By Rufus Tyler
The central tenet of Marxist economics is the labour theory of value.
Economics was first studied seriously in the 1600s. At this time, mercantilism was the main school of thought. Mercantilism is essentially protectionist, the idea is that wealth and value are created by a trade surplus. Buying and selling was seen as a source of wealth: basically buy cheap and sell dear. The circulation commodities was thought to create value by the mercantilists.
This was the policy of an emergent merchant class. At the time there was an alliance between the rising bourgeoisie and the state. The merchants provided wealth, not just for themselves but also for the nation state. The state, in turn, provided protection to these traders – as an example, the [British] Royal Navy protected merchant ships to enable them to trade, thus allowing profit to be created.
Mercantilism promotes the idea of state intervention in the economy. The aim was to strengthen one particular state against another. Policies included things like: colonies weren’t allowed to trade with anyone except the metropole, tariffs on foreign goods were high, national industries were subsidised by the government which tried to achieve a trade surplus with every partner. The goal was to ensure that precious metals flowed into the metropole from the colonies.
One of the leading exponents of mercantilism was Thomas Munn. He basically believed that a nation becomes wealthy by exporting more than it imports – it’s about the circulation of commodities. These ideas reached their high point in England during the long parliament of 1640 to 1660. The Navigation Act of 1651 said that trade to England had to be carried on English ships manned by English sailors. It was the best example of mercantilist economic policy.
In 1700s France, a new school of thought arose. “Les economistes”, also known as physiocrats, made a step forward in our understanding of economics. The physiocratic doctrine was vastly different from the principles of mercantilism. The physiocrats placed much emphasis on land as the true creator of wealth. The mercantile principle of wealth existing in the forms of gold and silver was dismissed and more concrete forms of wealth were adopted.
Because of the level of technological development in their society, it was mostly an agricultural economy, the physiocrats believed that value came from agricultural labour alone. They thought that all productive work had to do with agricultural labour and the development of land to increase that productivity. All other forms of labour, industrial labour, artisans, merchants, were seen as unproductive appendages. It was a first step towards the labour theory of value.
To the physiocrats, to be an artisan or merchant you require the produce of the land, you require food in order to survive, so the real productive labour comes from the land and everything else is unproductive. Profit, then, was rent collected by property owners from the productive activity on their land.
The industrial revolution was picking up pace in the 18th century when Adam Smith wrote The Wealth of Nations in 1776. He was a critic of mercantilism, his ideas were based on those of the physiocrats. He made another step forward in our understanding of economics when he said it’s not just agricultural labour that produces value and creates wealth, it’s all kinds of labour. It was a crude and underdeveloped understanding, but it is recognisable as a form of labour theory of value.
Smith believed that the value of something is determined by the time involved in its production. Smith marked the beginning period of classical economy.
Enlightment thinkers like Thomas Malthus and David Ricardo accepted the labour theory of value. Marx largely based his work on theirs, it allowed Marx to develop his theories from the discoveries that they had made.
To get to the heart of capitalism, you have to look beyond Commodity fetishism, you have to look beneath the surface. Marx criticised Ricardo for looking at the labour theory of value only in the context of the circulation of already existing commodities, how much could one be traded for in exchange of another that is determined by the labour theory of value. What he didn’t consider was the process of production of those economies, he didn’t consider the relation between the application of human labour to capital.
Another limitation of classical economists is that they regard capitalism as an eternal system of society, an eternal way of organising the economy, rather than as a necessary state in human evolution. They tended to ignore the contradictions of capitalism. Take as an example the crisis of over production. The idea that a crisis could take place because of overproduction was denied by the classical economists. Instead they argued that the world economy would tend towards equilibrium, that everything would cancel each other out, that every seller, every producer would find a buyer for their goods, that in the act of producing they would find someone who was willing to buy. Therefore, while there would be ups and downs, the natural tendency would be towards a natural equilibrium.
Marx pointed out that as capitalism develops, what you see is a growth of fictitious capital, of globalisation; gradually as it develops you see more and more distance between the initial production and the final purchase of a particular commodity. Because of all the middlemen buying commodities to trade, the producer doesn’t have to worry about finding the final purchaser of his product, he only has to worry about production. Marx said that is precisely that separation between buying and selling that caused overproduction. This is in stark contrast to the classical economists who believed that this separation would eventually balance out creating a natural equilibrium.
It is this separation that allows producers to continue producing without finding a final purchaser. Because of the development of capitalism you can produce more and more commodities without having someone to buy it at the other end.
