formulate a system for homogeneous units of socially-necessary labour time to accurately measure and aggregate different heterogenous forms of human labour.

At one point in volume 1 of Capital, Marx states that the market itself accurately measures the value of skilled labour compared with unskilled labour through actual market prices, but this cannot work because Marx in volume 3 admits most commodities do not exchange at true labour values.

Marx’s concept of a homogenous unit of socially-necessary labour time value is therefore undefined, not meaningful, has never been properly formulated by any Marxist, and remains empirically irrelevant for real-world economics.

Finally, the LTV faces the problem of joint production: if a production process produces more than one commodity, such as two or several goods, then how does one calculate socially-necessary labour time? In particular, Ian Steedman has argued that joint production leaves open the possibility that some labour values of commodities produced in joint production can be undefined, nil, or negative (Steedman 1977: 137–183; Nitzan and Bichler 2009: 101).

There are, however, some core insights about labour that I assume Marxists agree with, as follows:

(1) human labour is a fundamental factor input in modern capitalism,

(2) the cost of labour is frequently a huge part of cost-based, mark-up prices, and

(3) labour is fundamentally different from other commodities.

But these insights are held as true in Post Keynesian economics. The LTV can be cast aside as unnecessary, unproven, and with no causal power of explanation, just like, say, the Neoclassical concept of the “natural rate of interest.”

(2) Marx’s “Law of Value” in the text of Volume 1 of Capital contradicts Volume 3
In volume 1 of Capital, Marx defended in his text a “law of value” in which homogeneous socially-necessary labour time units were the anchor for the price system in modern capitalism. That is to say, individual commodity prices are supposed to gravitate towards their real labour values. Volume 1 also contained two footnotes hinting at the different theory of “prices of production” in Marx’s draft of volume 3 (which Marx had already written before he published volume 1). But the text left readers with the impression that Marx really did think that the prices of real-world reproducible commodities in 19th-century capitalism tended to equal labour values, because Marx said this again and again in the text. This and Marx’s theory of surplus value that was necessarily different between firms with different compositions of capital led to the famous “Transformation Problem.”

But in volume 3 of Capital, Marx stated that the “exchange of commodities at their values, or approximately at their values, requires, therefore, a much lower stage than their exchange at their prices of production, which requires a relatively high development of capitalist production” (Marx 1909: 208–210). So Marx now thought that exchange of commodities with prices at their true labour values only happened in the pre-modern world of commodity exchange when workers owned their own means of production.

Crucially, Marx in volume 3 now only defended the view that the “law of value” only ultimately and indirectly explains prices, and defended three aggregate equalities:

(1) the sum of surplus value = sum of profits;

(2) the sum of values = sum of prices, and

(3) the value rate of profit = the money rate of profit.

Marx also now accepted that Classical “prices of production” became the anchors for the real-world 19th-century capitalist price system, which contradicted his “law of value” in volume 1.

This contradiction was pointed out by many critics of Marx and even sympathetic Marxists.

Engels was deeply concerned by this contradiction, and in his “Supplement and Addendum to Volume 3 of Capital” of 1895 (Engels 1991 [1895]) Engels claimed that Part one of volume 1 of Capital was actually referring to the pre-modern word of commodity exchange, even though the text frequently refers to 19th-century capitalist commodity prices.

Marxists must explain why Engels tried to explain the contradiction between volume 1 and volume 3 of Capital this way, if Marx only intended his “law of value” in volume 1 – that commodities tend to exchange at true labour values – to be either (1) totally abstract and not meant to apply to the real world, or (2) only ever meant to apply to the pre-modern word of commodity exchange.

(3) Volume 3 of Capital is Theoretically and Empirically Wrong
It is well known that the work of Ladislaus von Bortkiewicz showed that two of the three aggregate equalities defended by Marx in volume 3 of Capital fail, and that the sum of surplus value = sum of profits quality cannot be defended unless under very special assumptions (see Bortkiewicz 1906; 1907a; 1907b; 1907c; English translations in Bortkiewicz 1949 and 1952; see also here).

Moreover, as Ian Steedman has argued, (1) Marx’s Transformation solution is internally inconsistent as the value rate of profit S/(C + V) does not explain money rate of profit when commodity prices do not equal labor value, and (2) Marx failed to transform the prices of non-labour inputs (constant capital) in his transformation tables (though this was a minor problem) (Steedman 1977: 29–31). In short, Marx’s logical inconsistency is that he “assumes that S/(C + V) is the rate of profit but then derives the result that prices diverge from values, which means precisely, in general, that S/(C + V) is not the rate of profit” (Steedman 1977: 31).

