So far, the intention has been to give a sense of the relevance and accessibility of Marx’s macroeconomic ideas. Rather than jump straight into his theory, with what might appear to be strangely named variables and foreign concepts, it seemed desirable to spell out simple connections between Marx’s categories and those of non-Marxist economics. Doing so meant glossing over some of the finer points of Marx’s definitions and categories. The first task of this post is to address a few of these. Attention then turns to distinguishing value from price and introducing Marx’s three aggregate equalities. The implications of Marx’s equalities are powerful, but their validity depends on how his theory is interpreted. The final section of the post will highlight the major points of contention. This will provide context for two upcoming posts, which consider the temporal-single system interpretation (TSSI) and a possible rationale for its adoption in this series.
Finer points on labor as the source of value
Abstract labor. When Marx argued that labor is the sole source of new value, he was specifically referring to ‘abstract labor’. By this he meant labor without regard to its specific concrete qualities. It is labor as such. Hair dressing, waiting tables, engineering, accounting, assembly line work, general office duties and many other kinds of labor have innumerable differences in terms of their concrete characteristics. But there is a sense in which they are all the same. They are, despite their many differences, labor. They are the expenditure of effort. It is in its undifferentiated, abstract quality that labor, when engaged in commodity production, creates value.
The reduction of different kinds of abstract labor to simple abstract labor is carried out socially. Complex labor is treated as a multiple of simple labor. This is reflected, for instance, in wage differentials. Labor performed for the minimum wage is simple, abstract labor. It comes in different varieties, but for the purposes of commodity production is all treated the same. Complex labor is qualitatively the same as simple labor – it is still abstract labor – but, quantitatively, it is considered to create more value per hour than simple labor.
It was mentioned in the first post that, unless stated otherwise, labor in this series refers to socially necessary labor. Now it can be added that, unless indicated differently, labor also refers to abstract labor.
Labor power. Marx drew a critical distinction between labor and labor power to explain the origin of surplus value. Capitalists purchase an individual’s capacity to work for a period of time. Marx called this capacity to work ‘labor power’. Workers sell their labor power to capitalists in exchange for wages. During the period of employment, the amount of labor workers actually perform can vary, depending on the extent to which they expend effort.
For Marx, the secret of how profit comes into existence is in this distinction. Capitalists must pay the value of labor power. In exchange for this payment, workers perform labor. The value of labor power, like the value of any commodity in Marx’s theory, depends on the amount of labor required to reproduce it. If this value – the cost of reproducing workers – is less than the value workers create in production through the performance of labor, surplus value will be left over for capitalists. In other words, the reason surplus value exists is that workers perform more labor time than is necessary to reproduce themselves.
Once society progresses beyond mere physical subsistence, the value of labor power is culturally determined. From that point onward, the determination of the value of simple labor power becomes purely social. Workers can attempt to win pay increases, including through unionization or engagement with liberal-democratic institutions, and with persistence achieve long-lasting improvements in the living standards that are regarded by society as commensurate with the cultural reproduction of the working class.
The determination of the value of more complex labor power, though similarly social, will also reflect the different costs of reproducing workers with various skills (including education, training costs and so on). Different categories of workers can establish wages and conditions that persist, more or less, for extended periods of time. Under some institutional arrangements – for example, centralized wage determination in which the state mediates bargaining between workers and employers – real wages and conditions may intentionally and consciously be raised gradually over time as productivity improves.
Productivity improvements. At the micro level of an individual firm, capitalists can attempt to increase the amount of surplus value not only by working their labor force longer but by raising the level of productivity. This can be achieved through an intensification of the labor process or implementation of productivity-enhancing technical innovations. When such actions lift the firm’s level of productivity above that of its competitors, its staff will spend less time reproducing value equivalent to their own wages and more time creating surplus value for capitalists. A greater proportion of the new value created in the economy as a whole will be created in this firm as a result of the productivity improvement.
Even so, at the aggregate level, Marx argued that productivity improvements have no direct effect on the amount of new value and surplus value created in real labor-time terms. According to Marx, an hour of socially necessary labor always creates the same new value, in real terms, irrespective of variations in productivity. There is certainly an increase in the use values (physical output) produced per hour of labor when productivity improves, but this will not translate into additional new value. Instead, society’s aggregate labor time (new value for the period) will simply be spread over a larger physical output. Individual commodities will, on average, have lower values than before. They will now represent less socially necessary labor time.
