Economics: the Marginalist Fallacy

What is ‘value’ (economically speaking)? It is a good question and one that has often generated controversy. Classical economists like Adam Smith maintained that a commodity’s value depended on how much labour went into making it. This argument was taken up and refined by Marx. Then, in the late nineteenth century, partly in response to Marx’s own labour theory of value and the perceived threat it posed by exposing capitalism’s exploitative character, a new approach emerged. The ‘Marginalist Revolution’ in economics ushered in the idea of marginal utility – the satisfaction you get from consuming an additional unit of a good which declines with each additional unit consumed along with the price you are willing to pay. As the Austrian economist Ludwig von Mises put it: ‘It is ultimately always the subjective value judgments of individuals that determine the formation of prices’ (Human Action, 1940)

However, Von Mises’ explanation won’t wash. The ‘subjective value judgement’ a hungry beggar makes about a three-course meal contributes nothing to its price while they lack the money to afford it but there is, additionally, an obvious epistemological flaw in Mises’ thinking. ‘Subjective value judgements’ are something only individuals can make – not society – but prices are the emergent outcome of millions of individuals interacting, each of whom are external (objective) to everyone else. Furthermore, as social phenomena, prices clearly influence our valuation of a commodity by making us more – or less – inclined to buy it. So the subjective theory of value is based on circular reasoning. Prices are supposed to be determined by subjective valuations which, in turn, are determined by price.

Does this mean that subjective valuation – the utility or ‘use value’ of a good – has no role to play in price formation? Of course not. As Marx himself noted ‘nothing can have value, without being an object of utility’ (Capital, Vol. 1, Ch. 1). However, while the subjectivists conflate ‘use value’ with ‘exchange value’ he insisted they be distinguished. Use value could not account for exchange value even though it was a precondition of market exchange. Fundamentally, only labour could provide a sound explanation of value under capitalism.

Why? Drawing on Aristotle’s observation that ‘exchange cannot take place without equality, and equality not without commensurability’, Marx reasoned that this ruled out utility as the basis on which commodities exchanged. This was because the utilities of chalk and cheese (or anything else) are essentially incommensurable. Commodities can only exchange on the basis of something they have in common.

What jackets and pairs of shoes have in common is the fact that they are both products of human labour. Exchanging one for the other presupposes each took roughly the same amount of labour to produce. After all, no one would exchange something worth more for something worth less.

Equivalence is assured by adjusting the ratios in which commodities exchange. So if our jacket takes more labour to produce than a pair of shoes this may mean exchanging it for, say, three pairs of shoes to ensure equivalence. Of course, today we don’t normally exchange jackets for shoes – barter. Instead, we use money as a universal equivalent with the ‘exchange value’ of a good being expressed in price.

The relationship between price and value in Marxian theory often gives rise to misunderstandings. Largely, this is because critics fail to grasp Marx’s method. As Michael Harrington notes:

Therefore the reader must be warned that the opening pages of Das Kapital – or, for that matter, the entire first volume – contain conscious simplifications. Marx, like everyone else, actually began with the “chaotic whole” of immediate experience, but in his masterpiece he follows a logical rather than an experiential order. So in understanding any part of the Marxian analysis one must carefully ask: Under what simplifying assumptions is it subsumed’ (Socialism, 1972).

As Marx’s argument unfolds, one ‘conscious simplification’ after another disappears. The purpose of this procedure is to arrive at a progressively closer approximation of capitalist reality. Hence the initial hypothesis that commodities sell at their values gives way to a new hypothesis that commodities sell, not literally at, but around, their value and that their price is influenced by other factors apart from value – such as the interplay of supply and demand.

That does not invalidate the theory, however. Though there is a constant disequilibrium in capitalism, there is also a constant tendency for supply and demand to adjust to each other via the price mechanism. In the long run, argues Marx:

If supply equals demand, they cease to act, and for this very reason commodities are sold at their market-values. Whenever two forces operate equally in opposite directions, they balance one another, exert no outside influence, and any phenomena taking place in these circumstances must be explained by causes other than the effect of these two forces’ (Capital, Vol. 3. Ch. 10).

Thus, after balancing out supply and demand we have still to explain why, say, a Berlingo van consistently costs so much more than a Raleigh bicycle. It is at this deep structural level that the law of value exerts a powerful gravitational pull on prices. This is buttressed by the fact that prices cannot fall below a business’s costs of production for any length of time which has the effect of keeping them firmly within the orbit of value.

One should bear in mind also that Marx’s theory does not equate ‘value’ with the actual amount of labour it took to produce a good – ‘concrete labour’. If that were the case there would never be any incentive to introduce labour-displacing technology since this would mean less value being produced. Rather the metric of value is ‘abstract labour’ – the socially necessary labour time it takes to produce a good, from start to finish, under average industry-wide conditions.

Socially necessary labour-time is not something you can measure with a stop watch – like concrete labour. Moreover, it can only express itself through market exchange. As Marx explained in the same work:

Social labour-time exists in these commodities in a latent state, so to speak, and becomes evident only in the course of their exchange. Universal social labour is consequently not a ready-made prerequisite but an emerging result’.

This means that the value of a product can change even after it has been produced as a result of ongoing technological and other changes.


Leave a Reply