Marx’s “Socially Necessary Labour Time”: A Quick Overview and Critique

I have one question for Marxists. Where in Marx’s works does Marx give us a clear, explicit, detailed, and unambiguous definition of the crucial concept of “socially necessary labour time”?

I am not even sure Marx ever did this, but I will take this passage in a letter that Marx wrote to Louis Kugelmann as my source for what follows in this post:

“Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish. Every child knows, too, that the masses of products corresponding to the different needs required different and quantitatively determined masses of the total labor of society. That this necessity of the distribution of social labor in definite proportions cannot possibly be done away with by a particular form of social production but can only change the mode of its appearance, is self-evident. No natural laws can be done away with. What can change in historically different circumstances is only the form in which these laws assert themselves. And the form in which this proportional distribution of labor asserts itself, in the state of society where the interconnection of social labor is manifested in the private exchange of the individual products of labor, is precisely the exchange value of these products.”
Marx to Kugelmann, Letter, London, July 11, 1868.
https://www.marxists.org/archive/marx/works/1868/letters/68_07_11-abs.htm

Though Marx does not explicitly use the phrase “socially necessary labour time” it seems clear that he is referring to it here.

The first idea is that human labour is necessary for production and human survival, or at least for advanced industrial societies. That is true.

Then we have the crucial statement. The different types of goods that a capitalist economy produces require “different and quantitatively determined masses of the total labor of society.” So here labour is assumed to be an aggregate (admittedly of heterogeneous types of labour) and we can quantitatively measure how much of the aggregate is needed for the production of each type of good produced.

I assume Marx is thinking of labour time as the homogenous unit by which we measure the aggregate of the “total labor of society” and the parts therefore. If he is not, then what is he thinking of? Labour measured as the total number of workers?

I will continue to assume that labour time is the relevant concept. But immediately problems arise. If the car manufacturing sector takes 100,000 hours of total labour to produce 5000 cars, then is the value of an individual car 20 hours of labour time? What if this average conceals significant differences in various companies in terms of productivity and speed of the workforce? Is the average really justified as a measure of labour value?

And isn’t there a problem of aggregation of labour? If labour value is measured by labour time by means of the homogenous unit of hours worked, aren’t we faced with radically different types of labour value? Highly skilled labour (e.g., a professional surgeon) seems more valuable than unskilled manual labour (e.g., a person who mops floors). Does Marx’s labour theory of value make any allowances for this, or just regard one hour of doctor’s labour as equivalent to that of a janitor?

And, fundamentally, Marx makes it clear that he thinks his “social labour” proportions determine the exchange value (whether barter prices or money prices) of goods exchanged on the market:

“ And the form in which this proportional distribution of labor asserts itself, in the state of society where the interconnection of social labor is manifested in the private exchange of the individual products of labor, is precisely the exchange value of these products.”
Marx to Kugelmann, Letter, London, July 11, 1868.
https://www.marxists.org/archive/marx/works/1868/letters/68_07_11-abs.htm

So here we have the “transformation problem” right before our eyes. I can’t understand Marxists who tell me that there is no transformation problem in Marx’s work or that Marx never said that labour value determines exchange value or money prices. Clearly, he did.

But how on earth do Marxists solve the problem of how labour value as measured by “socially necessary labour time” determines prices on the market, and then empirically prove the values map to real world prices in real capitalist economies?

Actually, the Marxists have never solved these problems. And they never will.

The utter failure of the classical Marxist project is in the very assumption that “socially necessary labour time” determines exchange value or prices on the market. It does not.

This is an empirical fact. Most prices in modern economies are mark-up prices. It is not labour time per se but average unit cost of labour along with the average unit cost of all other non-labour factors at a given quantity of output that is used to calculate most prices. Given differing economies of scale, if you change the given quantity of output, then total average unit costs radically change, regardless of the total number of labour hours. After they calculate total average unit costs, businesses add a profit mark-up to this, nearly always. The profit mark-up can vary and is not related to labour.

There is, on straightforward empirical grounds, no rational reason to believe the Marxist mystical dogma that “socially necessary labour-time” determines exchange value or prices in modern capitalism.

