Thursday, April 9, 2015

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.

Moseley, Fred. “Marx’s Concept of Prices of Production: Long-Run Center-of-Gravity Prices”

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.


  1. Happy to help as always:

    that analysis leaves out an important element: subjective utility. The concept of “demand” existed long before the marginal revolution

    You've distinguished subjective utility from demand and asserted a role for the former not expressed as the latter. Can you describe such a role? I don't think you're saying sellers are psychic, so what *are* you saying?

    It's also interesting because of what he discusses later on. For example:

    "It would seem, then, that there is on the side of demand a certain magnitude of definite social wants which require for their satisfaction a definite quantity of a commodity on the market. But quantitatively, the definite social wants are very elastic and changing. Their fixedness is only apparent. If the means of subsistence were cheaper, or money-wages higher, the labourers would buy more of them, and a greater social need would arise for them..." (vol 3, ch 10)

    In other words, a (Marshall-esque) short-term price analysis incorporating elasticity of demand is even considered in passing. He doesn't develop it, because it's *not* the point of the theory he's developing. Value theory != price theory; he's analyzing the social relations that fuel the growth and reproduction of society. (But one could conceivably incorporate other price-theoretical tools as a supplement, if one needed.)

    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 [SNLT]

    It's not absurd at all; it's the cost to the owner of the firm.

    You should look into that Baumol paper I mentioned ("Marx and the Iron Law of Wages"). Short version: Marx argued supply, demand, and other social factors determined wages.

    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

    No, you and other incautious or determinedly anti-Marx readers get that impression. Those paying attention manage to avoid such confusion. (Also, you've been given examples other than that footnote.)

    Marx takes over this concept but calls it the “average price” or later in his writing “cost-price” or “price of production”

    You state this twice, but it's wrong; cost-price is K, price of production is K plus the general rate of profit. Please mind your terms. Maybe refer to a glossary.

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

    The only contradiction is the one in your post; you provide one of the passages from vol 1 stating a position you claim only exists in 3, and then go on to insist on a contradiction between them.

    Your misreading is dishonest and tedious, suggesting you hold great respect for whatever authority told you Marx was wrong and not a whole lot of respect for scientific discourse.

    As an aside, Fred Moseley’s paper ... shows how the [TSSI] badly misunderstands...

    No. You (as in LK) can't take up the argument of one school of Marxist econ against another. Moseley holds to a theory you believe is badly flawed and inconsistent. Attempting to use an argument you plainly believe is wrong to argue that another idea is wrong is a cheap, intellectually dishonest tactic.

    Of course, if you're willing to assume Moseley's premises hold for the sake of the argument, then guess what: you, by your own standards, have fallen into contradiction. If you want to flatly deny any difference between an explicative tool and the theory it explicates, you get to live with the consequences. (Or you could just stop doing that.)

    1. "No. You (as in LK) can't take up the argument of one school of Marxist econ against another. ....etc."

      Yes, I can and you clearly cannot refute anything Moseley argued, so you are having a comical tantrum.

      I can reject Moseley’s general interpretation of Marxism but accept his specific argument (which is well argued) about what Marx believed about "average price" and how Marx thought these were long run anchors for prices in his economic theory.

      Look at how quickly you resort to laughable name calling when confronted with devastating criticism by a fellow Marxist.

    2. As usual: I point out errors in your use of terms, your interpretation and your method, and you engage in inconsequential and baseless sniping. Good that we've got a relatively egalitarian division of labor going.

      It's not name calling to mock a terrible argument, and once again if the only card up your sleeve is to attribute an emotional state to your opponent, then you may as well call it a wrap.

      I stand by my statement, partly because the argument being made is theory dependent in and of itself (i.e., he's taking Marx to be an equilibrium theorist whereas my camp does not, and therefore he reads a static equilibrium magnitude where we see an average), and partly because you are in no respect qualified to judge said case as "well-argued," since you have not demonstrated that you even understand the terms of this debate, or are familiar enough with the primary literature to criticize Moseley should the need arise. Above all, you certainly haven't demonstrated any effort to check the secondary literature for responses to Moseley, much in the same way you carefully extracted and reproduced Loria quotes from Engels' critique of Loria without any substantive discussion of the latter.

      My hopes were elevated when I started reading this post, because at first it seemed like you were making a greater effort to treat the material with scholarly respect. But once more we find you showing more interest in declaring yourself winner than in good-faith argumentation.

      I will say, you've been consistent on one point, lately: The things that you report as "clear" are generally figments of your own imagination. So there's that, at least.

