In thinking about the relationship between Marx and Modern Monetary Theory (MMT), one point of entry appears to be the ‘monetary expression of labor time’ (MELT), introduced by Alejandro Ramos Martinez in chapter 5 of The New Value Controversy, in connection with MMT’s ‘value of the currency’. In considering this connection, the ‘temporal single-system interpretation’ (TSSI) of Marx’s theory of value shall be adopted. Chief proponents of this interpretation include Andrew Kliman and Alan Freeman. For readers unfamiliar with Marx, an earlier post provides an overview. Another post provides an introduction to the TSSI.
Values and prices
Marx’s theory of value applies to commodity production. A commodity is a good or service that is produced for the purpose of being exchanged in a market. The theory does not apply to goods or services that have not been produced as commodities, which may instead be valued according to normative criteria, cultural norms, and so on.
Value, in Marx, is socially necessary labor time or its monetary equivalent. Labor time is only socially necessary if it involves producing commodities at the prevailing, average level of productivity. This ensures that the value of a commodity is not increased simply by taking longer to produce it through inefficiency or the application of backward production techniques. The time taken must be consistent with prevailing technology, know-how and worker effort of the average kind in that line of production.
Price is distinguished from value in at least two different ways. In one usage, ‘value’ refers to the ‘value created’ in production, whereas ‘price’ refers to the ‘value received’ in exchange. In a second usage, price refers to value expressed in monetary rather than labor-time terms.
Unless otherwise stated, the present discussion employs the first usage. So value will refer to what is created in the sphere of production. Price will refer to what is realized in the market when output is sold. In this usage, both price and value can be expressed in labor time or, equivalently, in a monetary unit of account, and often will be.
Marx’s theory of value in a nutshell
For present purposes, discussion can be kept simple by considering the ‘total value’ and ‘total price’ produced in the economy as a whole. This is similar to considering the GDP of an economy without regard to sectoral breakdowns. Actually, since total price includes productive consumption of intermediate inputs, it is most akin to Gross Output, as measured in the US national accounts. Sectoral breakdowns are important in other contexts – see, for example, An Introduction to Marx’s Theory of Value With Multiple Sectors – but can be set aside for now.
Total value, for Marx, is the sum of three components. First, there is the value advanced for ‘constant capital’, which is the value of plant, machinery and raw materials used up in the production period. In Marx’s theory, constant capital represents value that existed prior to the current production period. It is ‘dead labor’ in the sense that it was produced by labor in a previous period. The magnitude of constant capital does not change during the current period. Instead, it is simply passed on to the final value of the output.
Second, there is ‘variable capital’. This is the amount of value advanced to employ workers in the current period. The employment of ‘living labor’ creates new value. Importantly, if workers are required to work for longer than is necessary to produce the equivalent of their wages (inclusive of benefits), there will be ‘surplus value’ left over for capitalists. This surplus value can be realized in exchange as gross profit, prior to its distribution into various parts (e.g., corporate retained earnings, interest, rent).
In practice, capitalists may fail to realize in exchange all the surplus value created in production. If so, realized gross profit will fall short of created surplus value. The difference will accumulate as unsold inventories. To avoid complications, in this post it will be assumed that all surplus value created in production is successfully realized in exchange. That is, the important possibility of a realization crisis is abstracted from to bring out some basic relationships.
A simple numerical example
For simplicity, assume that there is circulating capital but no fixed capital. This means that all constant capital advanced in a particular period is productively consumed in the same period. It can be supposed that the equivalent of $50 in constant capital, c, is used up in the production period and that capitalists advance $50 of variable capital, v, to employ workers for the period. The workers are required to work a total of 100 hours, which is the amount of total employment, L. It can be imagined that 50 hours of the workers’ labor time is spent creating value equivalent to their wage bill, W (assumed to be equal to variable capital). The other 50 hours of the workers’ time is spent creating surplus value, s, for the capitalists. Since half of the workers’ labor time goes toward the creation of surplus value and the other half creates value equivalent to variable capital of $50, this implies surplus value of $50 is created. Suppose, lastly, that the general price level, P, is 1.