Say’s Law: An Overview and Bibliography

I think an overview is in order in light of Robert Murphy’s confusing post here, which seems (as far as I can see) to agree that a “general glut” or failure of aggregate demand is possible, contrary to the extreme form of Say’s law, but in a bizarre argument invoking “present and future goods” and the notion that “leisure is a present consumption good.”

Say’s law of course is defined in various ways, but the two main definitions are as follows:

(1) Say’s Identity
According to Baumol (1977: 146), this

“is the assertion that no one ever wants to hold money for any significant amount of time, so that, as a result, every offer (supply) of a quantity of goods automatically constitutes a demand for a bundle of some other items of equal market value”; and

(2) Say’s Equality
Again, according to Baumol (1977: 146), Say’s Equality

“admits the possibility of (brief) periods of disequilibrium during which the total demand for goods may fall short of the total supply, but maintains that there exist reliable equilibrating forces that must soon bring the two together.”

The issue of how Jean-Baptiste Say (1767–1832) himself defined the law is complicated by the fact that Say produced various editions of his Treatise on Political Economy and different treatments of the law, as follows:

(1) the first edition of Say’s Traité d’économie politique (1803; or the Treatise on Political Economy in English) has only a brief and not properly formulated version of the law;

(2) the second edition of Traité d’économie politique/Treatise on Political Economy (published in 1814) has the first proper formulation of Say’s law (Baumol 1977: 147).

(3) a summary of the law appears in Say’s Catechism of Political Economy (1816: 103–105).

(4) in the fourth edition of Traité d’économie politique/Treatise on Political Economy (1819) Say revised his remarks on the law in important ways (Heertje 2004: 41).

It seems widely accepted today that Say’s role in formulating the law is overrated. That is, both Thweatt (1979: 92–93) and Baumol (2003: 46) conclude that Adam Smith was in fact the real father of what is recognisably Say’s law in Classical economics, with the major work in developing the idea conducted by James Mill (1808), not necessarily Jean-Baptiste Say himself.

So let us look at how Say’s law was formulated by the Classical economists, as defined by Thomas Sowell (1994: 39–41). Sowell defines it as these propositions:

“(1) The total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output [an idea in James Mill].

(2) There is no loss of purchasing power anywhere in the economy. People save only to the extent of their desire to invest and do not hold money beyond their transactions need during the current period [James Mill and Adam Smith].

(3) Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector [John Stuart Mill].

(4) In real terms, supply equals demand ex ante [= “before the event”], since each individual produces only because of, and to the extent of, his demand for other goods. (Sometimes this doctrine was supported by demonstrating that supply equals demand ex post.) [James Mill.]

(5) A higher rate of savings will cause a higher rate of subsequent growth in aggregate output [James Mill and Adam Smith].

(6) Disequilibrium in the economy can exist only because the internal proportions of output differ from consumer’s preferred mix—not because output is excessive in the aggregate” [Say, Ricardo, Torrens, James Mill] (Sowell 1994: 39–41).

Why is Say’s law false?

One fatal flaw is the underlying assumption, which is clear in the work of Jean-Baptiste Say himself, that money cannot provide direct utility:

“For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others.” (Say 1821a: 164–165).

This is made clear to us by Say’s statement: “[sc. the] whole utility [sc. of money] has consisted in conveying to your hands the value of the commodities.” This is a world where nobody holds money for significant periods of time because money can have no utility, except in what it can purchase in terms of commodities. But that is not the world we live in. We live in a world of uncertainty. In the face of uncertainty, money can yield direct utility (Graziani 2003: 11). Therefore people can and do hold money for significant periods!

First, “Say’s Identity” simply ignores the reality of people holding money without purchasing goods and services because of uncertainty (Keynes’s precautionary motive), or what Keynes called idle money hoards. It also ignores the spending of money on secondary financial or real asset markets or holding of money idle for this reason (Keynes’s speculative motive).