    3. Another laughable tantrum.

      In contrast to your ad hominem fallacies, here is some evidence from vol. 3 of Capital:

      "The price of production includes the average profit. We call it price of production. It is really what Adam Smith calls natural price, Ricardo calls price of production, or cost of production, and the physiocrats call prix nécessaire, because in the long run it is 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 why the same economists who oppose determining the value of commodities by labour-time, i.e., by the quantity of labour contained in them, why they always speak of prices of production as centres around which market-prices fluctuate."

      So for Marx by vol. 3 "price of production" is the same concept as Adam Smith's "natural price" or Ricardo's "cost or production" price. That is a long run equilibrium price, and Marx tells us his concept is is "really what Adam Smith calls natural price".

      Conclusion: you cannot refute the evidence, so you scream and shout your anger.

    4. You're really doubling down on this ad hom business. To review: An ad hominem attack is a claim laid against the person rather than against their (as your) facile arguments, childish tactics, blatant falsehoods, or contemptuous tone. Where snark has been warranted, my target has always been the latter set, and I believe I have been very careful in this regard. An ad hominem fallacy is to dismiss an argument on the grounds of such an attack or character judgment.

      With that cleared up, perhaps you can provide evidence of any of the (allegedly multiple) times I've committed this faux pas?

      Or you could instead double down on your claims about my temper. I am, after all, a fan of irony.

      You're jumping the gun by including your conclusion about me right in your opening salvo. I say "opening" because until just now you had only mentioned a paper without reference to its content, apparently leaving me the chore of making both sides of an argument. That's bad form, even if it's par for the course in this discussion.

      On to the meat:

      You did not specify you meant *Ricardo's* "cost of production," which, if different, should be spelled out. In Marx's mature political economy (which I prefer in all cases), cost-price and cost of production both specify costs to the capitalist prior to production, i.e. v+c = K, with neither s nor p appearing yet. And I never denied that prices of production were equivalent to Smithian natural prices in magnitude; I merely requested that you keep to Marx's terminology for clarity's sake.

      What I *do* dispute is whether said figure is a static equilibrium price. And I already provided you with at least one document that explicitly responds to the Moseley paper you quote (Kliman 2007, Ch. 6.3), long before you quoted it. Hence me rolling my eyes at your failure to perform even basic due diligence.

      The only tendency prices have towards the price of production is the one encompassed in the tendency of the rate of profit to equalize, which I (and Freeman, et al) have been crystal clear is seldom the dominant tendency, such that no necessary law (including the logic of equilibrium) insists that profit be at one level and not another. Given the empirical record, I believed (mistakenly?) that we actually saw eye to eye on this. But the trend appears to be that you take up whatever position lies opposite me. I almost wish I had started off quoting Moseley; maybe you'd be using Kliman in response.

      Anyway, Carchedi has written quite a lot contrasting tendencies with equilibrium, going back decades. I believe I linked some of that, too.

      All the quotes marshaled by Moseley (and Mongiovi, and all the others to which TSSI authors have already responded) only state that prices fluctuate around prices of production. The problem is they equate "average" and "static equilibrium." Once these are shown to be two different concepts, their argument does not hold.

      Worthy of note is that under the equilibrium interpretation, the tendency of the rate of profit to fall does not hold (since it effectively cuts historical time out of the picture), while under the "average" interpretation, it does. George Stigler, in "Textual Exegesis as a Scientific Problem," lays out a "principle of scientific exegesis" that applies here: "that such an interpretation should be rejected if it cannot deduce the author’s main analytical conclusions from her definitions and premises." (Kliman 2007, 4.6)

      Conclusion: You still haven't a leg on which to stand. Only now, beyond terms of Marxist econ and philosophy of science, we can also add informal fallacies to the list of concepts you've butchered.

      Frothing in unspeakable rage (I guess?),


      P.S. Maybe next we can say something rude about my parents -- that's always a tender subject for me.

    5. Of course, just because I'm carefully avoiding ad homs does not mean I'm not escalating the situation. Now that I've had the chance to reread it in line, I'm quite certain I could have gotten across at least a few of those points much more diplomatically.

      Apologies. I'm game for turning a new leaf on this discussion if you are.

    6. Am exhausted by other work today, will have a look at this tread and issue tomorrow.


    7. Understood. Take care.

  2. Marx's theory operates a numerous levels of abstraction.

    Volume 1 of "Capital" abstracts from competition and assumes an equal level of fixed capital (i.e., one industry). This means that volume 1 assumes that the law of value operates directly within capitalism. He does this to show that labour is exploited within capitalism.

    Volume 3 relaxes these assumptions and introduces competition and differences in capital investment. This means that there is a tendency for the rate of profit to equalize which, in turn, means that the law of value operates indirectly within capitalism, not directly.