Notice, though, that this applies strictly only to new value created in the period. Rising productivity does not alter the new value created by one hour of socially necessary labor. It simply raises the bar on what counts as socially necessary labor. But there might be an increase in total value (c + v + s) for the period, just not new value (v + s). This is because a more highly productive workforce might transfer more preexisting value from the elements of constant capital to final output. More inputs will be used up during the production period to create a larger mass of physical commodities. If the value of the elements of constant capital do not fall sufficiently (as a result of the productivity improvement) to offset the increased physical quantities transferred to final output, total value will increase, even though new value and surplus value will not. This consideration relates to a point of contention in debates over Marx’s theory. If the elements of constant capital are revalued instantaneously (simultaneously) with alterations in productivity, there will be no general tendency for more constant capital in value terms to be transferred to final output even though the mass of physical quantities has increased. If, instead, value determination is considered temporal, there will be a time lag between the rise in productivity and the revaluation of the elements of constant capital. For the rest of this post, we will leave this issue to one side.
If the macro impact of rising productivity initially seems counterintuitive, it may help to think of the likely effect on prices. If all commodities could suddenly be produced with half the labor that was required previously, their costs of production and prices would fall sharply. To the extent that prices in aggregate did not precisely halve, it would be because of the presence of other costs not directly related to living labor.
Competition is continually exerting pressure on firms to raise the level of productivity to get an advantage over competitors. The result, if employment remains the same, is no change in the new value created in aggregate. There is just a change in the proportions in which different firms generate value and surplus value. In fact, if productivity improvements enable firms to lay off some workers, resulting in technological unemployment, there will be a temporary reduction in new value created.
Class conflict and inflation. Marx’s contention that an hour of socially necessary labor always creates the same value in real labor-time terms suggests that once we know the wage rate and employment, changes in the rate of surplus value can only occur through changes in the MELT (the monetary expression of labor time).
Recall that $s = mL – $v. Here, $s and $v are surplus value and variable capital in dollar terms. L is employment expressed in hours of simple labor and equals the real new value created in the period. The MELT, m, expresses the dollar value of one hour of simple labor. Suppose the wage rate and level of employment are chosen at the beginning of the period and specified in labor contracts. A rise in the MELT by the end of the period will cause a change in mL but no change in $v – since it is fixed, given wages and employment – leaving more as surplus value $s. Inflation in terms of the MELT has enabled a change in the rate of surplus value (s/v) and in the distribution of new value created between workers and capitalists. However, if the MELT had remained constant, the rate of surplus value could not have changed.
This may partly explain Marx’s practice, at certain stages in his analysis, of treating the rate of surplus value as constant. Kalecki, similarly, often treated the wage share in nominal income as roughly constant. It makes sense to do so when assuming, as Marx often did, that a unit of the currency represents a constant amount of socially necessary labor (what would now be called a constant MELT). Kalecki, for his part, often assumed a given price level. Under these assumptions there is no strong reason to think that the economy-wide rate of surplus value or the nominal wage share will be susceptible to much change once the wage rate has been set.
The same holds true once we allow employment to vary. Whatever the extra amount of employment, if it is true that an hour of socially necessary labor always creates the same value in real labor-time terms, then for a constant MELT the increase in employment will leave s/v unchanged. (The rate of profit will be a different matter, because it also depends on the value of total capital.)
These observations are consistent with the ‘conflict theory of inflation’. Variations in the MELT appear, in this context, to be the way s/v can change once the wage rate has been set. Workers, of course, will attempt to factor in the effects of anticipated inflation in forming their wage demands. To the extent that the distributive claims of workers and capitalists are incompatible in real terms, inflation will result.
Value, price and Marx’s three aggregate equalities
By definition, commodities are created in production for the express purpose of being sold for money in the marketplace. In analyzing both production and exchange, it is often important to distinguish between ‘value’ and ‘price’. In this series, the term ‘value’ always refers to the value created or transferred to the final output in production, whereas ‘price’ refers to the value received in exchange.
The value of a commodity equals c + v + s, whereas its price equals c + v + π, where π is profit. In general, at the firm or sectoral level, the price of an individual commodity differs from its value. As a result, the profit received in exchange differs from the surplus value created in production.
There are various reasons for this. For starters, as Marx stressed, the possibility of price-value deviations is inherent in the price form itself. Even if there was a tendency for prices and values to converge, market prices would almost always differ from values due to fluctuations in demand relative to supply.
