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An introduction to Marxian economics 1: the labour theory of value

The Labour Theory of Value is a theory in the science of political economy to explain how the working class are exploited under capitalism and how capitalist society works. This article also explains such phenomena as wages, prices, and profits.Why is the labour theory of value important?

Capitalism is the stage in the development of human society characterised by class monopoly of the means of production, with wage-labour and commodity-production. (Also see What is Capitalism? and Why there are two classes.)

The Labour Theory of Value is central to an understanding of the economics of capitalism because capitalism is commodity production par excellence, and the Labour Theory of Value basically explains what fixes the value of a commodity. At one time there were rival theories of value, but now academic economics tends to deny the need for such a theory. All you need, they say, is a theory of price. We shall see, however, that prices cannot be explained without recourse to the concept of value.

Some definitions

Wealth is anything useful produced by human labour from materials found in nature. In capitalist society, Marx said, wealth takes the form of an immense accumulation of commodities.

A commodity is an article of wealth produced for the purpose of being exchanged for other articles of wealth. Thus commodityproduction is an economic system where wealth is produced for sale, for the market. In its simple forms it exists only on the outskirts of non-commodity producing societies where wealth is produced directly for use, either by the producers for themselves or by a subject class for their masters. In the beginning commodities were bartered, but as commodity-production developed one commodity came to assume a special role: it became the universal equivalent, for which all commodities could be exchanged and vice versa; it became, in short, money. Here we have a problem for the science of political economy: what determines the proportions in which commodities exchange one for the other?

What all commodities have in common…

One conclusion we can draw from the fact that commodities consistently exchange for one another in fixed ratios is that all commodities must share some common characteristic to a greater or lesser degree. What? As articles of wealth all commodities share two characteristics: they are useful and they are products of human labour. Which of these could provide a standard? Some have suggested usefulness (or utility), but the trouble here is that the same article can be useful to a greater or lesser degree to a different person. Usefulness is a personal matter: a personal relation between the commodity and its consumer. So utility would be a changing; subjective standard and could not explain why commodities consistently exchange at stable ratios. We are thus left with commodities as products of human labour.

Unlike usefulness the amount of labour embodied in a commodity can be objectively measured : by how long it took to make it, for instance. However, all wealth, not just commodities, shares this characteristic of being products of human labour. What we want to know is how do commodities differ from other forms of wealth. Wealth, we know, only takes the form of commodities under certain social conditions, specifically when it is produced for sale. Similarly with labour (used-up human energy): under the same social conditions it becomes "value". Thus value is not something you can find in the physical or chemical properties of a commodity, for it is a social property, a social relation. However, as value only expresses itself in exchange, as exchangevalue, this social relation appears as a relation between things. This is what is behind Marx's writing about the "fetishism of commodities". Price is the monetary expression of value.

Labour, says the Labour Theory of Value, is the basis of value. But how does labour determine the value of a commodity? The value of a commodity, said Marx, is determined by the amount of socially necessary labour contained in it or, what is the same thing, by the amount of socially necessary labour-time spent in producing it from start to finish. Note that the Labour Theory of Value does not say that the value of a commodity is determined by the actual amount of labour contained in it. That would mean that an inefficient worker would create more value than an efficient worker. By socially necessary is meant the amount needed to produce, and reproduce, a commodity under average working conditions, e.g. average productivity, average intensity of labour. For instance, take the coal industry, assuming that the average output is about 43cwts. per man shift and there are approximately 230 pits in operation. In some of these output per shift will be above 43cwts. and in others below, but the value of the coal is not fixed by the labour of the workers at pits of either sort. Its value is the social average brought out by the market. This means of course that what is socially necessary is continually changing. The whole process of producing the commodity coal also includes the labour of workers outside the pits, who are producing materials necessary for coal mining.

Under capitalism nearly everything is a commodity, or takes the form of a commodity, is bought and sold. This qualification is necessary to counter the argument often advanced against the Labour Theory of Value that some things that are bought and sold either are not products of labour or sell at prices quite out of proportion to the amount of labour embodied in them, e.g. land and objects of art. Land, under capitalism, has a price which, in its pure form, is merely the capitalisation of its rent. Land has no value as it is not the product of human labour. Paintings and antiques are indeed products of human labour but are not really commodities because they cannot be reproduced; the concept of "socially necessary labour" therefore has no meaning with reference to such articles. One silly objection is: why is a lump of gold from a meteorite valuable, when there is no labour embodied in it? Actually, this is a confirmation of the Labour Theory of Value since its value is the same as that of gold produced under normal conditions. If gold were to regularly fall from the skies then its value would drop to what is needed to collect it.

