Two Important Instances in Volume 1 of Marx’s Capital where Labour Values determine individual Commodity Prices

There are two important passages here:

“But, although the money that performs the functions of a measure of value is only ideal money, price depends entirely upon the actual substance that is money. The value, or in other words, the quantity of human labour contained in a ton of iron, is expressed in imagination by such a quantity of the money-commodity as contains the same amount of labour as the iron. According, therefore, as the measure of value is gold, silver, or copper, the value of the ton of iron will be expressed by very different prices, or will be represented by very different quantities of those metals respectively.

If, therefore, two different commodities, such as gold and silver, are simultaneously measures of value, all commodities have two prices—one a gold-price, the other a silver-price. These exist quietly side by side, so long as the ratio of the value of silver to that of gold remains unchanged, say, at 15:1. Every change in their ratio disturbs the ratio which exists between the gold-prices and the silver-prices of commodities, and thus proves, by facts, that a double standard of value is inconsistent with the functions of a standard.” (Marx 1906: 108).

“A general rise in the prices of commodities can result only, either from a rise in their values—the value of money remaining constant—or from a fall in the value of money, the values of commodities remaining constant. On the other hand, a general fall in prices can result only, either from a fall in the values of commodities—the value of money remaining constant—or from a rise in the value of money, the values of commodities remaining constant. It therefore by no means follows, that a rise in the value of money necessarily implies a proportional fall in the prices of commodities; or that a fall in the value of money implies a proportional rise in prices. Such change of price holds good only in the case of commodities whose value remains constant. With those, for example whose value rises, simultaneously with, and proportionally to, that of money, there is no alteration in price. And if their value rise either slower or faster than that of money, the fall or rise in their prices will be determined by the difference between the change in their value and that of money; and so on.” (Marx 1906: 111).

In the first passage, Marx is saying 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.

This is confirmed in the second passage where Marx also notes that the second mechanism driving prices is the fluctuation of labour values of commodities as against money.

It is also no surprise that for Marx money must by necessity be a produced commodity with a labour value in order to even function as money, and commodity money like gold or silver, when it is initially brought to market, is exchanged with other goods with an equal socially necessary labour time value as a barter transaction (Marx 1906: 122).

It is clearly the case that the theory of value in volume 1 of Capital is that individual commodity prices are determined by their labour values or the labour value embodied in units of gold or silver, at least in the long-run. Marx admits that prices can and do diverge from labour values (Marx 1906: 114), but he appears to think that are driven back to these values which are the anchors for the system:

“It is true, commodities may be sold at prices deviating from their values, but these deviations are to be considered as infractions of the laws of the exchange of commodities, which, in its normal state is an exchange of equivalents, consequently, no method for increasing value.” (Marx 1906: 176–177).

“The production of commodities must be fully developed before the scientific conviction emerges, from experience itself, that all the different kinds of private labour (which are carried on independently of each other; and yet, as spontaneously developed branches of the social division of labour, are in a situation of all-round dependence on each other) are continually being reduced to the quantitative proportions in which society requires them. The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” (Marx 1982: 168).

Marx also states in Chapter 1 that it is possible to accurately measure the value of skilled labour by looking at the exchange values of products of skilled labour as against products of unskilled labour (Marx 1906: 51–52), and this makes no sense unless Marx really believes that commodities tend to exchange at pure labour values.

BIBLIOGRAPHY
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 on Labour Value and Cost Price in the Grundrisse

Marx’s Grundrisse der Kritik der Politischen Ökonomie (Outlines of the Critique of Political Economy) is an 800 manuscript on political economy that Marx wrote between 1857–1858, but was not published until 1939 (Wheen 2001: 227). Therefore the Grundrisse represents Marx’s thinking on economics in the late 1850s and some 10 years before he published Capital.

In the Grundrisse, there is this very interesting description of the labour value:

“The value (the real exchange value) of all commodities (labour included) is determined by their cost of production, in other words by the labour time required to produce them. Their price is this exchange value of theirs, expressed in money. The replacement of metal money (and of paper or fiat money denominated in metal money) by labour money denominated in labour time would therefore equate the real value (exchange value) of commodities with their nominal value, price, money value. Equation of real value and nominal value, of value and price. But such is by no means the case. The value of commodities as determined by labour time is only their average value. This average appears as an external abstraction if it is calculated out as the average figure of an epoch, e.g. 1 lb. of coffee = 1s. if the average price of coffee is taken over 25 years; but it is very real if it is at the same time recognized as the driving force and the moving principle of the oscillations which commodity prices run through during a given epoch. This reality is not merely of theoretical importance: it forms the basis of mercantile speculation, whose calculus of probabilities depends both on the median price averages which figure as the centre of oscillation, and on the average peaks and average troughs of oscillation above or below this centre. The market value is always different, is always below or above this average value of a commodity. Market value equates itself with real value by means of its constant oscillations, never by means of an equation with real value as if the latter were a third party, but rather by means of constant non-equation of itself (as Hegel would say, not by way of abstract identity, but by constant negation of the negation, i.e. of itself as negation of real value). In my pamphlet against Proudhon I showed that real value itself -- independently of its rule over the oscillations of the market price (seen apart from its role as the law of these oscillations) -- in turn negates itself and constantly posits the real value of commodities in contradiction with its own character, that it constantly depreciates or appreciates the real value of already produced commodities; this is not the place to discuss it in greater detail. Price therefore is distinguished from value not only as the nominal from the real; not only by way of the denomination in gold and silver, but because the latter appears as the law of the motions which the former runs through. But the two are constantly different and never balance out, or balance only coincidentally and exceptionally. The price of a commodity constantly stands above or below the value of the commodity, and the value of the commodity itself exists only in this up-and-down movement of commodity prices. Supply and demand constantly determine the prices of commodities; never balance, or only coincidentally; but the cost of production, for its part, determines the oscillations of supply and demand. The gold or silver in which the price of a commodity, its market value, is expressed is itself a certain quantity of accumulated labour, a certain measure of materialized labour time. On the assumption that the production costs of a commodity and the production costs of gold and silver remain constant, the rise or fall of its market price means nothing more than that a commodity, = x labour time, constantly commands > or < x labour time on the market, that it stands above or beneath its average value as determined by labour time. The first basic illusion of the time-chitters consists in this, that by annulling the nominal difference between real value and market value, between exchange value and price -- that is, by expressing value in units of labour time itself instead of in a given objectification of labour time, say gold and silver -- that in so doing they also remove the real difference and contradiction between price and value. Given this illusory assumption it is self-evident that the mere introduction of the time-chit does away with all crises, all faults of bourgeois production. The money price of commodities = their real value; demand = supply; production = consumption; money is simultaneously abolished and preserved; the labour time of which the commodity is the product, which is materialized in the commodity, would need only to be measured in order to create a corresponding mirror-image in the form of a value-symbol, money, time-chits. In this way every commodity would be directly transformed into money; and gold and silver, for their part, would be demoted to the rank of all other commodities.”

Marx, The Grundrisse, October 1857, Chapter on Money
https://www.marxists.org/archive/marx/works/1857/grundrisse/ch02.htm#p136

Some important points:

(1) The initial sentence is crucial to understanding Marx’s thinking:

“The value (the real exchange value) of all commodities (labour included) is determined by their cost of production, in other words by the labour time required to produce them.”

A real “exchange value” or price equal to labour value (“labour time required to produce them”) is the cost of production. This is so obviously the same view that Marx held in his essay Wage-Labor and Capital published in the periodical the Neue Rheinische Zeitung in April 1849:

“The determination of price by cost of production is tantamount to the determination of price by the labortime requisite to the production of a commodity, for the cost of production consists, first, of raw materials and wear and tear of tools, etc., i. e., of industrial products whose production has cost a certain number of work-days, which therefore represent a certain amount of labor-time, and, secondly, of direct labor, which is also measured by its duration.” (Marx 1902: 34).

For more discussion of this point see this post.

(2) Marx thinks that

“The replacement of metal money (and of paper or fiat money denominated in metal money) by labour money denominated in labour time would therefore equate the real value (exchange value) of commodities with their nominal value, price, money value.”

Of course real world capitalist economies do not do this, and even if you introduced “labour money” denominated in labour time, then you would have to

(1) demonstrate how to reduce all heterogeneous human wage labour to a common, meaningful homogeneous unit so that, for example, 1 labour money unit equals one unit of homogeneous labour time, and

(2) ensure that in real world capitalism wage labourers are paid exactly in accordance with the socially necessary labour time appropriate for their labour, and

(3) price all non-labour factor inputs in terms of socially necessary labour time required to produce them.

Only this would allow one to say that a cost of production price would be equal to labour value.

Yet, once again, it is obvious that this is not how real-world capitalism works, and the fact that it does not work this way contradicts and negates Marx’s statement in (1) above (that is, “The determination of price by cost of production is tantamount to the determination of price by the labortime ... .”). Marx even recognizes this by saying: “But such is by no means the case.”

