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Reconstituted Socialist Party of Great Britain (1991) Socialist Education Series - Understanding Capitalism.

Understanding Marxs Labour Theory of Value.

Marx developed three interrelated theories to understand and explain capitalism; a political theory of class struggle which is explicitly stated in THE COMMUNIST MANIFESTO, a materialist conception of history (see Preface to A CONTRIBUTION TO A CRITIQUE OF POLITICAL ECONOMY) and a Labour Theory of Value developed in its final form in the three volumes of CAPITAL and TTHEORIES OF SURPLUS VALUE.

For those coming to Marx for the first time, the Labour Theory of Value often proves to be the most difficult of the three. To ease the difficulty it is useful to place Marxs Labour Theory of Value in the context of previous economists like William Petty (Political Arithmetic, 1691 and ECONOMIC WRITINGS, Kelly 1967), Adam Smith (AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS, 1776) and David Ricardo (THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION 1817).

To help the reader Marx sketched out historical notes on the analysis of commodities beginning with William Petty and ending with Ricardo and the utopian Socialists in his three volumes of THEORIES OF SURPLUS VALUE.

It should be remembered that early theories of value grew out of the class struggle between Feudalism and Capitalism. Ideas and beliefs are closely linked to struggles within a ruling class and between a ruling class and other classes.

There was a view in the 17th century that stated that only gold and silver had value. This mercantilist fallacy was rejected by the Classical Economists whose primitive theory of value set out to answer whether labour was the source of value and what determined the value of a unit of labour. These questions have been analysed in a very readable book A HISTORY OF ECONOMIC THOUGHT (Pluto 1989) by II Rubin particularly his commentary on Smith and Ricardos theory of value in parts 3 and 4).

Marx noted that the Theory of Value which had been developed by the Classical Economists contained many defects which needed to be resolved. Ricardo had given classical political economy its final shape and it was to Ricardos theory of value that critics, like J. B. Say, directed their fire. Although Ricardo and Say supported capitalism, Ricardo at least set out to understand commodity production and exchange for profit whereas Say was a mere apologist.

In his A CONTRIBUTION TO A CRITIQUE OF POLITICAL ECONOMY (Lawrence and Wishart 1971) Marx turned his attention to the Theory of Value as it had come down to him in the section, Historical Notes on the Analysis of Commodities (pp 52-63). The section is as important as the Preface which precedes it. In eleven pages he dissects the theoretical framework of the Classical School as formulated by Petty, Smith and Ricardo and highlights four serious theoretical shortcomings seized upon by critics of Ricardo and offers solutions to each, all of which would be later developed in the three volumes of CAPITAL.

The first objection against Ricardo was the belief that Labour itself has exchange value and varied types of labour have different exchange values. However, if you make exchange-value the measure of exchange value it creates a vicious circle for the exchange-value used as a measure requires in turn a measure (p. 61). The objection can be stated in the following way: given labour-time as the intrinsic measure of value, how are wages to be determined on this basis (p.62).

Marxs theory of wage-labour provided the answer.

In his theory of wage-labour Marx showed that Labour is an activity not a commodity. It is Labour-power which is the commodity the worker sells to the capitalist in exchange for a wage or a salary. Marx dismissed the Price of labour as being as irrational as a yellow logarithm. The value of a commodity depends on the quantity, not on the value, of labour embodied in the commodity. Ricardo was wrong in supposing that the wage is the value of labour.

The second objection against Ricardo was the view that if the exchange-value of a commodity equals the labour-time contained in it, then the exchange value of a working day is equal to the commodity it produces, or, in other words, wages must be equal to the product of labour. However, the opposite is true. So how does commodity production on the basis of exchange-value created by labour-time lead to the result that the exchange-value of labour is less than the exchange-value of the commodity produced.

Marx answered this problem in his analysis of capital.

Marx showed labour power is a commodity. It follows that the value of the workers capacity to work equals the quantity of labour required to produce the value of the commodities a worker and his family needs to produce and reproduce themselves. The difference between what the worker is paid as a wage or salary and the value of the commodity is surplus value. Marxs discovery of surplus value led on to relative and absolute surplus value and capital accumulation; that is, capital in motion driven on by the class struggle.

Marx distinguished the different functions of the means of production and labour power in the creation of surplus value. In the production process the means of production are constant capital because they preserve and transfer value that was originally created by labour in its journey from raw material to finished commodity. Labour power is variable capital because it is the element in the production process that accounts for the creation of surplus value. The capitalist can vary labour time, the intensity of work and therefore the extraction of surplus value from the working class. In a letter to Engels, Marx stated Constant capital is that part of capital which consists of raw material and machinery. Variable capital that part which is exchanged for labour (SELECTED CORRESPONDENCE, July 6, 1863 Marx-Engels, Moscow page 133).

The third objection against Ricardo was the theory that the law of supply and demand forces the market-price of commodities to fall or rise above their exchange-value. This allowed critics of Ricardos theory of value, like J. B. Say, to state that the value of commodities is determined not by the labour-time contained within them, but by the relation of supply and demand. Marx thought this was a strange conclusion. He said that it begs the question how on the basis-of exchange value a market price differing from this exchange value comes into being (p.62).

