Eduard Bernstein on Engels’ Historical Defence of the Law of Value in Volume 1 of Capital

Eduard Bernstein in Evolutionary Socialism: A Criticism and Affirmation (1909) describes Friedrich Engels’ attempt to defend the idea that the law of value in volume 1 of Capital was both empirical and historical:

“According to the Marxist theory surplus value is, as we have seen, the pivot of the economy of a capitalist society. But in order to understand surplus value one must first know what value is. The Marxist representation of history and of the course of development of capitalist society begins therefore with the analysis of value.

In modern society, according to Marx, the value of commodities consists in the socially necessary labour spent on them measured according to time. But with the analysis of this measure of value quite a series of abstractions and reductions is necessary. First, the pure exchange value must be found; that is, we must leave aside the special use values of the particular commodities. Then—in forming the concept of general or abstract human labour—we must allow for the peculiarities of particular kinds of labour (reducing higher or complex labour to simple or abstract labour). Then, in order to attain to the socially necessary time of work as a measure of the value of labour, we must allow for the differences in diligence, activity, equipment of the individual workers; and, further (as soon as we are concerned with the transformation of value into market value, or price), for the socially necessary labour time required for the particular commodities separately. But the value of labour thus gained demands a new reduction. In a capitalistic developed society commodities, as has already been mentioned, are sold not according to their individual value but according to their price of production—that is, the actual cost price plus an average proportional rate of profit whose degree is determined by the ratio of the total value of the whole social production to the total wage of human labour power expended in producing, exchanging, etc. At the same time the ground rent must be deducted from the total value, and the division of the capital into industrial, commercial, and bank capital must be taken into the calculation.

In this way, as far as single commodities or a category of commodities comes into consideration, value loses every concrete quality and becomes a pure abstract concept. But what becomes of the surplus value under these circumstances? This consists, according to the Marxist theory, of the difference between the labour value of the products and the payment for the labour force spent in their production by the workers. It is therefore evident that at the moment when labour value can claim acceptance only as a speculative formula or scientific hypothesis, surplus value would all the more become a pure formula—a formula which rests on an hypothesis.

As is known, Friedrich Engels in an essay left behind him which was published in the Neue Zeit of the year 1895–96, pointed out a solution of the problem through the historical consideration of the process. Accordingly the law of value was of a directly determining power, it directly governed the exchange of commodities in the period of exchange and barter of commodities preceding the capitalist order of society.

Engels seeks to prove this in connection with a passage in the third volume of Capital by a short description of the historic evolution of economics. But although he presents the rise and development of the rate of profit so brilliantly, the essay fails in convincing strength of proof just where it deals with the question of value. According to Engels’ representation the Marxist law of value ruled generally as an economic law from five to seven thousand years, from the beginning of exchanging products as commodities (in Babylon, Egypt, etc.) up to the beginning of the era of capitalist production. Parvus, in a number of Neue Zeit of the same year, made good some conclusive objections to this view by pointing to a series of facts (feudal relations, undifferentiated agriculture, monopolies of guilds, etc.) which hindered the conception of a general exchange value founded on the labour time of the producers. It is quite clear that exchange on the basis of labour value cannot be a general rule so long as production for exchange is only an auxiliary branch of the industrial units, viz., the utilisation of surplus labour, etc., and as long as the conditions under which the exchanging producers take part in the act of exchange are fundamentally different. The problem of Labour forming exchange value and the connected problems of value and surplus value is no clearer at that stage of industry than it is to-day.” (Bernstein 1909: 29–31).

As we can see, Bernstein rejected Engels’ apologetics in the “Supplement and Addendum to Volume 3 of Capital” (Engels 1895).

For Bernstein the law of value in volume 1 of Capital – that commodities tend to exchange at true labour values – was a “pure abstract concept.”

This apologetic Marxist tactic – in contrast to Engels’ defence of the law of value as a real empirical and historical phenomenon confined to the pre-capitalist world of commodity exchange – was adopted early on after the publication of volume 3 of Capital by Werner Sombart, Conrad Schmidt, and Wilhelm Lexis.

Let’s review their views:

(1) Werner Sombart argued in 1894 that the law of value was not empirical fact but an “ideal” or “logical” one (Sombart 1894).

(2) Conrad Schmidt argued in 1895 that the law of value is just a “necessary theoretical point of departure” but not something empirically present in the “phenomena of prices under competition” (Schmidt 1895: 258).