It can be inferred from the above numbers that the net product of the entire economy, equal to v + s, is $100. This is the total new value created in the period. Given the assumption that all value created in production is realized in exchange, this net product will correspond to nominal GDP, PY, so real output, Y, must be 100.
The table below summarizes the situation. The dollar figures are values and prices expressed in monetary terms. The figures in parentheses are values and prices expressed in terms of labor time.
__________________________________________________________________ c v c + v s Net Product Total Value (= W) (= v + s) (= Total Price) (= PY) (= c + v + s) __________________________________________________________________ $50 $50 $100 $50 $100 $150 (50) (50) (100) (50) (100) (150) __________________________________________________________________
In passing, it can be noted that the economy-wide rate of profit is s/(c + v) = 50%. The rate of exploitation (or rate of surplus value) is defined as s/v = 100%.
The monetary expression of labor time (MELT)
More relevant for present purposes is the MELT. In this post, it can be assumed that productivity remains constant over the period. Doing this keeps calculation of the MELT ultra simple. Once productivity is permitted to change from one period to the next, it is necessary to resort to a more general formula. This is left for another post (see here).
The MELT is one hour of socially necessary labor expressed in monetary (let’s say dollar) terms. It is the dollar value of one hour of labor time. Equivalently, it is the economy-wide ratio of total price to total value.
In the example, the MELT is equal to $1/hr. This says that each hour of socially necessary labor creates $1 of value in monetary terms.
Value is usually expressed in terms of ‘simple’ labor time. This is the simplest form of labor performed in the economy. More complex labor is then considered as a multiple of simple labor.
In relation to the above example, one of two things could be supposed. Either all labor is simple or the above calculations are made once all labor has been converted to an equivalent amount of simple labor.
In the example, the average wage rate is $0.50/hr. This can be seen from the fact that variable capital and the wage bill are $50 and total employment is 100 hours. Suppose that, in addition, the minimum wage happens to be one-fifth of the average (i.e. $0.10/hr). If minimum-wage labor is interpreted as simple labor, it can be inferred, imperfectly, that one raw hour of labor (often called an hour of concrete labor) is the equivalent of five hours of simple labor. That then implies that total employment is the equivalent of 500 hours of simple labor.
This modifies the figure for the MELT. Whereas 150 hours of concrete labor corresponds to the total value of $150, it is actually 750 hours of simple labor that corresponds to this $150 of total value. In other words, the MELT can be modified to $0.20/hr.
Connection between the MELT and MMT’s value of the currency
In MMT, the value of the currency is defined as what must be done to obtain it. Currency value can therefore be defined in terms of labor time. In the example, the minimum wage is $0.10/hr. This implies that it takes 10 hours of simple labor to obtain $1. The value of a dollar, in other words, is 10 hours of simple labor.
Denote the MELT by m and the value of the currency by z:
This implies a simple relationship between the MELT and value of the currency that makes it easy to switch back and forth between the two:
So, in the example, knowing that the MELT is $0.20/hr, it can easily be determined that the value of the currency is:
Or, knowing the value of the currency is 10 hrs/dollar, it is easy to calculate the MELT:
A Marxist reader might prefer a definition of currency value more in keeping with Marx’s analysis. It is possible to adopt a commodity theory of currency value so long as the commodity labor-power, rather than a precious metal, is taken to be the ‘money commodity’. Adopting this approach leads to a definition of currency value that is distinct from the MMT definition but has a straightforward relationship with it. The relationship between this commodity-theory definition of currency value and the MELT is even simpler than the relationship just considered. Specifically, currency value under a commodity theory will simply be the reciprocal of the MELT. This is discussed at length in:
The appropriateness, in a modern monetary system, of interpreting labor-power as the money commodity is considered in: