In Defence of Marx’s Labour Theory of Value

Written by Rob Sewell
In Defense of Marxism, Monday, 13 January 2014
{NOTE: THIS POST INCLUDES A VIDEO, “Karl Marx Was Right”, a debate held at the Royal Geographical society on 9th April 2013. Please see below. }

[dropcap]W[/dropcap]hat is value? This question has perplexed the human mind for more than 2,000 years. The classical bourgeois economists grappled with the question, as did Marx. After much deliberation, they correctly concluded that labour was the source of value. This idea then became a cornerstone of bourgeois political economy, beginning with Adam Smith. On this question, there was common ground between Marx and the classical bourgeois economists.

However, for the bourgeois economists the labour theory of value presented a paradox as well as a blind alley. “The man who found the way out of this blind alley was Karl Marx,” explained Engels.1 For Marx, who went on to develop and elaborate the theory of value, it was the means through which he discovered the laws of motion of capitalism and the secret of surplus value. For this reason, the labour theory of value has become the principal target for all opponents of Marx, both bourgeois and reformist. “The stock-in-trade of most anti-Marxian writers is the exposition of the absurdities of this doctrine”, states A.D.Lindsay, the former Master of Balliol College, Oxford.2

The idea that all wealth is created by human labour is certainly not new. It can be traced back to the Middle Ages in John Ball’s sermons and was a central idea amongst the communist sects in the English Civil War. “But rich men receive all they have from the labourer’s hand, and what they give, they give away other men’s labours, not their own; therefore they are not righteous actors in the earth”, stated the Diggers’ leader Gerrard Winstanley in 1652. While the leader of the London Jacobins, John Thelwall, proclaimed, “Property is nothing but human labour”, Benjamin Franklin, one of the Founding Fathers of the United States, wrote, “Trade in general being nothing else but the exchange of labour for labour, the value of all things is justly measured by labour.”

One should add that labour is not the only source of material wealth. We also receive the proceeds of nature as a free gift, which also contributes to the wealth of society. An early English economist, William Petty, correctly observed that labour is the father of wealth and the earth its mother. It is a statement that Marx quotes in Capital.

The labour theory of value has become an anathema in bourgeois circles, not least because of its revolutionary implications. Initially, the labour theory of value was a very useful weapon to the rising bourgeoisie, when, as a progressive class, they used it to strike blows against the politically powerful landowning class. But once the battle was won, the bourgeoisie no longer had any use for such a theory. In fact, for the now dominant bourgeoisie, the theory had subversive connotations which had to be discredited and rejected.

“That labour is the sole source of wealth,” wrote the economist John Cazenove in 1812, “seems to be a doctrine as dangerous as it is false, as it unhappily affords a handle to those who would represent all property as belonging to the working classes, and the share which is received by others as a robbery or fraud upon them.”

We can forgive Cazenove’s indiscretion about labour being the sole source of wealth, which is false. In fact, there are forms of wealth which are supplied by nature alone, and which contains no labour whatsoever. This includes, for example, virgin forests and natural rivers. Marx explained this in Volume One of Capital. Nature and labour both play their part in the production of wealth. We should not, however, confuse wealth (which is composed of use-vaues) with value, which is completely different, as we shall see.

The theory of value is straight forward enough. Human beings can only live and satisfy their basic needs through labour. Of course, this can take the form of an exploiting class living off the labour of others. Without labour we would all die.

“Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish”, explained Marx. Broadly speaking, the things we need have to be produced in certain quantities and then distributed according to the requirements of society. This constitutes the economic laws of all societies, including capitalism.

“And every child knows, too, that the amounts of products corresponding to the differing amounts of needs, demand differing and quantitatively determined amounts of society’s aggregate labour”, continued Marx.3

Natural Laws

In order to satisfy human need, the labour of society, no matter what the specific form of social production, whether it be primitive communism, slavery, feudalism, capitalism, or socialism, has to be allocated out according to these basic requirements. Of course, the form by which this allocation takes place differs from one social system to another. “Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves,” Marx explained.4 Furthermore, “Labour, then, as the creator of use-values, as useful labour, is a condition of human existence which is independent of all forms of society; it is an eternal natural necessity which mediates the metabolism between man and nature, and therefore human life itself.” 5 Material wealth or use-values are therefore produced under all modes of production.

Marx in his winter years. The old boy was right.

In a “natural economy”, namely an economy prior to the development of capitalism, producers created use-values for the needs of the community; however, as soon as the market becomes dominant, producers now create commodities for exchange. Here then lies the basis of capitalist econmic relations. Everyone becomes dependent on everyone else due to the social division of labour, i.e., because everyone needs the products produced by others.

Just as the weight of an object can only be understood in relation to another object, so the exchange-value of a commodity can only be understood when it is exchanged with another. The exchange of commodities — which is based on an exchange of equivalents — takes place on the basis of a common quality inherent in all commodities. In fact, for exchange to happen at all, there needs to exist something common within things that allows them to be compared, one with another. This is clearly not weight, colour, size, or any other physical quality, which vary considerably between one commodity to another. A pair of shoes is very different from a coat. What commodities have in common is that they are all products of human labour. “Nature builds no machines, no locomotives, railways, electric telegraphs, self-acting mules, etc. These are products of human industry,” explained Marx.6 As a consequence, so much generalised labour in one commodity can be compared with so much generalised labour in another. In exchange so many watches can be traded for so many pairs of shoes, depending on the quantity of labour time involved in their production. Commodities can therefore be regarded as condensed labour-time.