Labour power as a commodity

Another thing that under capitalism takes the form of a commodity is labour-power (the ability of human beings to work, human energy). Indeed this fact is the basis of capitalism since it presupposes the separation of the producers from the ownership and control of the means and instruments for producing wealth. But there is one very important difference between labour-power and other commodities. labour-power is embodied in human beings who can think, act and struggle to get the best price for what they are selling. Otherwise its value is fixed in the same way as that of other commodities: by the amount of socially necessary labour spent on creating it and recreating it. The labour spent on creating a man's labour power is that spent in producing the food, clothing, shelter and the other things needed to keep him in a fit state to work. Thus the value of an unskilled man's labour-power is equal to about enough to keep him and his family alive and working. Skilled men get more because it costs more labour to produce and maintain their skills. When the worker finds an employer he is paid a wage, which is the price he is paid for allowing the employer to use his labour power for, say, 8 hours. Wages, then, are a special kind of price; they are the monetary expression of the value of labour-power.

Unpaid labour

Labour-power has a peculiar characteristic. Because wealth can only be produced by human beings applying their mental and physical energies to materials found in nature and because labour (the expending of labour-power) is the basis of value, labour-power has the property of being able to produce and create new value. Let us assume that our worker's labour-power is worth 4 hours labour a day. After he has worked 4 hours does he stop? Of course not. Under his contract he must work for another 4. Since he is working in his employers' place, with his employers' tools, machinery and raw materials anything he produces belongs to his employer. Thus, in this case, the employer gets 4 hours free labour. This is the source of his profit, which he shares with his creditors as interest and with his landlord as (ground) rent (and with the State as taxes). So the source of all Rent, Interest and Profit is the unpaid labour of the working class.

Let us look into this process of exploitation a little closer. The first point to notice is that it takes place at the point of production. Workers are exploited at work. When a worker receives his wage (or salary, another name for the price of labour power) he has already been exploited. He cannot therefore be exploited again by moneylenders or shopkeepers or landlords or taxmen (though of course they can rob and cheat him, and he them, but that's a different matter). So-called secondary exploitation is a myth.

What is capital?

For Marx capital, like value, is not a thing but a social relation; indeed it is value or rather a collection of values. Only under certain social conditions do the means of production become capital, specifically, when they are used to exploit wage-labour for surplus value. Thus we find Marx describing the process of capital accumulation as the "self-expansion of value". Capital, in its pure form, is money-capital. A capitalist invests his capital, say, in producing cotton textiles. He must advance his capital to buy a factory, textile machinery, raw cotton, etc, and also to buy labour-power. His capital can be divided into categories. Fixed capital is the buildings and machinery that are not consumed entirely in the production process; circulating capital is the raw materials and labour power that are. More significant from the socialist point of view is the division into constant and variable capital. Constant capital is that invested in the buildings, machinery and raw materials. In the process of production their value, or a part of their value, is only transferred to the finished product. Variable capital is that invested in labour-power and is so called because this is the part of capital that expands. Labour power not only transfers its own value and is instrumental in transferring that of the constant capital, but it also creates new value. We see then, that machines do not create value. All they do, and this only when set in motion by human beings, is transfer part of their own value (itself of course a past creation of the work of human beings) to the finished product. Even capitalist accountants recognise this: the part of the cost of a commodity they put down to depreciation is to cover the value transferred from the buildings and machinery.

The rate of exploitation

We saw earlier that part of the working day is spent in producing the equivalent of the labour-power used up, and the rest in producing surplus value for the capitalist. The first part of the working day Marx called necessary labour (not to be confused with "socially necessary labour") and the second surplus labour. We are speaking here in terms of parts of the day. This is not to be taken literally otherwise you make the mistake of of the economist in Marx's day who opposed the Ten Hour Bill to limit the working day on the grounds that all the profit was made in the last hour! In fact, surplus value is produced each moment the worker is at work.