But, in addition to this, in volume 3 of Capital, Marx holds that Classical “prices of production,” with an equal rate of profit, are the anchors for the price system. However, Post Keynesian economics shows us that this is empirically false. The real world does not have a strong tendency to equalisation of profit rates, and even Marxists like D. Zachariah have found strong empirical evidence against such a tendency (Zachariah 2006: 18).

In the real world, there are two factors that prevent any strong tendency to equal rates of profit:

(1) the strong barriers to entry in many capitalist sectors (including aggressive use of capacity utilisation as a barrier to entry, patents and intellectual property law), and

(2) the significant, persistent differences in profit mark-ups in different sectors and industries.

Diffrent capitalist firms have the power to charge divergent mark-ups on their cost-prices, and there is no evidence these mark-ups get competed away.

Once we reject the idea of “prices of production” as empirically relevant and operative in modern capitalism as the anchors for the price system, then Marx’s theory of price determination in volume 3 of Capital is falsified.

Even if, hypothetically, one accepts the concept of labour value as meaningful, there is no logical reason to think Marx’s three aggregate identities – such as “the sum of surplus value equals sum of profits” or the “sum of values equals sum of prices” – would hold true when prices depart so radically from “prices of production.”

Conclusion
Marx’s argument for labour value in volume 1 of Capital is hopelessly flawed. It does not prove labour value exists, and Marx’s concept of a homogenous unit of socially-necessary labour time unit is undefined, not meaningful, has never been properly formulated by any Marxist, and remains empirically irrelevant for real-world economics.

Worse still, Marx’s “law of value” in volume 1 of Capital contradicts volume 3, which means his economic theory is not consistent, but internally inconsistent.

Finally, the “prices of production” are not causal anchors of real-world prices. Marx’s theory of price determination in volume 3 of Capital is false, since real-world prices depart significantly even from “prices of production.”

A final point is to be kept in mind.

We know that Marx’s LTV in the text of volume 1 of Capital (published in 1867) contradicts the LTV in volume 3 (which Marx never published in his own lifetime).

But volume 1 of Capital also contains two absurd footnotes that contradict what is said in the text about the LTV (namely, footnote 24 in Chapter 5, and footnote 9 in Chapter 9) and these footnotes appear to admit that prices of production are the anchors for the price system in 19th century capitalism, and that such prices of production do not correspond to true labour values.

So it seems clear these footnotes hint at the different and contradictory theory Marx had already sketched in the draft of volume 3 of Capital and also in a number of private letters as follows:

(1) a letter to Engels of August 2, 1862 (on this letter see here);
(2) an exchange with Engels between June 26 and June 27, 1867;
(3) a letter to Engels of 8 January, 1868 (on this letter, see here);
(4) an exchange with Engels from April 22 and April 30, 1868, and
(5) in a letter to Ludwig Kugelmann on 11 July 1868.

However, if Marx really held his “prices of production” theory in private from 1862 to 1868, this theory utterly demolished and smashed up the “law of value” that Marx had been defending in the actual text of volume 1 of Capital, and showed that book to be a tendentious work of communist propaganda.

In reality, Marx was perfectly capable of holding contradictory views and especially for polemical or propagandistic purposes.

Why was this the case? We know Marx was perpetually short on money and nearly bankrupt multiple times after he came to London. Marx was almost always financially dependent on Engels after 1849 (apart from brief periods where Marx inherited money that never lasted long). We also know that Engels was pressing Marx for a new economic work that attacked capitalism as early as 1863 (Fabian 2011: 430) but Marx dragged his feet for years on end with feeble excuses and infuriated Engels (Fabian 2011: 438–443). By 1866 Engels severely cut the money stipend he gave to Marx and was effectively condemning Marx to penury and bankruptcy (Fabian 2011: 442), so Marx desperately tried to placate Engels and finish the first volume of Capital.

It is likely that, under pressure from Engels to produce a work in defence of communism, Marx’s ideological commitments skewed volume 1 so that it presented capitalism in the worst light possible and with an extreme and dogmatic defence of the labour theory of value, including the idea that prices tend to equal their labour values, which, in view of his work on the first draft of volume 3 of Capital (which he had already written from 1863–1865), he knew to have severe problems, such as the transformation problem, and contradicted his “prices of production” theory in volume 3.