Commodity Fetishism

For Marx, value is a relationship between persons, a social relationship, but under capitalism it appears in a “fantastic form” as a relation between things. It is people alone, with their own interests, who engage in this exchange, using inanimate objects for sale, not the other way round. This appearance arises from what Marx calls “the fetishism of commodities”. As we know appearances can be deceptive. Each day the sun appears to circumnavigate the earth, when the reality is that the earth travels around the sun. We therefore need to penetrate the veil of appearance in order to reveal the reality that is disguised within. That is the reason for Marxist economic theory. As the Soviet economist Rubin explained, “Marx approaches human society by starting with things, and going through labour. He starts with things which are visible and moves to phenomena which have to be revealed by means of scientific research.” 7

Marx repeatedly explained that if truth could be obtained solely from the appearance of things, then there would be no need for science. That was the whole reason for writing the three volumes of Capital. We must see beyond the appearance of things to the real relationships. This is the aim of genuine science, of Marxism.

“The vulgar economist has not the slightest idea that the actual everyday exchange relations and the value magnitudes cannot be directly identical. The point of bourgeois society is precisely that, a priori, no conscious social regulation of production takes place. What is reasonable and necessary by nature asserts itself only as a blindly operating average. The vulgar economist thinks he has made a great discovery when, faced with the disclosure of the intrinsic interconnection, he insists that things look different in appearance. In fact, he prides himself in his clinging to appearances and believing them to be the ultimate. Why then have science at all?

“But there is also something else behind it. Once interconnection has been revealed, all theoretical belief in the perpetual necessity of the existing conditions collapses, even before the collapse takes place in practice. Here, therefore, it is completely in the interests of the ruling classes to perpetuate the unthinking confusion. And for what other reason are the sycophantic babblers paid who have no other scientific trump to play except that, in political economy, one may not think at all!” 8

Value, in the Marxist sense, appears a rather strange thing. It is neither a natural nor physical quality of the commodity, nor one that can be understood through our senses. As such, value cannot be seen even with a powerful microscope. Neither can it be touched or smelled, as it has no physical presence. But exchange-value certainly exists, just like gravity, and is not an arbitrary thing. As Marx explained, value is a definite social quality and only appears when exchange takes place between commodities. As a social relation, it is expressed as a relationship between the labour of the different producers. In exchange, so much generalised labour changes hands through the exchange of values. The law of supply and demand does not determine value, but simply makes the market price of commodities fluctuate above or below their values.

Value is the result, however, not of a particular form of labour, but of abstract human labour, or labour in general. The particular labour used to make different commodities, such as shoes and coats, is different from abstract labour. The shoes and coats are the specific products of the shoemaker and the tailor. However, in exchange, what is exchanged is not the particular labour, but human labour in general. All labour, whether it is simple, unskilled, average labour or skilled labour, is all reduced in exchange to quantities of average labour; skilled labour being simply a multiple of unskilled.

The value of a commodity, as Marx explained in volume one of Capital, can be measured according to the amount of socially necessary labour-time that was invested in its production. Value can only be expressed in relation to other commodities and manifests itself in exchange-value. For example, so many shoes can be exchanged for so many coats, depending on their value (or the socially-necessary labour-time involved in their production).

Machines

In the process of production, machines do not create new value. Machines simply transfer their own value bit by bit to the new commodities through depreciation. Machines have to be put to use by workers otherwise they are redundant. “A machine which is not active in the labour process is useless”, explained Marx. “In addition, it falls prey to the destructive power of natural processes. Iron rusts; wood rots. Yarn with which we neither weave nor knit is cotton wasted. Living labour must seize on these things, awaken them from the dead, change them from merely possible into real and effective use values.” 9

Marx went on to answer the common objection about a lazy worker who appears to produce greater values, having spent more time in producing things. Marx explained that it was not labour that created value, but “socially necessary” labour, a distinction the classical economists failed to grasp. By this is meant the average labour used to produce goods under average conditions and under the existing level of technique. Whether a commodity contains socially necessary labour or not will be revealed in exchange as commodities are sold or rejected in the market.

If it takes longer to produce a certain commodity than the average time, then this excessive labour-time is useless labour. In the market, such commodities will not find a buyer. All those commodities made at a higher social average cost will remain unsold or will have to be sold at a loss to the capitalist. The ebb and flow of price levels settles around an equilibrium, which covers production costs and a certain average rate of profit. Our capitalists employing unproductive labour will soon find themselves driven out of business, unable to sell their goods at the “going rate”.

Clearly, if capitalists are able to develop and introduce new production techniques and produce commodities below the costs of production, then they will be able to sell more goods more cheaply and make super profits — that is until everyone else follows suit and introduces the new technique. Once this happens, the price falls to a new level to correspond with the new “socially necessary” labour-time. Each commodity now takes less time to produce and therefore contains less value than before, thereby effectively reducing its cost and the price. Of course, socially necessary labour-time is always changing with the changes in technique. However, there exists a general average standard at any one point, which is nevertheless superseded in a never-ending process.

Through this means, the law of value determines the ratios of commodities that need to be produced and the distribution of labour power throughout the various sectors of the economy. This demonstrates how the law of value acts as the basic regulator of the capitalist system.

