A category mistake in the classical labour theory of value

No one likes being wrong. But being shown to be wrong, especially in science, is actually a gift to be welcomed, however hard that may be psychologically. Recognising and acknowledging error is a first and necessary step to a greater understanding of reality.

There is something wrong with the classical labour theory of value, including Marx’s version of it.

Some Marxists accept this proposition, others do not. But there is nothing to fear. Because identifying the wrongness immediately leads to a better labour theory of value.

So what is wrong with the classical labour theory of value?

The earliest critics of the classical labour theory of value were the classical author themselves. For example, both Ricardo and Marx theoretically struggled with different manifestations of the same underlying problem in their theories of value. Ricardo’s struggle became known as the problem of an invariable measure of value, and Marx’s struggle became known as the transformation problem. Sadly, most discussions of the transformation problem completely miss the indissoluble link with Ricardo’s problem, and therefore fail to fully encompass and express the entire problematic.

The problem of measuring economic value

Consider a tree A that is twice the height of a tree B. At a later date tree A is three times the height of tree B. Assume we only know the relative change in heights. Does this change indicate that tree A has increased in size, tree B has decreased in size, or some combination of these causes? To answer this question we need an absolute measure of height that is invariable over time.

The metre is such an invariable standard. We measure the absolute height of tree A and B in metres, both before and after the change. Then we can unambiguously determine the cause of the variation in relative heights.

The definition and adoption of the metre by the French state after the revolution in 1793 was accompanied by much theoretical debate and reflection. Ricardo, a contemporary of these events, recognised that an objective theory of economic value requires an analogous invariable standard of measurement.

Why? Because market prices—whether stated in terms of exchange ratios between commodities or in terms of a unit of account—cannot function as a standard because prices merely indicate relative values:

If for example a piece of cloth is now the value of 2 ounces of gold and was formerly the value of four I cannot positively say that the cloth is only half as valuable as before, because it is possible that the gold may be twice as valuable as before (Ricardo 2005, 289).

The cause of an altered exchange ratio might be due to an alteration in the absolute value of the standard itself. So picking a market price to measure absolute value is analogous to picking the height of a specific tree to function as an invariable standard of length. Between measurements the chosen tree might grow (or get cut down in size).

Perhaps we should not try to find a standard? This is not an option because, lacking an invariable standard, the theory of value collapses into subjectivity, leaving “every one to chuse his own measure of value” (Ricardo 2005, p.370). In consequence, public statements about objective value, such as ‘commodity A is now less valuable than one year ago’, would, strictly speaking, be nonsense.

Ricardo, therefore, wished to identify an Archimedean standpoint, outside the marketplace and system of relative prices, from which to measure the objective value of commodities. Although he knew of “no other criterion of a thing being dear or cheap but by the sacrifices of labour made to obtain it” (Ricardo 2005, p.397) his own arguments demonstrated that the profit component of natural prices appears to be unrelated to labour cost. He couldn’t link the price system to physical labour costs. So although “the great cause of the variation of [the value of] commodities is the greater or less quantity of labour that may be necessary to produce them” there is another “less powerful cause of their variation” (Ricardo, 2005, 404), which Ricardo suggested was “a just compensation for the time that profits were withheld” (Ricardo, [1817] 1996).

In consequence, natural prices (the measurand) vary independently of real costs of production defined in terms of labour costs (the candidate measure of value). A measure that fails to vary with its measurand is not fit for purpose.

Ricardo grappled with this problem, and wrote a remarkable unfinished essay on the topic in the last weeks of his life, which finally concluded that “it must then be confessed that there is no such thing in nature as a perfect measure of value” (Ricardo, 2005, 404). Ricardo retreated to proposing approximate, and therefore, imperfect measures of value, which minimise the discrepancies between the measure and measurand.

But a ruler that, on theoretical grounds alone, fails to invariably measure length is not merely an imperfect empirical tool – it implies that one’s theory of length is flawed.

Marx’s proposed solution

Marx, who inherited Ricardo’s problem, proposed a creative and novel resolution. He argued that natural prices are transformed, or distorted, labour costs due to capitalist property relations. Prices then appear to vary independently of labour costs because the transformation obscures the measurement relation. This explained Ricardo’s difficulties.

Marx argued, however, that the transformation is conservative and therefore the measurement relation continues to hold between macroeconomic aggregates (e.g., total profits and total surplus labour etc). The conservation condition is essential to Marx’s solution since it restores an invariable measure, and therefore avoids the conclusion that, on theoretical grounds alone, the labour theory of value is flawed. According to Marx, therefore, the “form of value” (natural prices) only appears to contradict the “substance of value” (labour costs) in virtue of the institutional peculiarities of capitalist production.

Marx warned his readers, however, that his solution contained the “possibility of an error” (Marx, [1894] 1971, p. 165) if a particular assumption of his argument was relaxed (namely, his assumption that input costs are proportional to labour costs).

Marx’s critics promptly demonstrated that possibility and argued that, in general, Marx’s transformation cannot be conservative and hence fails to establish the desired measurement relation.

The quantitative incommensurability between labour-values and natural prices has knock-ons for other parts of Marx’s theory, such as his theory of exploitation, which claims that surplus-value, e.g. profits and interest income, is a money representation of the surplus-labour that workers supply to capitalists without payment. So, politically, there’s a lot at stake in this seemingly obscure debate in the theory of value.

