Karl Marx on Value

Many conservative pundits love to attack Karl Marx without really engaging his work in any depth. This is unfortunate since Marx deserves high calibre critics—and once received telling critiques by Max Weber, Michel Foucault and others across the political spectrum. One of the most common reductive tropes is to characterize Marx as supporting some variant of the now discredited labour theory of value. Kevin D. Williamson is a representative example:

As an economist, Marx was basically a caveman, building his analytic framework atop a version of the labour theory of value that does not hold up very well to scrutiny. His related claims about “surplus value” and its inherently exploitative character reflect a primitive understanding of how prices and exchange actually work. Marx was far from innumerate, but he was at heart a moralist trying to work in a field that was quickly becoming dominated by mathematics.

Williamson’s essay is commendable for its measured tone and sustained analysis relative to some shriller counterparts. But he makes the all too common argument that Marx is simply claiming that labour is the source of value: that there is a one-to-one relationship between how much labour goes into a commodity, and how much it is worth. This misses out the dialectical and historical dimensions of Marx’s argument, which are crucial to understanding where Marxism breaks with classical political economy. We don’t necessarily buy into Marx’s theory of value: McManus has very significant reservations. But understanding it can help clarify the grounds of dissent and contribute to an overall understanding of Marx’s place in the history of economics and philosophy.

Labour in Classical Political Economy

Though the earth, and all inferior creatures, be common to all men, every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.—John Locke, Second Treatise of Civil Government (1690)

One of the bigger holes in the contemporary dismissal of Marx is that he was hardly the originator of the argument that labour is the source of value. That position had already been staked out by John Locke. For Locke, when one mixes labour with matter it creates an entitlement to the object manufactured. Through the long process of labouring, the world which was originally owned in common gradually became private property. In the beginning “all the world was America” in the sense of being undeveloped and unowned—ignoring, of course, the claims of the indigenous peoples whom Locke dismisses as “the wild Indian” who doesn’t make proper use of the land on which he resides. Marxism turned this conceit on its head and directed it against defenders of what later became known as the workman ideal, which held that there was some intrinsic connection between wealth and the amount of labour contributed by the thrifty and hard-working rich relative to the lazy or shiftless poor. Marx’s immanent critique is that if we take the Lockean workman ideal seriously, laborers actually contribute most of the labour but reap far less of the harvest.

Later political economists would take inspiration from Locke in developing more sophisticated arguments about value more generally. In The Wealth of Nations, for example, Adam Smith explicitly endorses the view that labour is the “real measure” of all exchange value:

The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.

Of course, Smith himself occasionally seems unconvinced of this totalizing claim. Indeed, for him while labour is the origin of value in primitive societies, capitalist economies—which contain more factors of production than labour—cannot be explained so simply. A far more unambiguous cheerleader was David Ricardo, who is now probably most revered for his pioneering analysis of comparative advantage in international trade, often marshalled as a reason to reject protectionism. Ricardo was even more assertive than Smith in his insistence that labour was the foundation of exchange value. In his Principles of Political Economy and Taxation, Ricardo claims that “the value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.” In other words, even the cost of production is insignificant next to the quantity of labour vested in it.

Locke, Smith and Ricardo were hardly revolutionaries—though Smith’s status as a triumphalist defender of unbridled capitalism warrants reconsideration. Like many theorists, they wanted an objective metric for determining the value of a commodity that didn’t turn on the subjective desires of consumers as reflected in the tos and fros of supply and demand. But, as they were writing, a new moral doctrine known as utilitarianism was gaining ground in the English-speaking world. As put forward by Jeremy Bentham, the value of a commodity lies not in its labour but in the utility or “use-value” a consumer would get for it relative to another commodity. Consequently, consumers are engaged in cost-benefit analyses of the use value of commodities compared to what they are willing to pay for them. This process plays a much larger role in determining the price at which goods are exchanged than labour. Marx attempted to split the difference between these competing theories in a distinctively dialectical manner.

Marx and the Dialectic of Value

At the beginning of Capital, Marx argues that all value can be divided into use-value and exchange value. The use value of a commodity is its “utility.” One of the ways in which commodities can be qualitatively distinguished is by determining their utility. For instance, water is qualitatively far more useful than diamonds because it keeps us alive. Yet water is extremely cheap and diamonds prohibitively expensive. Marx criticised utilitarian political economy for its inability to solve this paradox.