In any real world economy, money from income streams from production, either to capitalists or workers, can become diverted to asset markets and may not be spent on goods. For this reason alone, Say’s law is a grossly unrealistic picture of market economies. Capitalists themselves have subjective expectations about the future and the future profitability of investment, and when their expectations are shattered, they will not necessarily invest out of retained earnings.

Secondly, a further serious problem with both versions of Say’s law is the assumption of universal or near universal flexprice markets, when vast numbers of industrial, service, retail and even capital goods markets are fixprice, and administered prices are the norm. In modern capitalist economies, supply and demand are equated by changes in employment and output, not by flexible prices. (And also the whole simplistic economic model of Say’s law does not have a place for endogenous money and banks that create credit money for investment.)

Lastly, as a matter of historical interest, eventually it appears that Jean-Baptiste Say actually repudiated the strong form of Say’s law we call “Say’s Identity” in his letters to Malthus, and seems to have admitted the existence of failures of aggregate demand.

More detailed discussion is here:

“The Myth of Say’s Law,” October 7, 2010.

“F. H. Hahn in a Candid Moment on Neo-Walrasian Equilibrium ,” January 29, 2011.

“Say’s Law Presupposes Aggregate Demand as a Meaningful Concept,” May 28, 2011.

“Say Repudiated Say’s Law,” December 1, 2011.

“Jean Baptiste Say on Failures of Aggregate Demand,” December 1, 2011.

“Jean-Baptiste Say and “Say’s Law,” September 14, 2012.

“The Origin of Say’s Law in Adam Smith and James Mill,” September 14, 2012.

“Bibliography on Say’s Law,” September 16, 2012.

“A Note on Prices and Say’s Law,” December 11, 2012.

“World GDP versus Total Value of Financial Asset Market Exchanges,” February 21, 2013.

I also reproduce my extended bibliography on Say’s law below.

BIBLIOGRAPHY

Anderson, William L. 2009. “Say’s Law and the Austrian Theory of the Business Cycle,” Quarterly Journal of Austrian Economics 12.2: 47–59.

Aspromourgos, Tony. 2009. The Science of Wealth: Adam Smith and the Framing of Political Economy. Routledge, London.

Balassa, Bela A. 1959. “John Stuart Mill and the Law of Markets,” Quarterly Journal of Economics 73.2: 263–274.

Baumol, William J. 1977. “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant,” Economica n.s. 44.174: 145–161.

Baumol, William J. 1999. “Retrospectives: Say’s Law,” Journal of Economic Perspectives 13.1: 195–204.

Baumol, William J. 2003. “Retrospectives: Say’s Law,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Edward Elgar Pub, Cheltenham and Northampton, Mass. 39–49.

Becker, Gary and William J. Baumol. 1952. “The Classical Economic Theory: The Outcome of the Discussion,” Economica 19: 355–376.

Blaug, M. 1996. Economic Theory in Retrospect (5th edn). Cambridge University Press, Cambridge.

Blaug, Mark. 1997. “Say’s Law of Markets: What did it mean and Why should We Care?,” Eastern Economic Journal 23.2: 231–235.

Clower, Robert W. and Leijonhufvud, Axel. 1973. “Say’s Principle, What It Means and Doesn’t Mean,” Intermountain Economic Review 4: 1–16.

Clower, Robert W. and Leijonhufvud, Axel. 1984. “Say’s Principle, What it Means and Doesn’t Mean,” in Donald A. Walker (ed.), Money and Markets: Essays by Robert W. Clower. Cambridge University Press, Cambridge. 145–165.

Cottrell, Allin. 1998. “Keynes, Ricardo, Malthus and Say’s Law,” in James C.W. Ahiakpor (ed.), Keynes and the Classics Reconsidered. Kluwer Academic, Boston, Mass. and London. 63–75.

“Debunking Economics, Part VIII: Macroeconomics, or Applied Microeconomics?,” Unlearning Economics, 26 August, 2012.
http://unlearningeconomics.wordpress.com/2012/08/26/debunking-economics-part-viii-macroeconomics-or-applied-microeconomics/

Gootzeit, M. 2003. “Savings, Hoarding and Say’s Law,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle. Edward Elgar, Cheltenham and Northampton, Mass. 168–186.