Both Ricardo and Marx’s problems directly undermine the idea that labour costs can in principle explain economic value. And they are essentially the same problem manifesting in different guises.

Digging deeper: the cause of the problem

My paper, “A category mistake in the classical labour theory of value”, tackles Ricardo and Marx’s problematic in the context of a formal model of capitalist production. The formality is austere but has the advantage that it imparts precise semantics to some of the key concepts of the labour theory of value. This helps pinpoint a certain kind of logical error in the classical theory.

Philosophers, such as Gilbert Ryle (1984 [1949]) and Ludwig Wittgenstein (1953), argue that the underlying cause of a long-lived and insoluble problem is often a hidden conceptual confusion or mistake. The problem is insoluble because the conceptual framework in which the problem is stated is itself faulty. Empirical study, or experimental activity, cannot resolve such problems. Rather, the problem must be deflated or dissolved by applying conceptual analysis.

For instance, Ryle introduced the term “category-mistake” (Ryle 1984[1949], ch.1) to denote the conceptual error of expecting some concept or thing to possess properties it cannot have. For example, John Doe may be a relative, friend, enemy or stranger to Richard Roe; but he cannot be any of these things to the “Average Taxpayer”. So if “John Doe continues to think of the Average Taxpayer as a fellow-citizen, he will tend to think of him as an elusive an insubstantial man, a ghost who is everywhere yet nowhere” (Ryle 1984 [1949], p.18).

In the paper, I argue that the contradictions of the classical labour theory of value derive from a “theoretically interesting category-mistake” (Ryle 1984 [1949], p.19), specifically the mistake of supposing that classical labour-values, which measure strictly technical costs of production, are of the same logical type as natural prices, which measure social costs of production, and in consequence labour-values and prices, under appropriate equilibrium conditions, are mutually consistent. Since this supposition is mistaken, Ricardo’s search for an invariable measure of value and Marx’s search for a conservative transformation attempt to discover a commensurate relationship between concepts defined by incommensurate cost accounting conventions. They therefore seek an impossible “elusive and insubstantial man” or “ghost”.

Once the category mistake has been identified we can resolve the classical problems by “giving prominence to distinctions which our ordinary forms of language make us easily overlook” (Wittgenstein 1953, § 132). Such distinctions then solve, or more accurately, dissolve the problems.

Dissolving the problem

The key step is to notice that we can and should define a different measure of labour cost – total labour costs – that generalises the classical measure to include real costs induced by the institutional conditions of production. We then immediately possess a more general labour theory of value that includes both total and classical (i.e., technical) measures of labour cost. The general theory then applies the different measures in distinct, but complementary, theoretical roles, and in consequence separates issues normally conflated in the classical theories.

I note that classical labour costs, and total labour costs, happen to be identical in the special case of what Engels called “simple commodity production” (i.e., production in the absence of specifically capitalist property relations) and I note this also happens to be the case where the classical labour theory of value ‘works’. The reason the classical theory ‘works’, in this special case, is that total nominal costs (i.e., the natural price system) are compared with total labour costs: apples are compared with apples. The classical theory then breaks down, once we introduce capitalist property relations, because the classical definition of labour cost no longer satisfies the definition of a total labour cost. The classical theory, therefore, commits a category-mistake when it compares total nominal costs with partial labour costs – and then expects a commensurate relationship to obtain between them: apples are compared with oranges.

The intellectual history and development of the classical labour theory of value is best understood in terms of an unidentified and recurring category-mistake in the sense of Ryle. Category-mistakes are precisely the kind of hidden conceptual errors that cause longstanding and insoluble theoretical difficulties, which explains why the problems of the classical theory have persisted for so long without resolution, despite a voluminous and longstanding literature on the issues.

The classical authors attempt to explain the structure of total costs of production – which include both technical costs due to the material conditions of production (e.g., the cost of physical capital and labour inputs) and additional social costs due to the institutional conditions of production (e.g., the cost of money-capital, state imposed taxes, etc.) – in terms of the structure of technical costs of production alone, which explicitly ignore institutional conditions. This conceptual error is the underlying cause of the almost two hundred year history of the “value controversy”.

In the paper I explain why the more general theory has both an invariable measure of value and lacks a transformation problem. The main technical result is the theorem that natural prices are proportional to physical real costs of production measured in labour time. Hence, prices and labour costs, in appropriate equilibrium conditions, are “two sides of the same coin”. The measurement relation, missing from the classical theory, is therefore established, which implies that labour costs can in principle explain economic value. The more general theory therefore removes the primary theoretical obstacle that has hindered the development of the classical theory of value since its inception.

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Marx, K., [1894] 1971. Capital. Vol. 3. Progress Publishers, Moscow.

Ricardo, D., [1817] 1996. Principles of Political Economy and Taxation. Prometheus Books, New York.

Ricardo, D., 2005. Absolute value and exchangeable value. In: Sraffa, P., Dobb, M. H. (Eds.), David Ricardo, the Works and Correspondence, Vol. 4 (Pamphlets and Papers 1815–1823). Liberty Fund, Indianapolis.

Ryle, G., [1949] 1984. The Concept of Mind. University of Chicago Press, Chicago.

Wittgenstein, L., 1953. Philosophical Investigations. Blackwell, Oxford.

In case a reader might think that citing ordinary language philosophers may be evidence of bourgeois deviation I suggest to chillax! 😉