(3) Wilhelm Lexis in 1895 argued the following:

“Value, as conceived by Marx, is thus a purely theoretical conception. The thing is never to be found in reality, neither in the normal exchanges of commodities nor in the consciousness of the individuals who take part in these exchanges.” (Lexis 1895: 11–12).

Benedetto Croce later argued something similar, that labour value was a mere ideal concept from which reality departs (Croce 1915: 52–57).

But Engels vehemently rejected the view that the law of value was totally abstract or non-empirical.

For Engels, the law of value in volume 1 was a real empirical and historical phenomenon, to be applied to the pre-modern world of commodity exchange (Engels 1991 [1895).

But, as we see, many Marxists rejected even this, and went for the apologetics of Conrad Schmidt and Werner Sombart.

BIBLIOGRAPHY
Bernstein, Eduard. 1909. Evolutionary Socialism: A Criticism and Affirmation (trans. Edith C. Harvey). B. W. Huebsch, New York.

Croce, Benedetto. 1915. Historical Materialism and the Economics of Karl Marx (trans. C. M. Meredith). Allen & Unwin, London.

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.

Lexis, W. 1895. “The Concluding Volume of Marx’s Capital,” Quarterly Journal of Economics 10 (October): 1–33.

Schmidt, Conrad. 1895. “Der dritte Band des Kapital,” Sozialpolitisches Zentralblatt 22 (25th February): 254–258

Sombart, Werner. 1894. “Zur Kritik des ökonomischen Systems von Karl Marx” [Toward a Critique of the Economic System of Karl Marx], Archiv für soziale Gesetzgebung und Statistik 7: 555–594.

Alexander Gray on the Two Contradictions in Marx’s Theory of Surplus Value in Volume 1 of Capital

From Alexander Gray’s book The Development of Economic Doctrine: An Introductory Survey (1956):

“… the Marxian explanation suffers from two inner inherent contradictions (or two aspects of the same contradiction) from which it never escaped, and on which it finally made shipwreck in the third volume. In the first place, if all profit springs from variable capital and none from machinery, then it is the height of folly ever to introduce machinery, and it is a poor explanation to suggest that the capitalist does not know what he is doing. Marx realizes the difficulties of this ‘contradiction which is immanent’ in the application of machinery, but his observations leave it barking for solution in the minds of all readers. On the Marxian theory, with every progress of capital to a higher proportion of constant capital, there will be a diminution of profits, since profits come solely from labour, which admittedly represents a continually smaller proportion of total capital. With every step forward which the capitalist makes, he thus more deeply cuts his own throat. Surplus value calls for, and can only arise from, the existence of vast masses of workers; the Marxian analysis shows an increasing army of unemployed, displaced by machinery which can yield no profit.

The other flaw is a variant of this, and is in a sense even more fatal. If profit springs only from the labour employed, and in no wise from the constant capital, then the rate of profit in different industries will vary according as the proportion of variable capital is high or low. When there is much variable capital (i.e., in more primitive and undeveloped industries) the rate of profit will be high; in industries which have had extensive resort to machinery, the rate of profit will be low. Marx admitted with praiseworthy frankness that the observed facts were in glaring contradiction with the law so ascertained:

‘This law clearly contradicts all experience based on appearance. Everyone knows that a cotton spinner, who, reckoning the percentage on the whole of his applied capital, employs much constant and little variable capital, does not, on account of this, pocket less profit or surplus value than a baker, who relatively sets in motion much variable and little constant capital. For the solution of this apparent contradiction, many intermediate terms are as yet wanted, as from the standpoint of elementary algebra many intermediate terms are wanted to understand that 0/0 may represent an actual magnitude.’ [Marx 1906: 335].

The subsequent history of this conundrum furnishes one of the few comedies of economic literature. The promised solution did not appear in Volume II, but references to it figure largely in the preface written by Engels, above all in the form of a challenge addressed to the followers of Rodbertus. For if, as was claimed, Marx had plagiarized Rodbertus, now (and that right early, before the publication of Volume III) was the time for those who had championed Rodbertus to vindicate his claims by producing the correct solution of the riddle. The odd thing is that many socialists and economists did in fact respond, and took part in the competition to the extent of speculating as to what the Marxian solution was to be. But indeed it ought to have been clear a priori that there could be no solution, since irreconcilables cannot be reconciled, nor can harmony be established between two contradictory propositions—unless by the simple expedient of dropping one of them overboard. Contemplating the ‘Russian campaign of disaster’ organized by Engels, Loria, an enthusiastic admirer of Marx, even suggests that the procrastinations of Marx in getting on with Volumes II and III were due to a realization of the impending ruination of his life's work: ‘Is there any reason for surprise at Marx's hesitation to publish this so-called defence; need we wonder that his hand trembled, that his spirit quailed, before the inexorable act of destruction?’