(3) After this Marx argues that the “value of commodities as determined by labour time is only their average value,” which appears to be what he would later call the “average price” that equals the cost of production price plus a uniform long-run rate of profit (though admittedly he does directly not refer to profit in the quotation above). We even get some Hegelian claptrap with which Marx dresses this up philosophically (“as Hegel would say, not by way of abstract identity, but by constant negation of the negation, i.e. of itself as negation of real value”).

But as always there is no rational reason to think that the labour theory of value is of any empirical value in the first place, when

(1) it ascribes to human wage labour a special significance that it does not have (that is, if work expended by labour creates a value in commodities, then slaves, animals or the power of nature should be able to create such a value too), and

(2) the problem of reducing (and aggregating) all heterogeneous human labour to a homogenous unit is a problem almost as severe as the idea of aggregating interpersonal subjective utilities, and I see no evidence that Marx or Marxists have ever shown how to do it.

Finally, neither real-world market wages or non-labour factor input prices are determined in the way required by Marx to make a cost of production price equal labour value, even if you could surmount the serious problems in (1) and (2) above.

In short, even here in the early version in Marx’s Grundrisse der Kritik der Politischen Ökonomie of 1857–1858 we have no reason to take the labour theory of value seriously.

BIBLIOGRAPHY
Marx, Karl. 1902. Wage-Labor and Capital. New York Labor News Company, New York.

Wheen, Francis. 2001. Karl Marx: A Life. W. W. Norton & Company, New York and London.

Marx’s Wage-Labour and Capital

Marx’s Wage-Labour and Capital (1849) was an essay he first published in the periodical the Neue Rheinische Zeitung in April 1849, and was taken from lectures Marx had given in Brussels in 1847 to the German Workers’ Society.

The work long pre-dates Capital, and an English translation was published by Engels in 1891, but Engels felt bound to change the text and harmonise it to some extent with Marx’s latter ideas (Marx 1902: 8). Nevertheless, there are some interesting statements in the work that still seem to reflect Marx’s earlier thinking.

There are two issues I discuss below: (1) does this work show that Marx understood subjective utility and (2) how Marx understands the cost of production price in his essay.

Chapter III is called “By What is the Price of a Commodity Determined?” Marx thinks supply and demand determines the surface market prices. The sellers, he says, who sell the most cheaply are sure to win the largest market share so that

“… there takes place a competition among the sellers which forces down the price of the commodities offered by them.

But there is also a competition among the buyers; this upon its side causes the price of the proffered commodities to rise.

Finally, there is competition between the buyers and the sellers; the ones wish to purchase as cheaply as possible, the others to sell as dearly as possible. The result of this competition between buyers and sellers will depend upon the relation between the two above-mentioned camps of competitors, i. e., upon whether the competition in the army of buyers or the competition in the army of sellers is stronger.” (Marx 1902: 27–28).

This is conventional supply and demand analysis from Classical Economics, but that analysis leaves out an important element: subjective utility. The concept of “demand” existed long before the marginal revolution, and when Marx talks about demand and supply determining market prices in conventional Classical Political Economy terms, this does not prove Marx understood subjective value. I see no evidence that Marx understood the importance of subjective utility, and it is not surprising he did not, because he wrote most of his economic writings in the 1850s and 1860s before the marginal revolution of the 1870s.

To continue with Marx’s exposition in Chapter III, Marx thinks – like the Classical political economists – that the cost of production of commodities allows the sellers to calculate profit (Marx 1902: 29), and that excess profits encourage the migration of capital into more profitable sectors:

“Now, what will be the consequence of a rise in the price of a particular commodity? A mass of capital will be thrown into the prosperous branch of industry, and this immigration of capital into the provinces of the favored industry will continue until it yields no more than the customary profits, or, rather, until the price of its products, owing to overproduction, sinks below the cost of production.

Conversely: if the price of a commodity falls below its cost of production, then capital will be withdrawn from the production of this commodity. Except in the case of a branch of industry which has become obsolete and is therefore doomed to disappear, the production of such a commodity (that is, its supply), will, owing to this flight of capital, continue to decrease until it corresponds to the demand, and the price of the commodity rises again to the level of its cost of production; or, rather, until the supply has fallen below the demand and its price has again risen above its cost of production, for the current price of a commodity is always either above or below its cost of production.” (Marx 1902: 30–31).

But Marx in Wage-Labor and Capital has an explicit view of what the cost of production price actually represents:

“The determination of price by cost of production is tantamount to the determination of price by the labortime requisite to the production of a commodity, for the cost of production consists, first, of raw materials and wear and tear of tools, etc., i. e., of industrial products whose production has cost a certain number of work-days, which therefore represent a certain amount of labor-time, and, secondly, of direct labor, which is also measured by its duration.” (Marx 1902: 34).