Marx solved this objection by his theory of competition.

Generally, if profits in certain branches of industry are too high, capital is attracted to that industry, production is increased, prices fall, and profits follow. If profits are too low, capital flows out from that industry, production is decreased, prices rise, profits follow (see CAPITAL VOLUME III, Chapter IX Formation of a General Rate of Profit (Average Rate of Profit) and transformation of the Values of Commodities into Prices of Production and Chapter X Equalisation of the Rate of Profit). This is how an average rate of profit is formed with the consequence that the price of commodities conform to the quantity of social labour required to produce them. The average rate of profit ensures that each capital receives its equal share of the total surplus value produced by the social capital in all spheres of production

The Fourth and last objection against Ricardo was this: if exchange-value is the labour-time contained in the commodity why and how do commodities which have no labour possess exchange value, for instance land.

This objection was solved by Marxs theory of rent.

Marx looked at two forms of ground rent; differential rent on all but the least productive land and absolute rent on all land. Ground rent is part of surplus value in agriculture and other land-using activities. His analysis is set out in Part 6, Transformation of surplus-profit into ground rent in the third book of Capital.

Marx clearly is not a minor-Ricardian for, in answering these four shortcomings in the work of Ricardo, he established the scientific grounding for a Labour Theory of Value and a scientific understanding of capitalism. Marxs own Labour Theory of Value showed that the exchange values of commodities are set by the relative amounts of necessary abstract labour incorporated in their production. Marx wrote; the value of a commodity, therefore, varies directly as the quantity, and inversely as the productiveness, of the labour incorporated into it (CAPITAL, page.48, Moscow edition).

There are, then, two parts of the labour theory of value that need to be understood to avoid any misconceptions. First, labour means necessary labour, i.e. the quantity of labour corresponding to current standards of productivity. The extra time taken by workers who are either inefficient or lazy is not productive in terms of exchange value. Second, skilled labour is more productive than unskilled labour as can be seen by a proficient bricklayer laying bricks compared to an apprentice.

These two points lead on to Marxs discussion of the difference between value and exchange value. A commodity has a use-value and it also has value which is expressed in the market as exchange-value.

At the beginning of CAPITAL, Marx stated that a commodity, in common parlance, had a use-value and an exchange value. But later on he qualified this statement:

the value of a commodity obtains independent and definite expression, by taking the form of exchange value. When, at the beginning of the chapter, we said, in common parlance, that a commodity is both a use-value and an exchange value, we were, accurately speaking, wrong. A commodity is a use-value or object of utility, and a value. It manifests itself as this two-fold thing that it is, as soon as its value assumes an independent form viz., the form of exchange value. It never assumes this form when isolated, but only when placed in a value or exchange relation with another commodity of a different kind. When once we know this, such a mode of expression does no harm; it simply serves as an abbreviation (CAPITAL VOLUME 1, Penguin, Ch.1, p.60).

Marx went on to show that exchange values are determined by values, not that they are proportional to values. Commodities have use value and value. Value can be considered qualitively and quantively. The magnitude of value is measured in units of socially necessary abstract labour time. The form value takes in circulation is exchange value. Exchange value can be measured in terms of a universal equivalent, money. The money form of exchange value is the price of the commodity. And exchange value is determined by the magnitude of value.

Finally there is Marxs most important contribution to understanding capitalism; surplus value. Surplus value is the difference between the exchange value of labour power and the use value of labour; it is the value added by the worker as the use-value of the workers mental and physical ability to work is expended with raw resources and the means of production. Marx defined surplus value as follows: M= money capital advanced, C + the commodity produced and M the increased money capital realised after sale. He wrote:

The exact form of this process is therefore M-C-M where M=M+?M=the original sum advanced plus an increment. This increment or excess over the original value I call surplus value. The value originally advanced, therefore, not only remains intact while in circulation, but adds to itself a surplus value or expands itself. It is this movement that converts it into capital (CAPITAL VOL. 1 p. 71).

A close study of these terms, either by reading WAGES, PRICE AND PROFIT or CAPITAL allows the reader to understand how capitalism takes shape as an exploitive class system. The language in which Marxs critique of political economy might at first appear to be different to what we are used to today but it is not difficult. Marx did not believe it was beyond workers thinking for themselves to master his writings.

The Labour Theory of Value is central in carrying out a critique of political economy and to showing how and why the working class are exploited in the labour process. More so than the materialist conception of history and the political concept of the class struggle; defenders of capitalism have gone out of their way to try to disprove the labour theory of value or to construct an apologetic economics which by-passes the labour theory of value altogether. The nearest comparison to a science like Marxism being suppressed by an apologetic ideology is the creationists construction on a non-Darwinian evolution based on religious fundamentalism.

In answering these four objections to Ricardos defective theory of value, Marx demonstrated the shallow and apologetic nature of Ricardos critics personified today in professors of economics and City scribblers. He did so as a socialist revolutionary, demonstrating that the capitalist class can never leave the working class alone and capitalism can never be made to work in the interest of an exploited working class.

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