Thus we can clearly understand the difference, which is often muddled, between material wealth and value. Value is a historical category, which is only valid as long as commodity production exists; it is a social relation. Wealth, on the other hand, is something material, and consists of use-values, irrespective of the form of society.

All things being equal, a rise in the productivity of labour will generate a rise in the material wealth of society. However, the total amount of existing values may at the same time remain unchanged, provided that the quantity of labour expended is the same. A favourable harvest increases the wealth of a country, but the total commodity values represented by the harvest would remain the same if the amount of socially-necessary labour expended remained unaltered.

The bourgeois critics take delight in pointing to the apparent “contradictions” in Marx, without understanding Marx’s method of analysis. Incapable of answering him, they instead prefer to distort and twist everything he says. “In the analysis of economic forms neither microscopes nor chemical reagents are of assistance”, explained Marx. “The power of abstraction must replace both.” 10 Thus, in Volume One of Capital, Marx assumes for the purpose of his analysis that commodities tend to exchange at their values. Only by making such assumptions was he able to demonstrate how labour was the source of value as well as the origins of surplus value. In Volume Three of Capital, however, Marx takes into account the different composition of capital in different industries or branches. He explained that competition between capitals brought about an average rate of profit based on the total capital, so that commodities tended to exchange at their prices of production rather than their value. The transformation of values into prices of production and the formation of the average rate of profit do not conflict with the theory of value, but pre-suppose it.

“The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” 11

The constant drive of the capitalists to keep up with “socially necessary” labour-time also explains why capitalism cannot exist without continually revolutionising the mode of production. In its turn, the introduction of machinery, together with an expansion of capital, means an inevitable tendency towards the concentration and centralisation of capital.

Broadly speaking, the classical bourgeois economists also understood the importance of labour in the creation of value. For Adam Smith, real wealth was not the accumulation of money, as in earlier mercantilist theory, but was based on the actions of labour in fashioning new products. In The Wealth of Nations (published in 1776, the same year as American independence), he argued that increased wealth depended upon the physical productivity of labour. This concept went beyond the ideas of the Physiocrats, who stressed the physical product, and led on to a more profound understanding of the labour theory of value. This served to place the study of political economy on firm objective foundations.

It was in The Wealth of Nations that Marx first came across the classical definition of value which he copied down word for word in his notebook: “It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, is precisely equal to the quantity of labour which it can enable them to purchase or command.”

“The real price of everything,” stated Adam Smith, “what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save himself, and it can impose upon other people… Labour was the first price — the original purchase-money that was paid for all things.”

What clarity, especially when compared with the modern-day disciples of Adam Smith! While indeed Smith confuses value with price, he nevertheless understands the importance of labour-time as the fundamental element underlying exchange-value. It was Marx, particularly in the third volume of Capital, who explained that the law of value does not reveal itself directly, but indirectly. Commodities are sold above or below their value. Only by accident do market prices correspond with value, around which they fluctuate. Nevertheless, whatever the degree of divergence individually, the sum of all prices is equal to the sum of all values, “for in the final reckoning only the values that have been created by human labour are at the disposal of society”, explained Trotsky, “and prices cannot break through this limitation, including even the monopoly prices of trusts; where labour has created no new value, there even Rockefeller can get nothing.” 12

Adam Smith stressed the importance of productivity and the division of labour in production. As a background to this, he advocated unregulated markets and the adoption of free trade, which soon became the battle-cry of the industrialist class. He believed that invisible market forces (“invisible hand”) and the pursuit of personal gain was the best possible environment for economic growth. This approach served to establish the classical economists as the most advanced thinkers of their age. Apart from Adam Smith, this school had another outstanding figure, David Ricardo. His Principles of Political Economy provided the classical economists for the first time with a fully worked out economic textbook, a position it maintained for more than half a century.

Today, while the bourgeois economists swear by every dot and comma of Adam Smith, and even name economic institutes after him, they shudder at the thought of the labour theory of value. For them, this is an anathema, and a bridge to socialism and Marxism!

It is no accident that Ricardo opens his Principles with a section on value. “In this Edition”, says Ricardo, “I have endeavoured to explain more fully than in the past, my opinion on the difficult subject of VALUE.” He then opens up section one with its definition: “The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.” 13

He goes on to stress the point in the following paragraph: “If we look to a state of society in which greater improvements have been made, and in which arts and commerce flourish, we shall still find that commodities vary in value conformably with this principle: in estimating the exchangeable value of stockings, for example, we shall find that their value comparatively with other things, depends on the total quantity of labour necessary to manufacture them, and bring them to market. First, there is the labour necessary to cultivate the land on which the raw cotton is grown; secondly, the labour of conveying the cotton to the country where the stockings are to be manufactured, which includes a portion of the labour bestowed in building the ship in which it is conveyed, and which is charged in the freight of the goods; thirdly, the labour of the spinner and weaver; fourthly, a portion of the labour of the engineer, smith, and carpenter, who erected the buildings and machinery, by the help of which they are made; fifthly, the labour of the retail dealer, and of many others, whom it is unnecessary further to particularise.” 14

Ricardo points to Adam Smith’s observation that there are two kinds of value, one called “value in use” and the other “value in exchange”, namely use-value and exchange-value, and then quotes Smith, “The things which have the greatest value in use, have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use.”