So at this stage in Marx’s economic thinking the cost of production price is equivalent to labour necessary for its production. It appears that “cost of production” here means total cost of a commodity without profit. Such a notion is absurd, of course, because hourly market wages across an economy are not determined by abstract necessary labour time, but by many other factors, including supply/scarcity of the labour service offered, the subjective utility people place on the labour service/commodity offered and all sorts of other factors. Nor are the prices of non-labour factor inputs equal to the abstract “labortime requisite to the production of a commodity.”

In volume 1 of Capital we get the impression that Marx thinks that many individual exchange values or prices are directly determined by socially necessary labour time (SNLT) and such a “pure” price corresponds directly to SNLT. Although how this happens is not clear.

Tucked away in a footnote in Chapter 5 of volume 1 of Capital (from 3rd German edn. but rev. from 4th German edn. by Ernest Untermann) we have this interesting statement:

“From the foregoing investigation, the reader will see that this statement only means that the formation of capital must be possible even though the price and value of a commodity be the same; for its formation cannot be attributed to any deviation of the one from the other. If prices actually differ from values, we must, first of all, reduce the former to the latter, in other words treat the difference as accidental in order that the phenomena may be observed in their purity, and our observations not interfered with by disturbing circumstances that have nothing to do with the process in question. We know, moreover, that this reduction is no mere scientific process. The continual oscillation in prices, their rising and falling, compensate each other, and reduce themselves to an average price, which is their hidden regulator. It forms the guiding star of the merchant or the manufacturer in every undertaking that requires time. He knows that when a long period of time is taken, commodities are sold neither over nor under, but at their average price. If therefore he thought about the matter at all, he would formulate the problem of the formation of capital as follows: How can we account for the origin of capital on the supposition that prices are regulated by the average price, i.e., ultimately by the value of the commodities? I say ‘ultimately,’ because average prices do not directly coincide with the values of commodities, as Adam Smith, Ricardo, and others believe.” (Marx 1906: 184–185, n. 1).

So here “average price” is something regulated by value of the commodities but it does not “directly coincide” with them. Why? It seems that for Marx “average price” means cost of production price plus a uniform long-run rate of profit.

So is this why it does not “directly coincide” with the labour values of commodities? If, once we strip out the average rate of profit and are left with the pure cost of production price, is this, as in Wage-Labor and Capital, assumed by Marx to be equivalent to labour value?

If we remember that for Ricardo the “natural price” of a commodity is its long run cost of production plus a uniform rate of profit, we can see how to understand the passage above. Marx takes over this concept but calls it the “average price” or later in his writing “cost-price” or “price of production” (see Moseley, “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices.”).

In the Economic Manuscript of 1861–1863, for example, when he discusses Rodbertus, Marx is clear that the “average prices” will be above or below the actual value of a commodity (Marx and Engels 1989: 264).

So what Marx is objecting to in the footnote in Chapter 5 of volume 1 of Capital is that Ricardo and Smith identify the “natural price” or “average price” directly with the value of commodities (understood as labour value). Marx rejects this.

In a letter to Engels of August 2, 1862, Marx makes it clear that he thought that competition reduces the market prices of commodities to the average price, not the labour value, and the average price might be above, below or equal to value, depending on the organic composition of capital (see Letter, Marx to Engels, August 2, 1862 from London).

None of this overcomes the contradiction between volume 1 and volume 3 of Capital, however.

But it does seem that, in Wage-Labor and Capital, Marx states that the “determination of price by cost of production is tantamount to the determination of price by the labortime requisite to the production of a commodity … .” (Marx 1902: 34). Either (1) this idea lies behind his thinking in Capital or (2) his ideas changed.

As an aside, Fred Moseley’s paper “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices” shows how the Temporal Single System Interpretation (TSSI) badly misunderstands Marx’s concept of the “price of production.”

Key Concepts
Average Price
For Marx, “average price” is the cost of production price and a uniform long-run rate of profit. This is equivalent to Smith and Ricardo’s “natural price.” Elsewhere in his writings Marx calls this “cost-price” or “price of production.” These are long-run prices that are a centre of gravity prices where profit rates are equal.

BIBLIOGRAPHY
Moseley, Fred. “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices”
http://www.mtholyoke.edu/~fmoseley/lrcgpric.html

Marx, Karl. 1902. Wage-Labor and Capital. New York Labor News Company, New York.

Marx, Karl. 1982. Capital. Volume One. A Critique of Political Economy (trans. Ben Fowkes). Penguin Books, Harmondsworth, England.

Marx, Karl and Frederick Engels. 1989. Collected Works. Volume 31. Marx: 1861–1863. Lawrence & Wishart, London.