    Given that Marx (in "The Poverty of Philosophy") attacked Proudhon for using abstractions, that he was in turn attacked for doing so is a nice little irony.

    Also, talking of "The Poverty of Philosophy", it is useful to remember that the Marx of the 1840s was an orthodox Ricardian -- the insights of "Capital" cannot be read back into "Wage-Labour and Capital" or "The Poverty of Philosophy". The Marx of the 1840s did not -- unlike Proudhon -- recognise how wage-labour resulted in exploitation (instead he just blames "the market").

    So is there contradictions within Marx? Probably -- but in this case we are talking of different levels of abstraction as well as changes in opinion. Volume 1 and 3 of "Capital" operate at different levels of abstraction, with different assumptions. Marx, though, did not make this clear (bar a few passing comments in a few footnotes). Similarly, the Marx of 1867 had a different analysis than the Marx of 1847 or 1849. While Marx was not explicit about that, it is the case -- he only reached Proudhon's level of understanding of capital and wage-labour in the late 1850s (not to mention recognition of the need for abstract models and the use of categories, but that is another matter!).

    In terms of the "labour theory of value", well, Marxists tend to add a lot of metaphysical baggage to it -- and spend far more time analysing the book "Capital" than capitalism. It is an abstraction, a means to understanding the dynamics of capitalism -- that production (the costs of producing goods) regulates the market. That Marxists tend to see "value" as a real thing is annoying and forgets that it is a model used to understand reality and not reality itself.

    So, yes, a good needs to have a use-value in order to be exchanged -- and this is a subjective thing (a utility). However, for goods which can be reproduced then the costs of production regulate its market price in the medium/long term. Short term changes in price increase/decrease market price, increasing/decreasing profit levels which in turn lead to investment/disinvestment decisions which, in turn, increases/decreases the supply of goods. This drives the market price back towards the price of production.

    Marx in "Capital" does not make this remotely easy to understand -- Ricardo in his "Principles" explains it far better and far clearer, as does Smith.

    I'm not a Marxist and so really have no interest in defending Marx (his book on Proudhon, for example, is a shockingly terrible work, deeply dishonest and inaccurate). However, the labour theory of value is of interest -- Smith, Ricardo and Proudhon utilised it for good reason. As it puts production at the heart of economic analysis, it is a better guide that the neo-classical economists which replaced it (which takes the amount of goods as a given).

    And talking of neo-classical economics, while many Marxists proclaim it as reaction to Marx in fact Léon Walras wrote a book against Proudhon...

    Anyway, that is my two-pees worth.

    An Anarchist FAQ

  3. Again, these are the less offensive aspects of Marx's theory. You want the average wage cost that determines prices? It's called Unit Labour Costs; that is, average wages per unit of output produced. And guess what? It tracks the aggregate price level.

    Not a bad starting point.

    1. But Marx is talking about much more than this: e.g.,

      (1) profits being competed away to a uniform level and long run equilibrium prices (based on costs + uniform profit rate) being the anchor for the system, and

      (2) labour value -- understood not just as unit labour costs but as abstract SNLT -- as the underlying phenomenon supposedly determining prices.

    2. (1) This is assumed in most Post-Keynesian models. With some allowances for monopoly players. Overall I don't think its a terrible assumption. Financial markets will allocate capital in firms with higher rates of profit and remove it from firms with lower rates.

      (2) I think its all semantics really. And I also think that starting from the idea that the wage bill is key to understanding the price level and not, say, the level of the money stock (Marx endorses endogenous money in Volume I) is a pretty good starting point. Way ahead of its time actually.

    3. "This is assumed in most Post-Keynesian models. With some allowances for monopoly players. Overall I don't think its a terrible assumption. Financial markets will allocate capital in firms with higher rates of profit and remove it from firms with lower rates."

      I was rather surprised to read that, given this:

      Where have I gone wrong?

      This subject interests me a great deal.

    4. I don't think that long-run equilibrium prices are synonymous with a gravitation toward equalised profit rates across industries. The mechanism for the latter probably doesn't hold. But the fact of the matter is that if investors see a higher rate of profit in one line than in another they will concentrate investment in that line until the excesses are driven out. This says nothing, of course, of the level of profits or anything like that. But it does imply that true monopoly profits are the exception and not the rule.

      I always judge economic theories by how useful they are empirically. And I have found that long run gravitation of profit rates is a useful concept empirically.

      This is a notion of 'real capitalist competition' which is found in Smith and Ricardo. It differs markedly with 'marginalist competition' which is all about optimal resource use.