But none of this mattered to Marx, who was a lazy, diseased, perpetually broke drug addict (likely addicted to opium: Fabian 2011: 28, 30, 113, 272), who was happy to be a parasite on Engels by currying favour with the latter through the severely flawed but anti-capitalist first volume of Capital. We know Engels paid off Marx’s debts after volume 1 of Capital was published and promised him financial security through gifts of money (Fabian 2011: 443).

And this, in my view, is why Marx’s economic theories are such an incoherent, contradictory mess: the Communist hack Karl Marx just didn’t care, and deliberately stopped any attempt to publish volume 3 of Capital, which would have quickly exposed his fraud in volume 1.

Years later when Marx was dead and Engels published volume 3 in 1894, the inevitable happened: hostile critics of Marxism and even some sympathetic supporters of Marx pointed to the devastating contradiction between the LTV in volumes 1 and 3. Marx’s intellectual fraud and charlatanry were exposed to the world.

Of course, Marx was long dead and had laughed all the way to the bank by continuing his life of bourgeois parasitism, having extracted the surplus value from the hard-working proletarian workers in Engels’ cotton factory.

BIBLIOGRAPHY
Bortkiewicz, L. von. 1906. “Wertrechnung und Preisrechnung im Marxschen System I,” Archiv für Sozialwissenschaft und Sozialpolitik 23: 1–50.

Bortkiewicz, L. von. 1907a. “Wertrechnung und Preisrechnung im Marxschen System II,” Archiv für Sozialwissenschaft und Sozialpolitik 25: 10–51.

Bortkiewicz, L. von. 1907b. “Wertrechnung und Preisrechnung im Marxschen System III,” Archiv für Sozialwissenschaft und Sozialpolitik 25: 445–488.

Bortkiewicz, L. von. 1907c. “Zur Berichtigung der grundlegenden theoretischen Konstruktion von Marx im 3. Band des ‘Kapital,’” Jahrbücher für Nationalökonomie und Statistik 34: 319–335.

Bortkiewicz, L. von. 1949. “On the Correction of Marx’s Fundamental Theoretical Construction in the Third Volume of Capital,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 197–221.
https://mises.org/library/karl-marx-and-close-his-system

Bortkiewicz, L. von. 1952. “Value and Price in the Marxian System,” International Economic Papers 2: 5–60.

Engels, F. 1991 [1895]. “Supplement and Addendum to Volume 3 of Capital,” in Karl Marx, Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London. 1027–1047.

Fabian, George. 2011. Karl Marx: Prince of Darkness. Xlibris Corporation, US.

Kurz, Heinz D. and Neri Salvadori. 2010. “Sraffa and the Labour Theory of Value: A Few Observations,” in John Vint et al. (eds.), Economic Theory and Economic Thought: Essays in Honour of Ian Steedman. Routledge, London and New York. 189–215.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1909. Capital. A Critique of Political Economy (vol. 3; trans. Ernst Untermann from 1st German edn.). Charles H. Kerr & Co., Chicago.

Nitzan, Jonathan and Shimshon Bichler. 2009. Capital as Power: A Study or Order and Creorder. Routledge, Abingdon, UK and New York.

Steedman, Ian. 1977. Marx after Sraffa. NLB, London.

Zachariah, Dave. 2006. “Labour Value and Equalisation of Profit Rates: A Multi-Country Study,” Indian Development Review 4: 1–20.

Further Reading
“Marx’s ‘Law of Value’ in Volume 1 of Capital,” February 4, 2016.

“Why Marx’s Labour Theory of Value is Wrong in a Nutshell,” June 28, 2015.

“Engels’ View of the Theory of Value in Volume 1 of Capital in the 1890s,” August 12, 2015.

“Prolegomena to the Study of Marx’s Capital (Updated),” June 2, 2015.

“Dühring’s Review of Capital and Marx’s Letter to Engels of 8 January, 1868 on the Labour Theory of Value,” May 12, 2015.

“Marx’s Letter to Engels of 2 August, 1862 on Prices of Production,” January 19, 2016.

Paul Cockshott’s “Why Labour Theory of Value is Right”: A Refutation

The Marxist Paul Cockshott presents his defence of the Labour Theory of Value in this video:



It appears that Paul Cockshott defends the Labour Theory of Value (LTV) found in volume 1 of Capital, albeit in a grossly simplified way.

He defines the LTV in three senses, as follows:

(1) The average price of a good will be proportional to the average amount of labour used to make it;

(2) The value added in an industry will thus be roughly proportional to the labour it uses.