Ricardo then gives the following examples: “Water and air are abundantly useful; they are indeed indispensable to existence, yet, under ordinary circumstances, nothing can be obtained in exchange for them. Gold, on the contrary, though of little use compared with air or water, will exchange for great a quantity of other goods.” He correctly concludes that “Utility then is not the measure of exchange value, although it is absolutely essential to it. If a commodity were in no way useful, — in other words, if

it could no way contribute to our gratification, — it would be destitute of exchange value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.” 15

Therefore, the classical economists, as well as Marx, regarded the labour theory of value as a vital law that governed political economy. Nature provides the materials, but it is labour that fashions them into use-values and values. Nature provides us with materials for free, without any value. It is human labour, through the expenditure of time and effort, that serves to create values. Production, where nature is changed by the application of human labour, is of course essential not only to our wellbeing but to our survival. Whatever amount of fictitious capital is created by finance capital, whatever the fortunes made on the money markets, real wealth can only come about through the creation of use-values through the application of labour.

A price tag can be applied to anything, including things that have no value whatsoever. In the past, the Catholic Church even put a price on a person’s soul in the form of religious indulgences. Things, such as land, can be priced and sold for enormous amounts of money. Rare works of art are sold for millions, far beyond the original intrinsic “value”, due to the frenzied speculation of those with money, keen to “invest” in these unique artefacts. With supply limited to a single object, individual Rembrandt paintings can be sold for a fortune. Such examples have been used endlessly to attack and discredit the labour theory of value.

To begin with, despite the allegations of our bourgeois critics, Marx never denied the effects of supply and demand on price. Neither did he deny the effect of monopolies on prices. A restricted supply, for whatever reason, will drive up the price of a commodity. We had the recent example of Apple, which lost a high-profile court battle, when a US federal judge ruled that the company had violated antitrust law by conspiring with publishers to increase the price of ebooks.

Monopolies

Apple entered the ebook market with the 2010 launch of its iPad and iBookstore. At the time, Amazon controlled nearly 90 per cent of the digital book business, buying new ebooks from publishers for $10, then selling them for $9.99. Publishers were worried that Amazon’s pricing model threatened their business which forced them to act collectively to increase prices or face retaliation from Amazon. Therefore, Apple struck deals that allowed publishers to set the price, while it took a 30 per cent cut. Publishers also agreed to price caps and a clause that allowed Apple to match other retailers’ prices.

The action of squeezing supplies by monopoly companies will force up prices, as demand will exceed supply. This is undeniable. However, we must not mix up the question of value with that of price, which are two different things. Value is determined by the socially necessary labour expended in the product. While market price rarely corresponds to a commodity’s value, which always tends to fluctuate above or below this value.

Indeed, the law of value could not function if prices did not differ from values. If coats and shoes exchange in proportion to their value, and more people decide they prefer to buy more coats and fewer shoes, the price of coats will rise above their value and the price of shoes fall below theirs. The money flowing into the production of coats will rise, but that for shoes will fall. Capital will then flow from the less profitable to the more profitable sector, resulting in an increased supply of coats. This reallocation of resources, capital and labour, could not occur without market prices rising above or falling below values in response to changes in the supply and demand of certain commodities.

Nevertheless, prices always hover around the value of a commodity. That is why certain commodities, like a tin of baked beans, will always be less than a motor car. While the price of beans can rise very high for reasons of scarcity, this will then cause capital to flow into this sector attracted by high profits, and will increase the future production of baked beans, thereby reducing their price. This process takes place across the entire economy.

This demonstates the fluctuation of market prices, but still leaves the question of what it is that lies behind these prices unexplained. For Marx, the answer is value. As for bourgeois economists, they simply ignore this question as it upsets their superficial explanations.

Francis Wheen, in his book entitled Marx’s Das Kapital — A Biography, believes he has hit upon a major contradiction in Marx, but simply reveals an ignorance of Marxist economics, a basic flaw with such writers.

“‘So far,’ Marx writes, ‘no chemist has ever discovered exchange-value either in a pearl or a diamond.’

“This is a curious example to choose, since it exposes a limitation in Marx’s own theory. If, as he implies, the exchange-value of pearls and diamonds derives solely from the labour-time spent on retrieving and transforming them, why do people sometimes pay hundreds of thousands of pounds for a single diamond ring or pearl necklace? Mightn’t these extraordinary prices also owe something to scarcity value, or to perceptions of beauty, or even to simple one-upmanship? If labour-time alone were the determinant factor, a doodle on a restaurant napkin by Picasso or a hat once worn by John Lennon would be worth no more than a few pounds — and the ‘value’ of a bottle of claret from a great vintage would be identical to that of an inferior vintage, if both embody the same quantity of labour…

“The labour theory of value may be of little assistance in understanding why a few of Elvis Presley’s hair-clippings, collected by his barber, sold for $115,000 at auction in 2002.” 16

But we must strongly object to this misrepresentation of Marx! Marx never said that exchange-value was the only thing that determined price. Works of art, such as John Lennon’s hat or Elvis’s hair-clippings, cannot be produced or reproduced, except as inferior imitations, and therefore such things are unique, one-off things. This monopoly situation has a direct bearing on their price or what simply people are prepared to pay. Their price is not based on their original value, but is determined solely by supply and demand, as Marx and the classical bourgeois economists had explained. In practice, such unique things lie beyond the realm of the labour theory of value, which deals with commodities that can be reproduced without limitations or restrictions. What we are dealing with here are monopoly prices. If the item is one of a kind, the restricted supply means it can attract an astronomical price. This has nothing whatsoever to do with their original value, but simply the uniqueness of the object and what people are prepared to pay.