The solution offered to the undiscerning in the third volume in explanation of the existence of a uniform rate of profit is embedded in a good deal of arithmetical illustration. Briefly, it amounts to this. Employers are not to be viewed in isolation. A group of enterprises, with different proportions of variable and constant capital, should be replaced by an imaginary enterprise, comprising the total of all the capitals of the members of the group. As this process of averaging cannot be limited, it means that all employers are to be regarded as one group, in which the surplus value gained by all is distributed among all. The possibility of a uniform rate of profit thus emerges; but it is on condition that some things sell above and some below their value. This uniform rate of profit is arrived at by competition, and capital everywhere looks for the average profit. Thus, there emerges a difference between value and price; and henceforth it will only be on rare occasions, indeed only by accident, that the surplus value really produced in any given branch of industry will correspond to the profit contained in the selling price of the commodity—the accidental case arising where the composition of the capital (as between constant and variable) is exactly the average of the sum total of all capitals. Elsewhere the products of industries, with a proportion of constant capital above the average, will sell at a price above their value, while in the contrary case they will sell below their value. Thus the desired uniform rate of profit is established, but at the cost of sacrificing the whole of the first volume of Capital; for the inspired doctrine of the first volume, that things exchange in accordance with the congealed labour they contain, is ignominiously tossed overboard. This is the ‘solemn mystification’ of which Loria speaks. In fact, Marx has replaced Volume I by a mere cost-of-production theory such as a vulgar economist like Adam Smith might have evolved in his most vulgar and least enlightened moments. Things exchange according to their cost of production (which includes a normal rate of profit). It is true that they still have a ‘value’ which differs in general from the price; but in a ‘value’ which is an abstract metaphysical conception, and which is uniformly ignored in the market-place, few of us have any lively interest.” (Gray 1956: 318–322).

And that is spot on.

BIBLIOGRAPHY
Gray, Alexander. 1956. The Development of Economic Doctrine: An Introductory Survey. Longmans, Green and Co., London.

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’s “Law of Value” in Volume 1 of Capital

Labour value in volume 1 of Capital is defined in the following passages:

“A use-value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it. How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labour, contained in the article.” (Marx 1906: 45).

“Since the magnitude of the value of a commodity represents only the quantity of labour embodied in it, it follows that all commodities, when taken in certain proportions, must be equal in value.” (Marx 1906: 53).

“We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour-time socially necessary for its production. Each individual commodity, in this connexion, is to be considered as an average sample of its class. Commodities, therefore, in which equal quantities of labour are embodied, or which can be produced in the same time, have the same value.” (Marx 1906: 46).

“Commodities as values are nothing but crystallized labour. The unit of measurement of labour itself is the simple average-labour.”
Chapter 1 of the first German edition of Capital (1867)
https://www.marxists.org/archive/marx/works/1867-c1/commodity.htm

“A use-value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it. How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labour, contained in the article.” (Marx 1906: 45).

“Human labour-power in motion, or human labour, creates value, but is not itself value. It becomes value only in its congealed state, when embodied in the form of some object.” (Marx 1906: 59).

“Value is independent of the particular use-value by which it is borne, but it must be embodied in a use-value of some kind. Secondly, the time occupied in the labor of production must not exceed the time really necessary under the given social conditions of the case.” (Marx 1906: 209).

“The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour-power.” (Marx 1906: 45–46).

“Value is here, as occasionally in the preceding pages, used in the sense of value determined as to quantity, or of magnitude of value.” (Marx 1906: 62, n. 1).

“The recent scientific discovery, that the products of labour, so far as they are values, are but material expressions of the human labour spent in their production, marks, indeed, an epoch in the history of the development of the human race …” (Marx 1906: 85).

That is to say:

(1) the substance of value is abstract socially necessary labour time, which must be defined as a homogeneous unit capable of aggregating and measuring all heterogeneous types of human labour-power (Marx 1906: 45–46);

(2) so therefore value is abstract, socially necessary labour time embodied, crystallised, or materialised in commodities, and

(3) the magnitude of value or quantitative measure of value is the amount of abstract socially necessary labour time, counted in homogeneous units (Marx 1906: 45–46).

