Fiat Money Destroys the Labour Theory of Value

Simple reflection on how Marx understood the nature of money as embedded in his labour theory of value in Part 1 of volume 1 of Capital leads to this conclusion.

Marx’s whole explanation of the emergence of money in Chapter 2 of Capital assumes that money must be a commodity. For Marx, as commodity exchange becomes developed and people produce things specifically for exchange, socially necessary labour time comes to determine exchange values (Marx 1990: 183–184), and the real value of commodity money arises not in the process of exchange but in the human labour expended in producing it (Marx 1990: 184–185).

In Chapter 3 of Capital Marx argues that money can only be a commodity that is the product of labour with an abstract socially necessary labour value so that it can be equated with labour values of other commodities in exchange:

“The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.

It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.” (Marx 1906: 106).

“But only in so far as it is itself a product of labour, and, therefore, potentially variable in value, can gold serve as a measure of value.” (Marx 1906: 110).

So only if money is a special commodity that itself has a labour value can it function as a universal medium of exchange and numéraire. You couldn’t have a clearer expression of Marx’s view: money must by necessity be a produced commodity with a labour value in order to even function as money, because, in Marx’s view, all commodity exchange is founded on the fact that commodities (including money) are made commensurable by having quantitative labour values.

This is why Marx thinks that commodity money like gold or silver, when it is initially brought to market, is exchanged with other commodities with an equal socially necessary labour time value as a barter transaction:

“Money, like every other commodity, cannot express the magnitude of its value except relatively in other commodities. This value is determined by the labour-time required for its production, and is expressed by the quantity of any other commodity that costs the same amount of labour-time. Such quantitative determination of its relative value takes place at the source of its production by means of barter. When it steps into circulation as money, its value is already given. In the last decades of the 17th century it had already been shown that money is a commodity, but this step marks only the infancy of the analysis. The difficulty lies, not in comprehending that money is a commodity, but in discovering how, why and by what means a commodity becomes money.” (Marx 1906: 104).

“… gold and silver, just as they come out of the bowels of the earth, are forthwith the direct incarnation of all human labour. Hence the magic of money.” (Marx 1906: 105).

“In order that it may play the part of money, gold must of course enter the market at some point or other. This point is to be found at the source of production of the metal, at which place gold is bartered, as the immediate product of labour, for some other product of equal value. From that moment it always represents the realised price of some commodity.” (Marx 1906: 122).

But in the modern world virtually all commodities exchange for fiat money, which is very clearly not a reproducible commodity with a labour value in Marx’s sense. You cannot exchange a commodity for something with no labour value (that is, fiat money) and maintain Marx’s orthodox labour theory of value, for commodities exchange against a thing with no labour value in the conventional sense.

Fiat money is not produced by capitalists by hiring labour and paying wages in return for some quantity of abstract socially necessary labour time.

Is it possible to argue that central banks hire workers to produce fiat money with an abstract socially necessary labour time that explains fiat money’s exchange value? This will not save Marx: it is simply not possible to save the labour theory of value this way.

Fiat money – the high-powered money of modern economies – can be created at will from nothing by central bank employees and theoretically in whatever quantities are needed. Such fiat money can be created at will simply by typing key strokes into a computer, and the amount of labour needed to create $1 of fiat money is hardly different from that needed to create $1 million or $100 billion (namely, a few extra key strokes). Yet obviously one dollar of high-powered money and $1 million buy commodities with vastly different quantities of abstract socially necessary labour time in Marx’s sense of this concept. You cannot explain the exchange value of fiat money by appealing to the abstract socially necessary labour time needed to create it.

The labour theory of value as an explanation of modern prices cannot even get off the ground unless money is a produced commodity with a labour value, but, quite clearly, we live in a monetary economy where virtually all exchanges occur by exchanging fiat money for commodities, and fiat money has no labour value in Marx’s sense. In our world of fiat money, Marx’s labour theory of value – as presented in volume 1 of Capital – is intellectually bankrupt.

Could it be salvaged? It might be salvaged, but only with radical revisions, such as giving up the view that money needs to be a commodity. Marx might, for example, argue that money need not be a commodity at all but could still be used as a unit of account to measure and price socially necessary labour time in the way I have sketched here.

But even then that would not address the following problems:

(1) the problem of reducing all heterogeneous human labour to a homogeneous abstract socially necessary labour time unit;

(2) the question of why free human wage labour should have a special power that animals, slaves or machines do not have;

(3) the empirical reality that prices are not set by means of abstract socially necessary labour time, and

(4) the problem that surplus labour value (if that concept could even be adequately defended) would not really explain money profits, since money profits can exist in a slave-based economy and very probably even in an economy where machines did most of the work.

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, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.