Scarcity Alone

The classical economist, David Ricardo, explained this point very well. “There are some commodities,” he wrote, “the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quality, are all of this description. Their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.”

Ricardo then goes on to explain that “these commodities, however, form a very small part of the mass of commodities daily exchanged in the market. By far the greatest part of those goods which are the objects of desire, are procured by labour; and they may be multiplied, not in one country alone, but in many, almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them.”

“In speaking then of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.” 17

Objects, which are not products of human labour, and do not have value, can certainly have a price when offered for sale. Through their price they take on a “commodity form”. As Marx explained, “things which in and for themselves are not commodities, things such as conscience, honour, etc., can be offered for sale by their holders, and thus acquire the form of commodities through their price. Hence a thing can, formally speaking, have a price without having a value. The expression of price is in this case imaginary, like certain quantities in mathematics.” 18 He goes on to give the example of the price of uncultivated land, which is without value because no human labour has been spent in its production. Nevertheless, given an attractive location, it can attract a hefty price.

Society however cannot live off honour, works of art or priceless artefacts, no matter what their price. Human beings can only live by the production of real wealth. Labour transforms nature and forms the basis for the production and reproduction of life. As Marx explained, it is socially necessary labour time, expressed in value, which lies at the centre of things. Monopoly prices are a product of definite circumstances, and do not reflect value as such. Despite our critics, the law of value, remains the key regulator of the capitalist economic life.

While Marx recognised the contribution of the bourgeois classical economists, he nevertheless made a rigorous criticism of their ideas, which can be found especially in the three volumes of The Theories of Surplus Value. Marx set about analysing and exposing their contradictions and limitations, while at the same time elaborating his ideas about the laws of capitalism. In effect, Marx’s writings represent a critical history of bourgeois classical economy, or vulgar political economy, as he called it, from its origins to its maturity and eventual collapse. He separated out what was progressive in it from what was worthless, which he then used to qualitatively transform and enrich a new view of political economy.

Marx explained that the classical economists developed their ideas at a time when “the class struggle was as yet undeveloped.” Under these conditions, their ideas were no threat to the capitalist order. However, as soon as the class struggle takes hold, the theoreticians of the bourgeoisie take fright and political economy degenerates into apologetics. Economists quickly abandon the labour theory of value and replace it with marginal utility, marginal theory, and other subjective analyses. The Austrian School was the chief artillery of this bourgeois counter-offensive against Marxism. For them, wages were simply regarded as a part of the national income, along with rent, interest and profit. Labour had no special place in production and surplus value did not exist. Their concept of value was not based on any objective criteria, but simply expressed a subjective choice or desire.

In the words of the Reverend Archbishop Whately, “It is not that pearls fetch a high price because men have dived for them, but on the contrary, men dive for them because they fetch a high price.” In fact, the high price of pearls arises from the difficult labour involved in retrieving them, and their high value spurs people to engage in this activity. Our Archbishop is blind to the essential question: what is the value of a pearl and how is it determined? The confusion about precious stones (or pearls) was answered by Marx in Capital. He first of all quotes the economist S. Bailey: “Value (i.e. exchange-value) is a property of things, riches (i.e. use-value) of man. Value, in this sense, necessarily implies exchanges, riches do not… Riches (use-value) are the attributes of man, value is the attribute of commodities. A man or a community is rich, a pearl or a diamond is valuable…” 19

Marx then goes on to explain the reason why such things have value. “Diamonds are of very rare occurrence on the world’s surface, and hence their discovery costs, on an average, a great deal of labour-time. Consequently, much labour is represented in a small volume.” He goes on, “With richer mines, the same quantity of labour would be embodied in more diamonds, and their value would fall. If man succeeded, without much labour, in transforming carbon into diamonds, their value might fall below that of bricks”! 20

Marx, therefore, sees value as an objective thing. With the Marginalists, the whole business is placed on its head in an idealist fashion and value becomes a subjective thing. At this point, bourgeois economics ceases to be a science. Its whole purpose now is to justify the capitalist system, which for them, is the only viable system possible. These subjective ideas were later refined by the Cambridge economist Alfred Marshall, who constructed demand and supply curves to demonstrate a crude theory of prices.

Individual Preferences

In a conscious attempt to refute Marx, as we can see, the whole of economic theory has now been reduced to the notion of individual preferences and choices, and ceases to have any scientific value, apart from the most trivial of things. “In place of disinterested inquirers there stepped hired prize-fighters”, explained Marx, “in place of genuine scientific research, the bad conscience and evil intent of apologists.” 21 The capitalist economy was not treated by them as a global social system, but simply made up of millions of individual atomised relations between producers and consumers.