Marx neither unambiguously affirms that use value is more important than exchange value or vice versa or pronounces on whether the classical labour theory of value is correct. Instead, he shows that what we prioritize when trying to suss out value depends a lot on our a priori analytical framework. This is a key point since Marx, of course, has a dialectical framework and believes that it alone can explain why these contradictions emerge.

For Marx, the argument that labour is the source of value could only come to the fore once humankind had reached a high stage of development and the real basis of economic value had become explicit. Often, we remain blinded to these questions by the power of ideology and fetishism. This is presented in vivid detail early in Capital. Contra the utilitarians, Marx argues that the use value we ascribe to objects is often highly distorted by their exchange value. We treasure diamonds and are willing to pay more for them than for water not because they’re actually valuable, but because when we engage in such opulence we present ourselves as wealthy and successful. In other words, we want diamonds not in spite of but because they’re expensive, and we know that others whose opinion we value are aware that they are. We attribute to a piece of hardened carbon almost theological powers to elevate our status through mere proximity. Marx then enacts a dialectical turn and says that classical political economists like Smith and Ricardo were on the right track in recognizing that we need a deeper explanation for why we treat commodities like diamonds as having a greater use value when really we are just attracted to them for their high exchange value.

To Smith and Ricardo, the answer is that it takes very little labour to gather a lot of water, but a tremendous amount to produce even one marketable diamond. Marx contends that they could only have arrived at this insight in a capitalist epoch, when the scientific study of economics encouraged theorists to probe deeper into the value of things than their predecessors—unlike, for instance, the mercantilists who thought the wealth of nations was simply a measure of how much gold they had and were flabbergasted when excess mineral wealth brought about inflation and economic downtown.

But Marx then points out that if labour is simply taken crudely to be the source of value, then an unskilled worker who labours for a long time to produce an inferior product could claim that his commodity is more valuable than a skilled rival’s. Marx resolves this by arguing that the source of exchange value doesn’t lie simply in labour over time, but instead in the “socially necessary labour time” that is required for an average worker using the means of production to produce a commodity:

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units … The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.

Finally, Marx enacts a third dialectical transition and historicizes his own argument about socially necessary labour time. Both Smith and Ricardo believed that labour was the transhistorical basis of value. They relied to a large extent on structures culled from physics: just as for Newton a body “remains in its state” unless it is acted on by another body; for Smith, labour and value will be identical, barring the intervention of other factors of production. For Marx, however, things are more complicated. Ever since the advent of property-owing society, labour has served as the primary basis of value. But because pre-capitalist societies lacked the means to comprehensively unify diverse labour markets, the de facto equivocation between labour-time and value within them always remained localized and obscured. Take two workers performing the same task under completely different productive conditions, each generating value with her labour. The general recognition that labour-time is the basis of value can only be brought about once these workers have been assimilated into the same context—when they possess approximately equivalent skill sets and productive implements, and are exchanging goods on a market which is structurally and temporally connected. This process of unifying markets continues today: this is why when territories like China and Mexico opened up to US investment, and supplied a cheaper labour force, it caused the extensive loss of manufacturing jobs in the US. But the specific importance of capitalism here is that it was the first economic system to achieve the broad equalization of labour inputs as well as the temporal units that measure them and the first capable of acutely perceiving the relationship of labour-time to value.

The Tenuous Relationship of Value to Price

As regards the question of the relationship of labour-time to value, Marx turns Smith right-side up. Whereas, for Smith, labour-time and value are most obviously associated at the beginning of civilization, when other factors of production, such as land and capital, had not entered the equation, for Marx precisely the opposite is true: it is capitalism that makes it possible to recognize labour as the source of value. For Smith, non-labour inputs—including, crucially, technology—are capable of creating value. For Marx, by contrast, value appears in Capital (and in capitalism) as congealed labour. This has led to the frequent accusation that Marx’s theory of value as socially necessary labour is out of step with our era, in which automation and computation have played a decisive role in the creation of profit.

There are two problems with this critique. First, Marx never claims that, within capitalism, technology—and non-labour inputs more generally—are unnecessary to the creation of value. His argument is more subtle than that. In Marx’s view, the reason why machines are not the basis of value creation is simply because, once they have been invented, they tend to soon become widely available to the capitalists competing within a certain field. If McDonald’s and Burger King have access to the same basic technologies, neither of them can hope to make more than its competitor by using them. The same cannot be said of labour. