Why the labour theory of value is true

As all educated people know — the labour theory of value is false. Indeed, a hallmark of a university education, whether in economics or not, is a belief in the certainty of this proposition.

And yet, if you ask an educated person “the value question”:

What does one dollar, or one pound, measure or represent?

then you are likely to be met with a good few minutes of rambling and mumbling.

Everyone knows that the marks on a ruler measure distance, or a thermometer’s mercury column measures temperature, or a clock’s hands represent time. And inquisitive minds, before they are socialised to stop worrying about such things, naturally ask the value question and enquire about the nature of the numbers they find stamped upon the goods they buy, and the tokens they carry in their pockets. But unlike rulers, thermometers or clocks, few adults have a clear and distinct idea of the semantics of monetary phenomena, including economists.

Possible answers to the value question include “some specific thing”, “many things” or “nothing”. The history of economic thought has explored all these options.

However, the predominant attitude among economists today is value nihilism. “There is only price” and to seek something behind prices, to dig deeper, is simply a kind of confused essentialism. In consequence, to ask a modern economist the value question is akin to raising the issue of phlogiston with a modern physicist. It is anachronistic. Economic science once grappled with the value question but has subsequently educated itself to stop asking it.

The academy, at least within capitalist societies, turned against the classical labour theory of value during the 19th Century’s marginal revolution in economics. Subsequently, the labour theory has eked out a threadbare existence on the periphery of the academy, while enjoying robust and continued support from a small minority of intellectuals associated with the socialist tradition within civil society.

But even a resolutely pro capitalist academy, like we experience today, must appear to conform to scientific norms. So what reasons are normally given for rejecting the labour theory of value?

Simplifying, the academy normally offers two main reasons: one exoteric, and the other esoteric.

The exoteric reason is that market prices are determined by the Marshallian scissors of supply and demand. So prices are indices of scarcity, and therefore cannot represent the amount of labour time supplied to produce commodities. This kind of argument frequently appears in popular or “folk” rejections of the labour theory of value.

The esoteric reason is that Marx’s theory of the transformation doesn’t work. What is that theory? Marx understood that equilibrium (as opposed to market) prices of commodities systematically diverge from the labour time supplied to produce them. So the labour theory of value appears false on the empirical surface of capitalist society. Yet Marx argued that this divergence is merely apparent and caused by the distorting effect of capitalist property relations. In his unfinished notes, published as Volume III of Capital, he proposed that prices are conservative transforms of labour time (i.e., prices are “transformed” expressions of labour time). So although the prices of individual commodities and labour times diverge, there is a one-to-one relationship between prices and labour times in the aggregate.

The father of neo-classical economics, Paul Samuelson, published articles in the 1950s and 70s that, although not original, demonstrated in mathematical terms that Marx’s theory of the transformation cannot work, and therefore there isn’t a systematic one-to-one relationship between equilibrium prices and labour time.

Unsophisticated critics of the labour theory will offer the exoteric reason, but more sophisticated critics know the scarcity objection doesn’t hold water. So sophisticated critics ultimately defer to Marx’s transformation problem.

But here’s the rub. The critics have a point. Marx’s theory of the transformation is indeed incomplete and does have its problems — a feature that Marx first pointed out himself in his own notes.

From a sociological point of view, and simplifying greatly, we have, on the one hand, a pro capitalist academy eager to excise the labour theory of value, and all its radical implications, from academic discourse; and, on the other hand, a pro Marxist periphery motivated to defend the theory against the ideological attacks of the ruling elites. The environment for pursuing the science of the theory of value is decidedly unhealthy. But it could not be otherwise.

An unfortunate trend in Marxist circles, which represents a real obstacle to material progress, is to “wiggle out” of the transformation problem via creative reinterpretation of the meaning of Marx’s texts. Many reinterpretations attempt to save Marx only by dismantling the scientific content of Capital. For example, a large family of reinterpretations end up denying that labour time is a market-independent property of reality. So much for materialism.

So why is the labour theory of value true? I give a brief, technical answer in this new position paper:

The General Theory of Labour Value

Some of the main points are:

  • The classical labour theory of value is a special case of a more general theory.
  • The general theory:
    • dissolves the transformation problem in a natural and transparent manner,
    • preserves Marx’s theory of exploitation and surplus value,
    • demonstrates that equilibrium prices and labour times are dual to each other (this is a theorem), and
    • reveals how the dynamics of capitalist competition instantiate a lawful relationship between scarcity prices and labour time (i.e., it reconstructs Marx’s “law of value”).
  • In consequence, the general theory establishes the logical basis for answering “labour time” to the value question.

The modern nihilist attitude does not represent a sophisticated rejection of naive substance theories of value but instead signifies the continued existence of unresolved and fundamental theoretical problems that first manifested at the birth of modern economic science in the eighteenth and nineteenth centuries.

There is no royal road to science. And the unfortunate truth for the pro capitalist academy is that the road to a scientific understanding of the economy passes through Marx. There’s no way around him, because, of all the economic thinkers, he got the fundamentals of the theory of value right. And every modern school of economic thought, whether orthodox or heterodox, is woefully ignorant of what the unit of account actually signifies. We are like blind ants who obsess, suck and exchange the Queen substance, yet know nothing of its true function. Marx stands on the road ahead, pointing in the direction of a truly scientific understanding of the kind of society we live in. That’s why this post has a picture of a coin with Marx’s head on it.

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7 comments

  1. Hi,
    I’m confused. After reading yours and other Marxist explanation for LTV I’m unclear as to how LTV relates to scarcity: for example the price of large diamonds. Also how the theory relate to house prices and price ‘gouging’ .

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    • Thanks for your question!

      The paper shows that market prices, which are indices of scarcity, are continually “pushed”, by the dynamics of capitalist competition, to equilibrium prices that directly relate to labour time. The rate at which the scarcity price of a commodity dissipates depends on the rate at which its supply can be increased. We don’t observe an economy in price equilibrium. So we expect to empirically observe market prices, which are determined by supply and demand, and which will not directly relate to labour time. My post
      https://ianwrightsite.wordpress.com/2017/06/07/karl-marxs-invisible-hand/
      steps through this in more detail.

      I hope this answers your question! Please follow up if anything is still unclear.

      -Ian.

      Like

      • Thank you for taking the time to reply. The post you link to raise another question, that of non-reproducibles- which I guess is what I was asking when referring to diamonds. “How can a labour theory of value handle non-reproducibles, such as land, or unique works of art? “

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  2. Hi! I’m a student from Italy
    I read your paper “The general theory of labour value” and I found it very interesting.

    May I ask you one question about it?
    How could you establish workers and capitalists’ consume bundles before knowing prices?
    While reading the numerical example you provide at the end of the paper, I noticed that you put both classes’ consumptions in physical terms among the hypothesis* and consequently you manage to find profit rate and prices.

    I think that in free market you cannot know ex ante what and how much workers and capitalists are going to consume: only ex post, when net product is available on the market, you’ll see what the breakdown between classes will be like in terms of consumptions.

    Maybe you actually can demonstrate that it is possible to identify the physical the consumption bundles of every class, but not simply by putting it among the hypothesis.
    If you do so, I then could ask you why capitalists and workers should have decided to acquire that specific amount of each commodities, instead of getting more (or less) of it? I mean, my opinion is that this should be a result, not a starting point.
    Otherwise it’s not easy to prevent someone from arguing that it is precisely wages and profit rates that determine the amount of consumption.

    Am I wrong? Did I misunderstand what you wrote?

    I thank you so much for your attention

    *I am referring to: ” w = [1, 0.05] and c = [0.5, 0.1] ” (page 9 in the paper)

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    • Thanks for your great question!

      > How could you establish workers and capitalists’ consume bundles before knowing prices?

      Quick answer: I don’t.

      Long answer: I assume that households want to consume a definite selection of commodities in given proportions. And I assume the commodities are perfect complements (this is a simplifying assumption). But we don’t fix the scale of consumption (i.e., the actual quantities of each commodity that are consumed).

      E.g., We assume that workers consume corn and sugar, and that they consume 2 units of corn for every unit of sugar. But how many units of corn and sugar they actually consume will depend on market prices and their money stocks.

      So real consumption varies along a fixed ray in quantity space (where each dimension of that space is a commodity).

      > While reading the numerical example you provide at the end of the paper, I noticed that you put both classes’ consumptions in physical terms among the hypothesis and consequently you manage to find profit rate and prices.

      The numerical example is for a steady state equilibrium. So the economy is repeating, unchanged over time.

      We then observe the actual bundle of commodities consumed by the different classes in this steady state. From this information, and knowledge of the technique, we may compute super-integrated labour values.

      The motivation for this numerical example is to demonstrate that super-integrated labour values are objective, or “physical”, properties of an economy, which may be operationalised independently of the price system. But there is no theory of income distribution here. We just take the distribution as a given.

      > If you do so, I then could ask you why capitalists and workers should have decided to acquire that specific amount of each commodities, instead of getting more (or less) of it?

      The dynamic model has an (implicit) theory of income distribution, which controls what each class gets, both during convergence, and in the steady state. For more details I suggest you look at Chapter 7 of my thesis
      https://sites.google.com/site/ianwrightoxford/research/2016-thesis

      I hope this answers your question! Please follow up if anything is still unclear.

      -Ian.

      Like

      • Hi Ohu

        Thanks for your follow up question:

        > “How can a labour theory of value handle non-reproducibles, such as land, or unique works of art?”

        I plan to address this issue in detail in future blog posts. But, for now, allow me to give the standard, classical answer.

        The supply of non-reproducibles cannot be increased by the reallocation of any additional labour or capital resources. In consequence, the price of a non-reproducible will not converge to a natural price but instead will persist indefinitely as a market price determined by supply and demand. So owners of such non-reproducibles will enjoy economic rents even in equilibrium (however defined). In this sense, non-reproducibles are not subject to the law of value.

        The classical authors, such as Ricardo and Marx, developed their theories of rent to account for the price of non-reproducibles. Marx, for example, viewed rent as a deduction or extraction from the surplus labour produced by workers.

        But the law of value isn’t entirely negated. For example, high-rise buildings, and poster reproductions of fine art, are some obvious examples that indicate that non-reproducibles are continually subject to attempts to increase their supply by the reallocation of more labour time to their production.

        The marginal revolution subsequently took Ricardo’s theory of rent and generalised it to apply to all commodities (and deprecated the vision of the classical gravitation of reproducible commodities). Yet merely stating that price is determined by supply and demand is vacuous as a theory of value (as the classical authors understood).

        I think the classical answer is OK, as far as it goes. But I also think more can be said …

        Best wishes,
        -Ian.

        Like

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