(3) Price quantities are thus the indirect representation of underlying quantities of human time.

Unfortunately, this is not an accurate representation of Marx’s actual “law of value” in volume 1 of Capital, where Marx defended in his text a “law of value” in which homogeneous, socially-necessary labour time units were the anchor for the price system in modern capitalism. That is to say, individual commodity prices are supposed to gravitate towards their labour values (even though volume 1 contained two footnotes hinting at the different theory of price determination in Marx’s draft of volume 3, so that volume 1 was not even internally consistent).

By volume 3 of Capital, Marx thought this only happened in the pre-modern world of commodity exchange, but he describes the process as follows:

“The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).

We must remember that Marx had no single, consistent Labour Theory of Value. The “law of value” (a phrase which Marx used to refer to the LTV) in volume 1 of Capital contradicts the “law of value” in volume 3. For Marx’s LTV in volume 1 of Capital to work and be empirically proved, all human labour of different kinds must be measurable in a homogenous unit of basic socially-necessary labour time and then compared, and actual real-world prices must tend to move towards their true labour values.

But Paul Cockshott is apparently not even concerned to defend this authentic version of the LTV in volume 1 of Capital. Instead, in a sleight of hand, he has substituted a much weaker version of the LTV whose main definition is that the “average price of a good will be proportional to the average amount of labour used to make it.”

I will discuss this video in the two sections below.

(1). Neoclassical Price Theory
When Cockshott responds to critiques of the Labour Theory of Value (LTV), he begins with the Neoclassical/Austrian theory of flexible prices determined by dynamics of supply and demand. Bizarrely, Cockshott dismisses this by arguing that it is “unfalsifiable,” but this is manifestly not true.

The fundamental prediction of Neoclassical/Austrian price theory is that prices are flexible and will be highly responsive to changes in supply and demand. We can test this empirically. We can easily look at empirical studies of real-world price determination as I have done here and here and see that the vast majority of prices are not highly flexible and determined by dynamics of supply and demand, as in Neoclassical theory.

Instead, most prices are cost-based mark-up prices, which are set on average unit costs plus a profit markup. This theory, however, is inconsistent with Marx’s “prices of production” because there is no real-world tendency towards a uniform, average rate of profit.

So, first of all, Cockshott fails to engage with the Post Keynesian theory of cost-based mark-up prices, which actually is the empirically correct explanation of most prices in modern capitalism. Under the Post Keynesian theory of cost-based mark-up prices, it is entirely normal to find that labour costs are a substantial component of prices, and where labour costs in a particular industry are high, there will be a strong correlation of labour costs with prices. But none of this proves Marx’s Labour Theory of Value.

(2). Correlation of Labour Costs with Money Prices
Next, Paul Cockshott cites this article to prove his definition of the LTV:

Zachariah, Dave. 2006. “Labour Value and Equalisation of Profit Rates: A Multi-Country Study,” Indian Development Review 4: 1–20.

I have already refuted this article here.

Cockshott seems blissfully unaware that the empirical finding that monetary labour costs are strongly correlated with money prices of output commodities is, as we have already seen above, actually one of many strong proofs of the Post Keynesian cost-based mark-up theory of pricing, and indeed of any non-Marxist cost-based mark-up theory of price determination, which have no need for a Labour Theory of Value at all.

So, once again, Cockshott has not proved the LTV, and apparently does even understand that his “proof” is, at the very least, perfectly compatible with the Post Keynesian cost-based mark-up theory of prices.

And Marxists like Cockshott are essentially incapable of defending the actual, authentic definitions of the LTV that Karl Marx used in volume 1 of Capital, and reduce it to a weak claim that does not vindicate Marx or his LTV.

A final point is that Cockshott relies on the data of Zachariah (2006), which admits that the empirical data do not support an equalisation of profit rates, but that is a necessary condition for the existence Marx’s prices of production as used in volume 3 of Capital! It follows logically that, if the existence of prices of production as long-run centres of gravity for real-world prices are refuted by the empirical evidence, then Marx’s economic theory in volume 3 of Capital – which relies on prices of production – is also refuted.

BIBLIOGRAPHY
Marx, Karl. 1909. Capital. A Critique of Political Economy (vol. 3; trans. Ernst Untermann from 1st German edn.). Charles H. Kerr & Co., Chicago.

Zachariah, Dave. 2006. “Labour Value and Equalisation of Profit Rates: A Multi-Country Study,” Indian Development Review 4: 1–20.