This is the basis of the so-called marginal utility theory, which was originally advocated by Stanley Jevons (1871), Karl Menger (1871) and Léon Walras (1874). “Repeated reflection and enquiry has led me to the somewhat novel opinion that value depends entirely upon utility”, stated Stanley Jevons. If someone wants something badly, it has considerable utility for that person; the more he wants it, the more he is willing to pay for it. The amount of labour-time spent in the production of a commodity had no relevance to these apologists. “Labour once spent has no influence on the future value of any article”, asserted Jevons. This subjective theory, which starts from the premise of individual consumption rather than social production, was championed by the Austrian School of Economics led by Eugene von Böhm-Bawerk. It was later promoted by Ludwig von Mises and many others, and subsequently mass-fed today in a variety of versions as “economics” in our schools and universities.

Marx deliberately ignored this vulgar subjective school and Engels jokingly dismissed them. “The fashionable theory just now here is that of Stanley Jevons”, wrote Engels, “according to which value is determined by utility and on the other hand by the limit of supply (i.e. the cost of production), which is merely a confused and circuitous way of saying that value is determined by supply and demand. Vulgar Economy everywhere!” 22

The labour theory of value subsequently challenged the whole ethos of capitalism. Value and surplus value were all derived from the labour of the working class. Marx concluded that profit was simply the unpaid labour of the working class. The whole theory had become a powerful and dangerous argument against capitalism and in favour of socialism. And that is why it could not be tolerated. This was admitted as much by von Böhm-Bawerk: “To be sure, I feel that the labour value theory for a number of years has rather gained in general acceptance, as a result of the dissemination of socialist ideas, but in the most recent epoch it has decidedly lost ground among the theoretical circles of all countries, and this is particularly due to the increasing importance now attached to the theory of ‘marginal utility’.” 23

But, despite the objections of our bourgeois critics, the cost of labour is something you can measure. It is an objective reality. In contrast, “utility” differs from one person to another. It depends on your point of view, namely how much satisfaction a person gets from consuming a certain commodity. Thus, utility is a subjective thing. Oddly, while it is possible to see that the same commodity has different amounts of utility for different people, it nevertheless sells in a supermarket at the same price. This means that price cannot be subjective, but must be based upon a real foundation of value (bourgeois economists view price as value expressed in money terms). If utility is supposed to measure value, how is it that different amounts of utility are sold for the same price? They attempt to get around this contradiction by reference to the “margin”, and in economic textbooks to “marginal utility”.

According to the Marginalists, we tend to buy as much of something at a certain price, then we stop as our satisfaction drops. The amount of satisfaction you obtain from a product depends on how much you have already consumed. The larger the supply of something, the less satisfaction you will get from consuming anything additional. Therefore, the marginal utility of something will rise and fall depending on how much you consume. The more you have, the less you want, until things balance out — all because of what happens at the margin, the last unit consumed.

Jevons explained it in the following terms: “Water, for instance, may be roughly described as the most useful of all substances. A quart of water per day has the high utility of saving a person from dying in a most distressing manner. Several gallons a day may possess much utility for such purpose as cooking and washing; but after an adequate supply is secured for these uses, any additional quantity is a matter of indifference. All that we can say, then, is that water, up to a certain quantity, is indispensable; that further quantities will have various degrees of utility; but that beyond a certain point the utility appears to cease… the very same articles vary in utility according as we already possess more or less the same article.”

Water and Diamonds

This argument was used to explain the so-called “water and diamonds” paradox, commonly used to “prove” the correctness of marginal utility. The Marginalists explain that it is not the total usefulness of diamonds or water that matters, but the usefulness of each unit of water or diamonds as we consume more. As in the Jevons’ example, the total utility of water to people is tremendous, but since it is in such large supply, the marginal utility of water is very low. In other words, each additional unit of water that becomes available can be applied to less urgent uses as more urgent uses for water are satisfied.

Therefore, any particular unit of water is worth less to people as the supply of water increases. On the other hand, diamonds are in very limited supply. They are so limited that the usefulness of one diamond is greater than the usefulness of one glass of water, which is abundant. Thus, diamonds are worth more to people. So, the value of water and diamonds is determined by their marginal utilities.

These disciples of marginal theory try to confuse matters by referring to the high price of branded products as a confirmation of a subjective basis of value. People chose to wear Levi jeans, and pay a higher price, not because of the law of value, but because of personal preference. The same argument also applies to luxury goods. But this is not the case. Bernard Arnault, who was recently engaged in the “handbag war” for control of Gucci, has forged a $29bn fortune with control of more than 60 brands, including Christian Dior, Louis Vuitton, Bulgari and Dom Pérignon. The higher prices of branded goods are linked to their “special” quality, their name, despite the fact that other lesser-known brands use the same factories to produce the same products. Behind the special brands are enormous amounts of advertising and marketing, which need to be added to their costs of production, to create the unique sought-after label. Through this marketing, the brand reaches a status of a “monopoly”, thereby attracting a monopoly price.

The Arnault family own the majority stock in Hermès, the top luxury goods company renowned for its bags, silk ties and scarves. In Hermès’ largest factory, in the Paris suburb of Pantin, more than 300 specialist artisans work on leather goods. This includes the group’s famed Kelly bags, a favourite of Princess Grace of Monaco, and the more sporty Birkin bag, designed for the singer Jane Birkin. The distinctive feature of Hermès’ production is that one highly-skilled worker makes a single bag from start to finish, only using a machine to sew the inside pocket and zips. It takes these workers about 18 hours to make a “Kelly”, which retails for more than 6,000 euros in a small version.