Marx viewed capitalism as a dynamic system which constantly grows and changes, this change causes new problems and phenomena. This is the fundamental difference between Marx and classical economists who interpret capitalism as very stable, static, and, tending towards equilibrium.
Marginal utility theory
The labour theory of value is quite a radical thing for classical economists because it identifies labour, that is the working class, as the only true source of wealth creation. In the nineteenth century, unions tried to get this point across when organising workers. It is seen as a dangerous idea by the bourgeois who go out of their way to ignore it.
Because of this bias their analysis will always fall short of the mark, and their modelling is of limited use. This is a political choice. From the point of view of the ruling class, as long as profits continue to roll in, as long as the crisis can be put off a little bit longer and commodities keep circulating, there’s no need to understand the labour theory of value. What they choose to get into instead is mathematical modelling of short term predictions of how to maximise profit.
Looking at how to overcome the limitations and contradictions of capitalism is not worthwhile for the bourgeois, it’s not necessary to know that in order to make a profit. Because of this attitude political economy as a science collapsed and it has been replaced in academic circles with how to keep capitalism going rather than trying to understand how capitalism actually works. University courses no longer delve into Ricardo and Smith, they talk about marginal utility and how to make more profit, how to keep the economy going rather than gaining a deep understanding of the economy. That is the difference between marginal utility theory and the labour theory of value.
Marx rescued the Labour Theory of Value and developed it to its fullest extent. He saw it as the central law of capitalism, the most fundamental question. He sought to prove the theory. He started his economic investigation with the commodity itself, it is the basic building block of the whole system. Not everything in society is a commodity. Commodities are especifically things produced for exchange. Domination of the economy by the exchange of commodities is the hallmark of capitalism, it is its highest point.
Marx says that commodities have two characteristics: firstly they posses “use value”, they are useful in some way ,or, they satisfy some desire. Secondly it has an exchange value, that is, a quantity of one commodity can be exchanged for a certain quantity of another commodity.
How do you determine exchange value? The thing all commodities have in common is that it takes time to produce them. It’s not just a question of the labour time required to produce something, it’s a question of the socially necessary labour time required to produce something. A lazy worker does not produce more value because he works slowly or less efficiently than the average worker. The market decides what is socially necessary on the basis of the prevailing technological development and the basis of the average intensity of labour.
Marx states that the price and the value of something aren’t always the same. Price is the money form of a commodity and price can fluctuate around the real value of a commodity. Price is not fixed to the value of a commodity. This fluctuation is determined by supply and demand. This is the realm of marginal utility theory, this is what modern economics investigates.
A lot of bourgeois say that theirs it isn’t just a theory of price it is a theory of value. They equate price and value which they claim is determined by supply and demand. Marx said that what you can’t explain with this theory is that if you imagine every commodity has its supply and demand exactly equal, what would then determine value? It’s a question which cannot be answered by the marginal utility theory. Value is an objective question, but marginal utility theorists believe it’s all subjective: depending on the wants and needs of individuals. That is the difference between a theory of value and a theory of prices. Unless we are able to separate those two things we will not be able to grok capitalism. That is the difference between marxist political economy and modern economic empiricism.
Marx posed the question. In the final analysis, if everything, if all commodities are exchanged at their correct value, then everything will even out and everyone will get what they deserve. If that’s true, then where does profit come from? Where does surplus value come from?
Marx said that profit comes from another commodity, from labour power, the capacity to work. This is the only commodity that can produce more value than its own value.
What gives labour power its commodity value is food, shelter, clothing – the things required to produce labour power. Employers then figure out how much this costs and hire the workers to use their labour power on raw materials to produce commodities.
Raw materials don’t produce value, they only transfer what value they have. It’s only by applying human labour to it that new value is created. That then enables the commodity to be sold at a profit.
CONCLUSION
It is the exploitation of the working class’ labour power that generates surplus value. The relation between capital and labour power is at the heart of Marxist economics. Understanding this process means that workers are paid less than the full value of the goods they produce. If the mass of people don’t have the wealth to buy back all the commodities that are being produced, at a certain stage that will mean a crisis of overproduction. The crisis of capitalism is only able to be explained if you understand the labour theory of value.
The labour theory of value is as radical as bourgeois economists fear. It suggests that the only sustainable route to further economic development is to end the fundamental contradiction between the social production of commodities by the working class and the private appropriation of those things by the capitalist class.