Marx called the ratio of surplus labour to necessary labour (which is the same as the ratio of surplus value to variable capital) the rate of surplus value, or rate of exploitation (s/v). It is obviously in the interest of the capitalist to increase the proportion of surplus labour to necessary labour. There are two ways in which this can be done. The first is by lengthening the working day itself. The extra surplus value so produced is called absolute surplus value. The other way to increase the ratio of surplus labour to necessary labour is to reduce the necessary labour. The crudest way to do this is to reduce the workers' standard of living by reducing wages, which of course the employer will always do if he can. But the same result, of reducing the proportion of necessary labour, will occur if productivity is increased so that, for example, the labour time necessary for the production of the articles the worker needs is reduced and their prices fall, with the consequent reduction of the value of labour-power without reducing the worker's standard of living. The extra surplus value so produced is called relative surplus value.

Defining the value of a commodity

How do the complications of capitalist production affect the value of a commodity? The value of each unit of cotton textiles turned out will be made up of the value of the raw materials, the value of the machinery transferred, the value of the labour power and the surplus value, or the commodity's value = c + v + s, where c is the part of the total constant capital (C) transferred to the product. The rate of profit is S/(C + V). The value of a commodity is fixed by the amount of socially necessary labour embodied in it from start to finish, not just in the final stage of its production. Thus it is inaccurate to say that agricultural workers produce food or that car workers produce cars. Production under capitalism is a social process in which all workers take part. An important corollary of this is: the capitalist class as a whole exploits the working class as a whole. The worker is not exploited just by his particular employer, but by the whole class of capitalists.

Why price does not always equal value

It may come as a surprise, after all that has been said about commodities exchanging in fixed proportions according to their values, to be told that under capitalism commodities do not sell at their values. But this is in fact the case. This is why it is important to understand that the Labour Theory of Value is not a mere theory of price. There are two simple reasons why price and value can differ: prices fluctuate with supply and demand, and with monopoly, a commodity will sell at above its value (or, with subsidies, below its value). The third reason is more complicated but must be grasped if you want to understand the observable workings of capitalism, e.g. what is behind the pricing policies of businesses. Those who decide on prices, don't know what the value is, and don't need to. What do they act or, then?

We saw that the capital advanced can be divided into constant and variable and that it is only the variable capital that increases to create the surplus value. The ratio C/V Marx called the organic composition of capital. Given the same rate of exploitation (s/v) in all industries, if all commodities sold at their value this would mean that the highest rates of profit should be made in the technically backward, labour-intensive industries. But is this so? Not at all; the tendency is rather for capital to get more or less the same rate of profit wherever it is invested.

How to reconcile a labour theory of value with the averaging of profits was a problem that baffled Adam Smith and Ricardo. But Marx solved it in the only way possible: by abandoning the assumption that all commodities sell at their values. Critics have called this the "great contradiction" in Marx's work, but it is nothing of the sort. As we have seen capitalist production and circulation is a social process: each individual capitalist does not exploit only his own employees but the whole capitalist class exploits the whole working class. Each capitalist employs so many workers who produce so much surplus value. Instead of going to the individual capitalist this surplus value goes, as it were, into a pool from which it is shared along with the rest of the surplus value amongst all the capitalists in accordance with how much capital they have invested. (This explains why, incidentally, a fully automated factory would still make a profit.) Consider the consequences of this on prices. Say s/v is 100 per cent and that there are three sectors with different organic compositions:

C V S value rate of profit A B C

With no averaging of profits B is the most profitable sector, but with an averaging we get:

C V S profit value price A 140 above value B 140 below value C 140 at value

Marx called this selling price, which is made up of cost plus average rate of profit, the price of production. This, in fact, is how businesses do operate and is regarded by academic economics (who, as Marx pointed out, merely take a businessman's view of economic events) as enough. But it is not. It is all very well talking airily about price being set at cost plus "normal profit". But what is normal profit? Something fixed by custom! This is only what it appears to be. Only the Labour Theory of Value, with its concept of value and surplus value, based on labour, can adequately explain why the "normal" rate of profit is, say, 10 per cent rather than 15 per cent.