According to a report in the Financial Times, “Because of the time needed to train artisans, supply lags [behind] demand and customers typically have to wait months for the bag of their choice.” 24

This example shows that the amount of labour that goes into the production of each bag is colossal. On the other hand, the highly skilled labour involved in such production creates greater quantities of value while, at the same time, the effects of “monopoly” branding pushes up the price of these luxury items to extortionate heights. Such a situation has nothing whatsoever to do with marginal theory, and serves as a confirmation of the labour theory of value, including the distortions of monopoly capitalism.

You will notice that more often than not the supporters of marginal utility prefer to give “examples” about water and diamonds, rather than ordinary mass-produced commodities, that can be reproduced at will. They fail to explain, for instance, why the price of bread in the shops is the same for the hungry unemployed person as it is for the millionaire tycoon, despite the fact that the marginal utility of an additional unit is a thousand times more for the former than the latter. This is conveniently swept under the carpet by these theorists.

For the Marginalists, we are all simply individual “consumers” with so much money (“effective demand”) with which to make individual choices. The fact that under capitalism, we are faced with massive levels of inequality, generated by the workings of the market economy, is completely ignored. The fact that the working class is incapable of buying back the full value of its labour never enters the Marginalists’ head. Such contradictions are of no concern to them and their mechanical view of economics. Nevertheless, their abstract examples are the theoretical bedrock of marginal utility theory, and the rotten floor on which modern bourgeois economics stand.

The whole Marginalist theory is rooted in the concept of individual consumer preferences, namely that our value judgements about our purchases are the basis of the value of commodities. In fact, our value judgements do not decide the exchange-value of commodities. While these expressions use the same word (“value”), they have very different meanings, based upon a whole different outlook.

In reality, the marginal utility school is the subjectivist land of Robinson Crusoe, or the “isolated man”, to use the words of Böhm-Bawerk. Economics, based upon a subjective preference theory, is reduced to individual tastes and individual choices, which serve to maximise a thing’s utility. This approach is completely abstract without any notion of real society. Market relations are simply individual relations between a person and a commodity. For the Marginalist, it is individual behaviour that is the key to understanding the capitalist economy. Using this reductionist approach, they want us to artificially strip away all the social and historical vestiges of capitalism, including existing class relationships, in order to reduce everything to this simple model of individual behaviour. The whole concept is a false abstraction. It has no historical content. As a society, we do not live as individuals in isolation on a desert island, like individual atoms. Our natural desires/choice preferences are not inborn, or subject to “free” choice, but are a product of society and our place within it. It is not simply a question of individuals confronted with choices in a supermarket, irrespective of time and place. How does the subjectivist island of the Marginalists translate into the realities of everyday capitalist relations? They do not. That is why, in their myopic world, they have no explanation of capitalist crisis.

Rather than a simplified exchange system of Robinson Crusoe and Man Friday, where the choice of things is decided through the exchange of one thing by another, we face a mass of circulating commodities that are exchanged through the medium of money. “The circulation of commodities presupposes the existence of money”, explained Engels, “barter creates only fortuitous exchanges, not the circulation of commodities.” 25 Money is essential for an economy based on the circulation of commodities. Money itself is a value, namely a definite quantity of labour which acts as a universal equivalent. And yet, our Marginalist friends were never able to solve the riddle of the marginal utility of money. The value of money is determined by what it can buy, which is not decided by individual preferences, but by the level of prices around us. These prices in turn are determined not by individual transactions, but the fluctuations of the world market. The world market, which dominates national economies, including our lives, is in turn subject to all kinds of uncertainties, where products are produced without any conscious or rational plan. Rather than equilibrium under capitalism, as stated by Say’s Law, we have disequilibrium and periodic crises of overproduction.

In the epoch of state monopoly capitalism, the laws of capitalism become increasingly distorted. Monopoly does not abolish competition, but bears down on it and mangles it. The power of the monopolies colossally distorts the market as well as price levels. Using data from 2006-09, Prof. Peter Nolan shows the degree of monopolisation. He concluded that a mere two giant multinationals dominate the manufacture of large commercial aircraft; two multinationals dominate the carbonate drinks industry; three dominate mobile telecommunications infrastructure; three dominate smart phones; four giants control beer, elevators, heavy duty trucks and personal computers; six for digital cameras; and of motor vehicles and pharmaceuticals, ten global firms. In these cases, businesses supplied between half and all of the world market. Similar degrees of concentration have emerged, after consolidation, in many industries. Much the same concentration can be seen among component suppliers, such as aircraft. The world has three dominant suppliers of aircraft engines, two of brakes, three of tyres, two of seats, one supplier of lavatory systems and one of wiring. Across whole industries, as Marx predicted, the world has just a few dominant suppliers of essential components.

Adam Smith, Ricardo and Marx all understood value from an objective point of view. Their starting point was production, and value was equated with or revolved around costs of production. Adam Smith’s famous “invisible hand”, which is supposed to regulate the market, is nothing more than the operation of the law of value. Marx understood that it was not individual preferences that drove capitalism forward, but the coercive laws of capitalism, which dictate the actions of individuals. It is not the personal preferences of capitalists that cause them to invest, but competition and the pursuit of greater profits. Workers are forced to sell their labour power, not through choice, but through necessity.