But there are devastating problems with the very concept of a homogeneous unit of abstract, socially necessary labour time and serious empirical problems with the theory, as I show here. The very concept, as Marx defines it, cannot be accepted or defended as coherent or meaningful, and is contrary to the empirical evidence.

At any rate, Marx in the text of volume 1 of Capital thinks commodities tend to exchange at pure labour values, as determined by socially necessary labour time (Marx 1906: 176–177; Marx 1909: 208–210). This is called the “law of value” (Marx 1906: 208, 335, 587, 612), “laws of the exchange of commodities” (Marx 1906: 177; Marx 1906: 638), “law of the determination of value by labour-time” (Marx 1906: 350) or “law of the exchange of commodities” (Marx 1906: 257).

However, Marx accepts that prices move around labour values as the latter are the equilibrium price anchors for the system and there are some exceptions.

We can see this from an analysis of the text of volume 1:

(1) In Chapter 1, Marx suggests that diamonds may not always exchange at their true labour values, and perhaps often below their real labour value (Marx 1906: 47). He also cites another economist who suggested that gold may not normally exchange at its true labour value either, but Marx does not explicitly commit himself to this, and indeed it blatantly contradicts his own theory of general price movements later in Chapter 3 (see (5) below).

(2) Marx 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), but that makes no sense unless Marx really believes that commodities tend to exchange at pure labour values. That is, this argument does indeed assume that commodities tend to exchange at true labour values.

(3) Marx also says that gold or silver, when initially brought to market, is exchanged with other commodities with an equal socially necessary labour time value as a barter transaction (Marx 1906: 122). That requires exchange at pure labour values.

(4) Marx refers to occasions where sellers sell commodities above their labour values as “swindling” (Marx 1990: 264), because they obtain more value in exchange than what they have given: this assumes that exchange at labour values is the honest state of affairs and the tendency of capitalism.

(5) in chapter 3, Marx admits that, because of supply and demand, market prices can deviate from true labour values:

“Magnitude of value expresses a relation of social production, it expresses the connection that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity. But this exchange-ratio may express either the real magnitude of that commodity’s value, or the quantity of gold deviating from that value, for which, according to circumstances, it may be parted with. The possibility, therefore, of quantitative incongruity between price and magnitude of value, or the deviation of the former from the latter, is inherent in the price-form itself. This is no defect, but, on the contrary, admirably adapts the price-form to a mode of production whose inherent laws impose themselves only as the mean of apparently lawless irregularities that compensate one another.” (Marx 1906: 114).

However, there is a mechanism by which prices move back towards labour values (see (5)).

(6) in Chapter 3, Marx goes on to explain general price inflation and deflation in terms of labour value:

“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).

So here Marx sees prices as ultimately determined by two factors: (1) the labour value of units of gold and (2) the labour value of commodities as they interact with (1).

(7) For Marx, there is an equilibrium process at work by which prices are driven back towards their true labour values:

“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).

“It requires a fully developed production of commodities before, from accumulated experience alone, the scientific conviction springs up, 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 continually being reduced to the quantitative proportions in which society requires them. And why? Because, in the midst of all the accidental and ever fluctuating exchange-relations between the products, the labour-time socially necessary for their production forcibly asserts itself like an over-riding law of nature. The law of gravity thus asserts itself when a house falls about our ears. The determination of the magnitude of value by labour-time is therefore a secret, hidden under the apparent fluctuations in the relative values of commodities.” (Marx 1906: 86–87).

These two passages in volume 1 are elucidated by a passage in Chapter 10 of volume 3 of Capital, where Marx specifies this equilibrium process:

“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).

This is the law of value on volume 1 of Capital, despite two blatantly contradictory footnotes: footnote 24 in Chapter 5 and footnote 9 in Chapter 9.

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 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, 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.

It also seems that Engels, despite the letters he had from Marx, also dishonestly defended the “law of value” in volume 1: for example, in Herr Eugen Dühring’s Revolution in Science, first published in 1878 when Marx was still alive, Engels defended the idea that commodities tend to exchange at their labour values in modern capitalism (see here).

Moreover, it took Engels years and years to finally publish volume 3 of Capital. In fact, he left it to 1894, even though people were pressing him for the volume and the solution to the transformation problem (Howard and King 1989: 24). And Engels utterly refused to relate Marx’s solution to the transformation problem to any private correspondents (even Marxists) or to have it printed separately before the publication of volume 3 (Howard and King 1989: 24–25), whose publication was delayed for years and years. That is telling.

