This post resulted from a thread on the p2presearch mailing list. The discussion started when a remark by Joseph Jackson’s “forced” me to clear up some frequent misunderstandings about the meaning of the labor theory of value, as formulated by Karl Marx. The thread then turned to Marx’ criticism of capitalism and I tried to explain why (according to Marx) the root cause of raising inequality and other detrimental effects of capitalism isn’t “unequal exchange,” but rather exchange per se, regardless of whether or not it’s equal.
Quotes from Joseph Jackson are indented and printed in italics:
Economics has no coherent Theory of Value and we must solve this problem if we are to establish the field of Abundance. The Labor Theory of Value has advantages in that it is objective and normative—it states that price should tend toward the cost of production; it also allows us to determine what constitutes equitable exchange.
Actually, the Labor Theory of Value, as first formulated by Adam Smith and Ricardo and later refined by Marx, is not normative, but descriptive: it describes the basics of price formation in capitalism. Of course, the value of goods is only their average price—actual prices will usually be somewhat below or above the average because of fluctuations in supply and demand etc.
Also, what Smith and Ricardo didn’t know but Marx found out (described in vol. 3 of Capital) is that there is a further systematic distortion between value and average price that assures that the average rate of profit will be about the same in all sectors (assuming free competition). However, that’s only a modification (which follows from the fact that the ratio between present, living labor—performed by workers—, and past labor—embodied in machines and such—differs from sector to sector) of the price building mechanism, which is still basically derived from the labor required to produce different goods.
Unfortunately, the LTV does not acknowledge that the amount of labor embodied in products is constantly diminishing with the advance of automation and improvements in capital.
On the contrary, the main reason that drives capitalistic competition is that you (as a capitalist/company) can outperform your competitors by reducing the value of your products, which allows you to sell at a lower price (thus enlarging your market share) and still make a higher (or equally high) profit per product. The LTV explains why capitalism relies so strongly on automation and technical innovations that reduce the necessary labor.
This seems to be a useful, very detailed discussion of the LTV: dreamscape.com.
[Joseph Jackson replied:] I agree with most of the LTV and by “normative” I meant that the LTV provides an objective notion of “fair price” (if price exceeds the average cost of production it is a sign that some barrier prevents competitors from entering).
That’s true, but if that’s your ideal, it’s not much different from what things are now, since in most areas, the barriers of entry are sufficiently weak to make the actual prices quite similar to the “fair price,” as you call it.
The problem with capitalism isn’t that prices are “unfair”—most prices aren’t. There are other problems. First, production only takes place if there is profit. The goal of all capitalist production is to make profit, i.e. to turn money into more money. So, in order to get the things you need, you have to convince some capitalist that they need you, i.e. that employing you allows them to make more profit than they would make otherwise. But capitalists only need a limited number of personnel, much less than there are people on Earth, so that’s the big hurdle which most people fail to overcome (when speaking on a global scale).
A second problem is that, as a worker, you don’t sell the results of your labor, you sell your labor power (workers, or would-be workers, are people who don’t have anything to sell than their labor power—most people haven’t). The deal by selling your labor power is: you get paid the value of your labor power (NOT the value of your labor—labor doesn’t have value, it produces values), and the value of your labor power is what you need in order to survive (according to your local community standard of living). In return, you have to give your full labor power (according to the local standard for the length of the work day/week, say, 8 hours a day/40 hours a week). If the production of the goods you need for your standard of living takes 20 hours a week, you still have to work 40 hours—the other 20 hours are the “surplus”—they go to the capitalist, become their profit and are, in fact, the only reason why they employed you in the first place.
So the problem isn’t unfair prices, it’s the fact that people have to sell their labor power, because they don’t have anything else to sell. And this situation will necessarily arise in a market system (even in a fictitious scenario where initially everybody had some means to production—inevitable, some people would go bankrupt and again have only their labor power to sell).
In contrast, after classical economics was abandoned economists have simply said that subjective preference rules supreme—price is whatever consumers are willing to pay. (nothing wrong whatsoever with charging anything I can for a bottle of water in a desert regardless of what it actually cost me to produce and transport that good). The only problem I have with LTV is making labor the most important “source” of value. To me, capitalism would be great if we actually had univeral ownership of capital. Pretty much everybody would love to receive income without laboring!
Capital doesn’t create value, only labor does. Money doesn’t turn itself into more money by itself (you could send a dollar to the moon and leave it there for 100 years to find out whether money can multiply by itself).
Rather, capital only allows you to get “income without laboring” because it gives you the means to employ other people’s work. It’s their surplus labor which pays your income.
I find the theory of Binary Economics interesting in this respect because it emphasizes the ever increasing power of technology to actually “do work.” If we instead emphasize the role of technology as primary it leads to new perspectives. What happens with the advent of true personal manufacturing? There is no more average price when everything is a custom order. Do we have one theory of value for standardized commodities and another for custom goods? I don’t have answers to any of this now, I’m just not sure the classical LTV can function for these situations.
LTV is only meant to work for situations where people trade their work, or the results of their work. If everybody had a personal manufacturing device catering for all her/his needs, trade would no longer be necessary, and value would no longer exist. That’s a rather fancy scenario, but there are other, more realistic scenarios that make value, and trading, superfluous. For example, when people employ commons-based peer production to jointly produce what they need, so they don’t have to trade and sell their labor power. I’ve written about that in my book, “From Exchange to Contributions”.