Gordon, B. J. 1965. “Say’s Law, Effective Demand, and the Contemporary British Periodicals, 1820–1850,” Economica 32: 438–446.

Graziani, A. 2003. The Monetary Theory of Production. Cambridge University Press, Cambridge.

Groenewegen, P. D. 1977. The Economics of A. R. J. Turgot. Martinus Nijhoff, The Hague.

Heertje, A. 2004. “On Say’s Law,” in Tony Aspromourgos and John Lodewijks (eds.), History and Political Economy. Essays in Honour of P.D. Groenewegen. Routledge, London. 44–56.

Hollander, S. 2005. “Review of Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle,” History of Political Economy 37.2: 382–385.

Horwitz, Steven. 2003. “Say’s Law of Markets: An Austrian Appreciation,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle. Elgar, Cheltenham, UK and Northampton, Mass. 82–98.

Hutt, William Harold. 1974. A Rehabilitation of Say’s Law. Ohio U.P., Athens, Ohio.

Johnson, Ivan C. 2001. “A Reappraisal of the Say’s Law Controversy,” Quarterly Journal of Austrian Economics 4.4: 25–53.

Jonsson, Petur O. 1995. “On the Economics of Say and Keynes’ Interpretation of Says’s Law,” Eastern Economic Journal 21.2: 147–155.

Jonsson, Petur O. 1997. “On Gluts, Effective Demand, and the True Meaning of Say’s Law,” Eastern Economic Journal 23.2: 203–218.

Jonsson, Petur O. 1998. “Keynes, Ricardo, Malthus and Say’s Law: Comment,” in James C.W. Ahiakpor (ed.), Keynes and the Classics Reconsidered. Kluwer Academic, Boston, Mass. and London.75–84.

Kates, Steven. 1994. “The Malthusian Origins of the General Theory or How Keynes came to write a Book about Say’s Law and Effective Demand,” History of Economics Review 21: 10–20.

Kates, Steven. 1995. “Crucial Influences on Keynes’s Understanding of Say’s Law,” History of Economics Review 23: 74–82.

Kates, Steven. 1996. “Keynes, Say’s Law and the Theory of the Business Cycle,” History of Economics Review 25: 119–126.

Kates, Steven. 1997. “A Discussion of Say’s Law: The Outcome of the Symposium,”Eastern Economic Journal 23.2: 237–239.

Kates, Steven. 1997. “On the True Meaning of Say’s Law,” Eastern Economic Journal 23.2: 191–202.

Kates, Steven. 2002. “Economic Management and the Keynesian Revolution: The Policy Consequences of the Disappearance of Say’s Law,” International Journal of Applied Economics and Econometrics 10.3: 463–479.

Kates, Steven (ed.). 2003. Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Edward Elgar Pub, Cheltenham; Northampton, Mass.

Kates, Steven. 2005. “‘Supply Creates Its Own Demand’: A Discussion of the Origins of the Phrase and of its Adequacy as an Interpretation of Say’s Law of Markets,” History of Economics Review 41: 49–60.

Kates, Steven. 2007. “Mill, McCracken and the Modern Interpretation of Say’s Law,” History of Economics Review 46: 32–38.

Kates, Steven. 2008. “A Letter from Keynes to Harlan McCracken dated 31st August 1933: Why the Standard Story on the Origins of the General Theory needs to be Rewritten,” History of Economics Review 47: 39–53.

Kates, Steven. 2010. “Why Your Grandfather’s Economics was better than yours: On the Catastrophic Disappearance of Say’s Law,” Quarterly Journal of Austrian Economics 13.4: 3–28.

Keen, S. 2003. “Nudge Nudge, Wink Wink, Say No More,” in S. Kates (ed.), Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle. Elgar, Cheltenham, UK and Northampton, Mass. 199–209.
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenNudgeNudgeWinkWinkSayNoMore.pdf

Kent, Richard J. 2005. “Keynes and Say’s Law,” History of Economics Review 41: 61–76.