In light of all this, we can understand why Engels – if he was fully aware of the use of a different theory of price determination in volume 3 – dragged his feet and must have been very apprehensive indeed about the publication of volume 3. That is to say, the reason was that in volume 3 of Capital Marx had used a different theory of price determination by prices of production which totally contradicted the theory of price determination in volume 1.

No doubt wishing to finish Marx’s great work even though it would come with a cost and pressed by Marxists to do so, Engels finally published volume 3.

As I have noted before, once Engels published volume 3, the inevitable happened: hostile critics of Marxism and even some sympathetic supporters of Marx pointed to this devastating contradiction between volumes 1 and 3.

Engels scrambled to re-write history and defend Marx: finally, in his “Supplement and Addendum” to Volume 3 of Capital published in 1895 Engels defended volume 1 by saying that the law of value there only applied to the pre-modern world of commodity exchange before prices of production came to dominate modern capitalism. Engels also
defended this apologetic rewriting of history in a private letter to Werner Sombart of March 11, 1895 (see here).

But that will not do: this was a dishonest Marxist intellectual fraud by Engels; the two volumes of Capital were and are contradictory, as numerous critics of Marxism have noted from Joan Robinson (Robinson 1950: 359) and Gerald F. Shove (Shove 1944: 48–49), to Werner Sombart (1894) and Achille Loria (1895; English trans. Loria 1920; see also here), and to Eugen von Böhm-Bawerk (1949 [1896]).

BIBLIOGRAPHY
Böhm-Bawerk, Eugen von. 1949 [1896]. “Karl Marx and the Close of His System,” 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. 3–120.

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.

Howard, Michael Charles and John E. King. 1989. A History of Marxian Economics. Volume I, 1883–1929. Princeton University Press, Princeton, NJ.

Loria, Achille. 1895. “L’opera postuma di Carlo Marx,” Nuova Antologia di Scienze 55.3 (February): 460–496.

Loria, Achille. 1920. Karl Marx. (trans. Eden and Cedar Paul), George Allen and Unwin Ltd., London.

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.

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

Robinson, Joan. 1950. Review of Karl Marx and the Close of his System by Eugen von Böhm-Bawerk (ed. Paul Sweezy), The Economic Journal 60.238: 358–363.

Shove, G. F. 1944. “Mrs. Robinson on Marxian Economics,” The Economic Journal 54.213: 47–61.

Sombart, Werner. 1894. “Zur Kritik des ökonomischen Systems von Karl Marx” [Toward a Critique of the Economic System of Karl Marx], Archiv für soziale Gesetzgebung und Statistik 7: 555–594.

Marx and Engels’ Attempt to Salvage the Law of Value in Volume 1 of Capital

I cannot stress enough how important this issue is for clarifying and refuting Marx’s economic theory. Though I have said much of what is below before, it bears repeating with some new observations.

In essence, Marx published volume 1 of Capital in German in 1867, but only volume 1 of Capital was published in Marx’s lifetime. The other volumes were edited and published by Engels (for an extended discussion of this, see here). For some reason, Marx refused to publish volumes 2 and 3.

In volume 1, Marx set out a law of value based on the labour theory of value, in which socially necessary labour time was the anchor for the price system in modern capitalism. There is no convincing evidence that (1) Marx regarded this law of value as a totally abstract “simplifying assumption” or that (2) he did not mean to apply it to the advanced industrial capitalism of the 19th century as an empirical explanation of price determination.

But when volume 3 of Capital was edited and published by Engels critics quickly pointed out that the theory of value in volume 3 was radically inconsistent with that of volume 1.

This devastating problem clearly worried Engels, and this can be seen in an article Engels wrote in May 1895 for the Neue Zeit (Marx 1991: 1027, n.), which is available as the “Supplement and Addendum” to Volume 3 of Capital in Marx (1991: 1027–1047).

Right at the beginning of this supplement, Engels notes that people such as Achille Loria had pointed to the devastating contradiction between volume 1 and volume 3 of Capital (Marx 1991: 1027–1028).

Next, Engels mentions that Werner Sombart, in a review of Marx’s work (Sombart 1894), declared that the labour theory of value as presented in volume 1 of Capital could not be empirically supported and was a mere “logical” concept (Marx 1991: 1032).

So, too, Conrad Schmidt in an 1895 review of volume 3 (Schmidt 1895) had also declared that the labour theory of value was a “necessary fiction” (Marx 1991: 1032). Engels describes Schmidt’s criticisms:

“Schmidt, too, has his formal reservations about the law of value. He calls it a scientific hypothesis put forward to explain the actual exchange process, which proves the necessary theoretical point of departure, illuminating and indispensable even for the phenomena of prices under competition, which appear completely to contradict it. Without the law of value, in his opinion too, any theoretical insight into the economic mechanism of capitalist reality is impossible. In a personal letter which he has allowed me to mention, Schmidt declares that the law of value in the capitalist form of production is a fiction, though a theoretically necessary one.” (Marx 1991: 1032).

Now it is clear that Engels’ “law of value” here is referring to the idea that commodities tend to exchange at their pure labour values.

Engels was well aware that hostile critics of Marx had declared that volume 3 of Capital utterly contradicted and overthrew the theory of value in volume 1. It seems that Conrad Schmidt was actually one of the first to point out the contradiction between commodities tending to exchange at their labour values and an average rate of profit in his 1889 work Die Durchschnittsprofitrate auf Grundlage des Marxschen Wertgesetzes [The Average Rate of Profit on the basis of Marx’s Law of Value] (Stuttgart, 1889) (see Böhm-Bawerk 1949: 28, with n. 2).

Engels desperately sought a solution and found a passage in volume 3 of Capital where Marx himself was trying to salvage the theory of value in volume 1, which had been overthrown by that in volume 3.

That passage of Marx comes in Chapter 10 of volume 3 and is as follows:

“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 was saying that the theory of value in 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.

It is particularly interesting to note how Marx specifically described the theory of value in volume 1 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).

This and Marx’s whole discussion around the passage clearly damn and refute all those pathetic Marxist hacks who want to tell us that the law of value in volume 1 – namely, that commodities tend to exchange at their pure labour values which are anchors for the price system – is only a “simplifying assumption” or some highly abstract system never intended to apply to the real world.

Clearly Marx did even in volume 3 of Capital apply it to the capitalist system in an empirical sense, but to those historical periods at a “lower stage … of capitalist production” confined to the older medieval and pre-modern eras. Crucially, this is exactly how Engels interpreted the passage, as we can see below in a quotation from Engels’ supplement to volume 3.

Engels cites the passage I have quoted above from volume 3 of Capital and says this:

“If Marx had been able to go through the third volume again, he would undoubtedly have elaborated this passage significantly. As it stands, it gives only an outline sketch of what needs to be said on the point in question. Let us therefore go into the matter somewhat more closely.

We all know that at the beginnings of society products are used by the producers themselves, these producers living in indigenous communities that are organized more or less on a communist basis; that the exchange of their surplus products with foreigners, which introduces the transformation of products into commodities, is of later date. It takes place first of all simply between individual communities of different tribes and only later does it come to prevail within the community, where it makes a decisive contribution to the dissolution of this community into larger or smaller family groups. Even after this dissolution, however, the family heads who exchange with one another remain working peasant farmers, who produce almost all their requirements on their own holdings, with the aid of their families, and obtain only a small portion of the items they need from outside, in exchange for their own surplus product. Not only does the family pursue agriculture and stock-raising, it also works up the products of these activities into finished articles of use, still doing its own milling in places with their hand mill, baking bread, spinning, dyeing, weaving flax and wool, curing leather, erecting and repairing wooden buildings, producing tools and equipment, and often doing its own carpentry and metalwork too; so that the family or family group is basically self-sufficient.