In reality, under capitalism, blind economic laws dominate the lives of people and not the other way around, and it is the task of economics to analyse these laws. “It is a question of these laws themselves”, explained Marx, “of these tendencies winning their way through and working themselves out with iron necessity.” 26 A handful of gobal multinational corporations, which are driven by the profit-motive, have accumulated more economic power than the governments of countries. Individual preferences do not enter into it. The laws of capitalism, through competition, drive a greater and greater centralisation and concentration of capital, greater monopolisation, a more intense scramble for markets, increasing greed, power, and the general lust for super profits.

In contrast, the whole marginal utility approach is based upon a microeconomic perspective, and has little, if anything to do with the macroeconomic level of things. It is essentially a one-sided, undialectical, reductionist approach to capitalist economy. While Marxism fully understands the dialectical unity of different levels of the capitalist economy, bourgeois economics maintain a massive Chinese wall between the micro and macro. Chris Giles, a columnist for the Financial Times, revealed the bankruptcy of bourgeois economics when he wrote recently, “Economists live in secluded silos. Absorbed in abstract thought, those at the academic frontier rarely have much useful to impart to those grubbing around real policy issues. The pond life in the microeconomic policy puddle too seldom talks to those in the macro pool — and vice versa.”27

This reflects their whole narrow abstract outlook and false method. They are incapable of understanding capitalism as a whole, in its real development and contradictions, as this is not their intention. The marginal school is maintained solely in order to prove and promote the subjective view, namely that of the atomised individual. Their view is based upon a false abstraction in an attempt to mystify the real relationships — class relationships — under capitalism. We are led to believe that we are all individuals, with our individual preference, irrespective of our class or income. The idea was represented by Thatcher when she said there was no such thing as society. But as soon as we think in terms of society as a whole, the labour theory of value becomes self-evident. The total number of hours worked by society is the ultimate factor of production, which is then divided amongst the needs of society. This is the central feature.

“The peculiar fetishism of the Austrian School,” explained Bukharin, “which provides its adherents with individualistic blinders and thus shuts off from their view the dialectical relation between phenomena — the social threads passing from individual to individual and alone constituting man a ‘social animal’ — this fetishism precludes any possibility of their understanding the structure of modern society.” 28

The apologists of the “free market” constantly attack the Marxist critique of capitalism. They attempt to ridicule Marxist ideas by simply distorting and twisting what Marx actually said. They deliberately mix up value with market price, which are two different concepts, in order to “prove” the flaws within Marxist economics. In reality, as Marx explained, prices do not directly correspond to value due to the vagaries of the market but tend to oscillate above and below it as if on an axis. They deny exploitation under capitalism as, according to them, profit is not the unpaid labour of the working class, but simply seen as a “remuneration” for “taking a risk” and paying wages to workers before they begin to produce anything. This, once again, is to turn reality on its head. As any worker will testify, it is they who have to work a week or a month “in hand” before they receive any wages, thereby extending credit to the capitalist, and not the other way round.

In the final analysis, all theories are tested by reality. In the period of capitalist boom, these free-marketeers were very much in vogue — until the great crash of 2008, which ushered in the biggest crisis of over-production since the 1930s. This shattered the theories of “equilibrium” economics, which understood nothing and foresaw nothing. If a market economy is supposed to rest on a general equilibrium with thousands of markets efficiently interconnected by prices reflecting the stable tastes of millions of people, then this has clearly failed. The standard models of marginal analysis, all based on Say’s Law, proved to be bankrupt. Events have shown that the so-called equilibrium model of capitalism, despite its mathematical niceties, is a total folly, divorced from reality, from everyday life. In contrast, today’s events have proved the correctness of the law of value and the Marxist critique of capitalism. Today’s events are ample proof that crisis is not a flaw in the capitalist mode of production, but an essential part of it.

In times of deep economic crisis, the whole official facade begins to crack and crumble. The arguments of the apologists of capitalism become increasingly discredited. Bourgeois economics is shown to be bankrupt. The Fabians and reformists, who also attempt to ridicule the labour theory of value, have long ago capitulated to capitalism and act as its open apologists. But their ideas are out of step with today’s reality, as living standards collapse in an age of on-going austerity. The crisis of capitalism means the crisis of reformism, as well as of bourgeois economics, on which they base themselves.

The crisis, which has assumed a protracted insoluble character, forces the working class to look for a way out of this mess and gravitate towards those who can offer a coherent explanation. Only Marxism can offer this alternative, based upon a scientific view of the world, as well as the solution in the revolutionary overthrow of capitalism. In the final analysis, this is the reason why Marxism is in a continual struggle against the defenders of an outmoded system. Philosophers have interpreted the world, states Marx, the point however is to change it.

1. Introduction to Wage Labour and Capital, Selected Works, vol.1, p.146.

2. Lindsay, Karl Marx’s Capital, p.53, London, 1931.

3. Letter from Marx to Kugelmann, 11 July 1868, MECW, vol.43, pp.68-69.

4. Ibid.

5. K. Marx, Capital, vol.1, p.133 (Penguin edition).

6. K. Marx, Grundrisse, p.706.

7. I.I. Rubin, Essays on Marx’s Theory of Value, (1928).

8. Marx Letter to Kugelmann, 11 July 1868, MECW, vol.43, pp.68-69.

9. K. Marx, Capital, vol.1, p.289.

10. Ibid, p.90.

11.?Ibid, pp.167-8.

12. Trotsky, Marxism in Our Time.