Lange, O. 1942. “Say’s Law: A Restatement and Criticism,” in O. Lange, F. McIntyre and T. O. Matema (eds), Studies in Mathematical Economics and Econometrics: In Memory of Henry Schultz. University of Chicago Press, Chicago. 49–68.

Lange, Oskar. 1994. “Say’s Law: A Restatement and Criticism,” in Tadeusz Kowalik (ed.), Economic Theory and Market Socialism: Selected Essays of Oskar Lange. Elgar, Aldershot, U.K. 213–232.

Mill, James. 1808. Commerce Defended. An Answer to the Arguments by which Mr. Spence, Mr. Cobbett, and Others, have Attempted to Prove that Commerce is not a Source of National Wealth. C. and R. Baldwin, London.

Mises, L. 2005 [1950], “Lord Keynes and Say’s Law,” Mises Daily, April 25, 2005, http://mises.org/daily/1803

Say, Jean Baptiste. 1803. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (1st edn.). De Chapelet, Paris.

Say, Jean Baptiste. 1814. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (2nd edn.). Antoine-Augustin Renouard, Paris.

Say, J. B. 1816. Catechism of Political Economy, or, Familiar Conversations on the Manner in which Wealth is Produced, Distributed, and Consumed in Society (trans. J. Richter). Sherwood, Neely, and Jones, London.

Say, Jean Baptiste. 1817. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (3rd edn.). Chez Deterville, Paris.

Say, Jean Baptiste. 1819. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (4th edn.). Deterville, Paris.

Say, Jean Baptiste. 1821. A Treatise on Political Economy, or, The Production, Distribution, and Consumption of Wealth (trans. from 4th edn by C.R. Prinsep with notes by the translator, with a translation of the introduction and additional notes by C. C. Biddle). Wells and Lilly, Boston.

Say, Jean Baptiste. 1821a. A Treatise on Political Economy, or, The Production, Distribution, and Consumption of Wealth (trans. from 4th edn by C.R. Prinsep). Longman, Hurst, Rees, Orne And Brown, London.

Say, J. B. 1821b. Letters to Mr. Malthus: On Several Subjects of Political Economy, and on the Cause of the General Stagnation of Commerce. To Which is added A Catechism of Political Economy, Sherwood, Neely, and Jones, London.

Say, Jean Baptiste. 1826. Traité d’économie politique, ou, Simple exposition de la manière dont se forment, se distribuent et se consomment les richesses (5th edn.). Rapilly, Paris.

Shoul, B. 1957. “Karl Marx and Say’s Law,” Quarterly Journal of Economics 71.4: 611–629.

Skinner, A. S. 1967. “Say’s Law: Origins and Content,” Economica 34: 153–166.

Silva, Antonio Carlos Macedo e. 2004. “From Say’s Law to Keynes, from Keynes to Walras’s Law: Some Ironies in the History of Economic Thought,” in L. Randall Wray and Mathew Forstater (eds.). Contemporary Post Keynesian Analysis. Edward Elgar, Cheltenham, UK and Northampton, Mass. 310–332.

Skinner, A. S. 1969. “Of Malthus, Lauderdale and Say’s Law, Lauderdale and Say’s Law,” Scottish Journal of Political Economy 16.2: 177–195.

Smith, A. 1811. An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; vol. 1), Oliver D. Cooke, Hartford.

Sowell, T. 1972. Say’s Law: An Historical Analysis. Princeton University Press, Princeton, N.J.

Sowell, T. 1974. Classical Economics Reconsidered. Princeton University Press, Princeton, N.J. and London.

Sowell, T. 1994. Classical Economics Reconsidered (2nd ed.). Princeton University Press, Princeton, N.J.

Spengler, Joseph J. 1945. “The Physiocrats and Say’s Law of Markets,” Journal of Political Economy 53: 193–211, 317-347.

Thweatt, W. O. 1979. “Early Formulators of Say’s Law,” Quarterly Review of Economics and Business 19: 79–96.

Thweatt, W. O. 1980. “Baumol and James Mill on ‘Say’s’ Law of Markets,” Economica n.s. 47.188: 467–469.