Now the little that such a family has to obtain from others by exchange, or buy, consisted right up to the early nineteenth century, in Germany, predominantly of objects of handicraft production, i.e. things whose mode of production was in no way strange to the peasant and which he himself failed to produce only because either the raw material was unavailable or the purchased article was much better or very much cheaper. For the peasant of the Middle Ages, therefore, the labour-time needed to reproduce the objects he obtained in exchange was quite accurately known. The village smith and cartwright were at work under his very eyes; similarly the tailor and shoemaker, who in my own youth still travelled round to our Rhineland peasants in turn, working up materials provided into clothes and shoes. Both the peasant and the people from whom he bought were workers themselves, and the articles exchanged were their own products. What had they applied in the production of these articles? Labour, and labour alone: to replace tools, to produce raw material and work it up, all they spent was their own labour-power; how else then could they exchange these products of theirs with those of other working producers than in proportion to the labour applied to them? The labour-time applied to these products, then, was more than just the most suitable measure for the quantitative determination of the magnitudes to be exchanged; no other measure was possible. Or are we to believe that peasant and village artisan were so stupid that one of them would part with the product of ten hours’ labour for that of a single hour? For the entire period of natural peasant economy, no other exchange is possible except that in which the amounts of commodities exchanged tend more and more to be measured according to the amounts of labour embodied in them. From the moment money penetrates into this economic mode, the tendency of adaptation to the law of value (Marx’s formulation, nota bene!) becomes more explicit, though it is already infringed by the interventions of usurer’s capital and fiscal extortion, so that the periods over which prices approximate on average to values, down to a negligible difference in magnitude, already become more drawn out.

The same applies to exchange between the products of peasants and those of urban artisans. At the beginning, this takes place directly, without the mediation of the merchant, on the town market-days when the peasant sells and makes his purchases. Here, too, the artisan’s conditions of labour are known to the peasant, and the peasant’s to the artisan. He is himself still one part peasant, and not only has his kitchen-garden and orchard but also very often a bit of a field, one or two cows, pigs, fowl, etc. People in the Middle Ages were thus in a position to reckon up each other’s production costs in raw and ancillary materials, and in labour-time, with a fair degree of accuracy – at least as far as articles of general daily use were concerned.

But how could the amount of labour be reckoned, even indirectly and relatively, when this served as the measure of exchange for products that required more prolonged labour, interrupted and at irregular intervals, and uncertain in its results, products like corn or cattle, for instance? And, moreover, with people who were unable to count? Evidently, only by a lengthy process of zig-zag approximation, often groping back and forth in the dark, in which, as in other things, wisdom was attained only by painful accident. But the need for each person to have a rough idea of his own costs helped time and again in the correct direction, and the small number of types of article coming into exchange, as well as the stable mode of their production, often over centuries, made the goal more easily attainable. That it in no way took so long until the relative values of these products were established with a fair degree of accuracy is shown by the simple fact that the commodity in which this seems most difficult on account of the long production time of the individual item, i.e. cattle, was the first fairly generally recognized money commodity. In order to arrive at the value of cattle, its exchange ratio with a whole series of other commodities must already have won established recognition to a relatively unusual degree, it must be unchallenged over an area of several tribes. And the people of that time were certainly clever enough – the cattle-breeders as well as their customers – not to part with the labour-time they had spent without an equivalent in exchange. On the contrary, the closer people stand to the original state of commodity production – e.g. Russians and Orientals – the more time they still spend today in extracting full compensation for the labour-time spent on a product by long and stubborn haggling.

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; therefore, in particular, the conditions become established under which labour is value-forming. These conditions, moreover, prevail although those involved do not become aware of them, so that they can be abstracted from everyday practice only by tedious theoretical analysis; they operate in the form of a natural law, which as Marx showed followed necessarily from the nature of commodity production. The most important and incisive progress was the transition to metal money, but this had the consequence that the determination of value by labour-time was no longer visibly apparent on the surface of commodity exchange. Money became the decisive measure of value for practical purposes, and all the more so, the more diverse were the commodities coming into trade, the more they originated from distant countries, and the less therefore the labour-time needed for their production could be checked. Even the money itself came mostly from abroad at first; and when it was obtained in a particular country as precious metal, the peasant and artisan were in no position to assess even approximately the labour applied to it, while their own awareness of the value-measuring property of labour was also pretty well obscured by the custom of reckoning in money; money came to represent absolute value in the popular conception.

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!” (Marx 1991: 1034–1038).

The passage in yellow highlighting is crucial: this is how Engels understood the theory of value in volume 1 of Capital at the end of his life.

This view is that commodities did historically tend to exchange at pure labour values in less developed forms of capitalism up until about the 15th century. That is, it actually happened in the pre-modern “period of simple commodity production” (Marx 1991: 1037).

Then what happened was that the “transition to metal money” obscured exchange at pure labour values:

“The most important and incisive progress was the transition to metal money, but this had the consequence that the determination of value by labour-time was no longer visibly apparent on the surface of commodity exchange. Money became the decisive measure of value for practical purposes, and all the more so, the more diverse were the commodities coming into trade, the more they originated from distant countries, and the less therefore the labour-time needed for their production could be checked. Even the money itself came mostly from abroad at first; and when it was obtained in a particular country as precious metal, the peasant and artisan were in no position to assess even approximately the labour applied to it, while their own awareness of the value-measuring property of labour was also pretty well obscured by the custom of reckoning in money; money came to represent absolute value in the popular conception.” (Marx 1991: 1037).