In any case, there is no such tendency for prices and values to converge in Marx’s theory. If competitive conditions prevail – meaning, for Marx, that money capital can be freely invested in whichever sector is offering the most attractive return – then prices will diverge systematically from values. Otherwise there would be highly unequal sectoral rates of profit, encouraging flows of investment in and out of the various lines of production in search of the highest returns. Since, in Marx’s theory, it is only living labor that creates new value and hence surplus value, sectors using more labor-intensive production methods tend to create the most surplus value per dollar invested. If every commodity sold at a price equal to its value, capitalists investing in more capital-intensive techniques of production would receive a lower return on their capital outlay, even if their techniques were more efficient than others. To the extent that there is competition, investment can flow into sectors offering high returns and out of sectors yielding low returns. The effect will be to expand supply relative to demand in sectors offering high returns and do the opposite in sectors offering low returns. This process will tend to push all sectoral profit rates toward the average.
Marx defined ‘prices of production’ as the prices that would return to capitalists the average rate of profit. Prices of production never really occur in practice because the social conditions of production are continually changing. But divergence of market prices from prices of production will show up as profitability above or below the average and, if persistent enough, encourage flows of investment in or out of sectors.
To the extent that competition prevails, prices will tend to be above values, and profit greater than surplus value, in sectors with higher than average ‘compositions of capital’ (measured by c/v). The reverse will be true in sectors with compositions of capital below the social average. Only sectors operating with a composition of capital equal to that of society as a whole will have prices equal to values and receive profit equal to the amount of surplus value created in the sector.
In reality, competition is somewhat restricted. There are monopolies and economic rents. This means that the free mobility of money capital will not hold complete sway. This does not necessarily imply a greater likelihood for individual prices to coincide with individual values. Rather, monopoly and rent can be additional causes of divergence between price and value.
Although individual prices and values almost always differ, Marx maintained that in aggregate:
- Total value equals total price. That is, the sum of all values equals the sum of all prices.
- Total surplus value equals total profit.
- The average ‘price rate of profit’ (calculated as profit divided by total capital) equals the average ‘value rate of profit’ (calculated as surplus value divided by total capital).
If true, these results are very powerful. They imply, for instance, that it is possible to deduce the average price rate of profit r directly from aggregate value magnitudes without any reference to individual prices. The determination of the rate of profit is, in that case, logically prior to price determination.
Here, total capital K includes the outlays for constant capital and variable capital as well as fixed capital (i.e. plant and equipment that has not been used up during the period).
Different interpretations of Marx’s theory
The validity of Marx’s three aggregate equalities depends on how his theory is interpreted. The matter essentially comes down to how the values of constant capital and variable capital are defined. If they are defined as the values of their elements – meaning the amount of labor embodied in inputs in the case of constant capital and the amount of labor embodied in goods consumed by workers in the case of variable capital – then the three equalities fail to hold. If, instead, the value of constant capital is defined as the monetary amount actually paid for inputs (or the labor-time equivalent of this monetary amount) and the value of variable capital is defined as the monetary amount paid in wages (or the labor-time equivalent of this monetary amount), then Marx’s three equalities do hold.
To understand why problems arise for Marx’s equalities with the former set of definitions, first consider constant capital. When a capitalist acquires an input to be used in production, the price paid for the input (as with the price of any commodity) will in general differ from its value. If the value of the input is taken to define the value of constant capital, the input’s value will enter into the value of the new commodity. The price of the new commodity will differ from its value not just because profit rather than surplus value is added to ‘cost price’ (c + v), but because the price of c + v itself will differ from the value of c + v. Marx’s aggregate equality between total profit and total surplus value requires, under this definition of constant capital, not only that differences between π and s cancel out, but that differences between the prices and values of c + v do as well. But it is well established that they don’t.
The same problem applies to variable capital. The value of the goods and services workers consume will in general differ from their price. If the value of variable capital is defined as the value of the goods consumed by workers, then variable capital will differ from the labor-time equivalent of the monetary wages paid to workers. This will cause a divergence between the price and value of c + v. Marx’s aggregate equalities between profit and surplus value and between the price and value rates of profit will fail to hold.
There are no such difficulties when the values of constant and variable capital are defined as the monetary amounts actually paid for inputs ($c) and as wages to workers ($v) or, after dividing by the MELT, their labor-time equivalents c and v. The value of c + v is then equal to its price by definition and the complications associated with an embodied-labor approach never arise.
The upshot is that Marx’s three equalities can be replicated if his theory is interpreted in the latter way. The TSSI is one of the interpretations that takes this approach. Other single-system interpretations do so as well. Needless to say, this still leaves the question of whether Marx’s theory should be interpreted in this way. The purpose of the next couple of posts is to introduce the TSSI and explain my reasoning for its adoption in this series.