After this point, the advanced form of modern capitalist production developed and prices of production replaced labour values as the anchors for the price system.

This view of Engels is splendidly confirmed in a letter he wrote to Werner Sombart (1863–1941) on March 11, 1895 about the labour theory of value (on which, see here), which was a response to a hostile review of volume 3 of Capital by Sombart (1894).

The crucial passage from this letter of Engels is below:

“When commodity exchange began, when products gradually turned into commodities, they were exchanged approximately according to their value. It was the amount of labour expended on two objects which provided the only standard for their quantitative comparison. Thus value had a direct and real existence at that time. We know that this direct realisation of value in exchange ceased and that now it no longer happens. And I believe that it won’t be particularly difficult for you to trace the intermediate links, at least in general outline, that lead from directly real value to the value of the capitalist mode of production, which is so thoroughly hidden that our economists can calmly deny its existence. A genuinely historical exposition of these processes, which does indeed require thorough research but in return promises amply rewarding results, would be a very valuable supplement to Capital.”
Letter, Engels to W. Sombart, from London, March 11, 1895
https://www.marxists.org/archive/marx/works/1895/letters/95_03_11.htm

Unfortunately, Engels’ attempt to save the law of value in volume 1 – which was undoubtedly a development of Marx’s own desperate attempt to save it as we have seen above – is still a feeble and unconvincing theory.

Why? The reason is that 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 the same time, Marx thinks that the second mechanism driving prices is the fluctuation of labour values of commodities as against money (Marx 1906: 111). This is succinctly summed up in what Marx calls the “laws of the exchange of commodities” in Chapter 5 of volume 1:

“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).

So either (1) Marx meant to apply this to modern capitalism in its contemporary form or (2) he was so incompetent and useless he never told his readers how the theory had to be strictly limited to pre-modern times. Either way Marx is damned.

Moreover, as I argued in the original version of this post, there is no convincing empirical evidence for Marx’s and Engels’ attempt to salvage the law of value in volume 1 by restricting it to the past. Once we realise this, it is the death blow to the Marxist labour theory of value.

The final view of Engels, then, was that the law of value in volume 1 of Capital had to be restricted to the pre-modern world of commodity exchange, but we have no good reason to accept that the theory properly describes price determination in that era. In volume 3 of Capital as edited by Engels, Classical long-run equilibrium prices of production are the anchors for the price system, not socially necessary labour time values. This is an admission that the law of value in volume 1 is irrelevant to the modern world.

Instead, the Marxism of the volume 3 of Capital, like modern Sraffianism, sees long-run equilibrium prices, based on cost of production and a uniform rate of profit, as the anchors or centres of gravity for the price system around which prices fluctuate.

Unfortunately, even this concept of a tendency to long-run equilibrium prices in modern capitalism has grave difficulties, and in the end such an idea should be regarded as an unrealistic assumption in an overly analytic, abstract model set in logical time (Lee and Jo 2011: 868–869), where ultimately it can only be assumed by definition to be true (on this issue, see here).

BIBLIOGRAPHY
Böhm-Bawerk, Eugen von. 1949. “Karl Marx and the Close of His System,” 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. 3–120.

Engels, F. 1895. Letter, Engels to Conrad Schmidt, March 12, 1895
https://www.marxists.org/archive/marx/works/1895/letters/95_03_12.htm

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

Lee, Frederic S. and Tae-Hee Jo. 2011. “Social Surplus Approach and Heterodox Economics,” Journal of Economic Issues 45.4: 857–875.

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.

Schmidt, Conrad. 1889. Die Durchschnittsprofitrate auf Grundlage des Marxschen Wertgesetzes [The Average Rate of Profit on the basis of Marx’s Law of Value]. Stuttgart.

Schmidt, Conrad. 1895. “Der dritte Band des Kapital,” Sozialpolitisches Zentralblatt 22 (25th February): 254–258.

Sombart, Werner. 1894. “Zur Kritik des ökonomischen Systems von Karl Marx” [Toward a Critique of the Economic System of Karl Marx], Archiv für soziale Gesetzgebung und Statistik 7: 555–594.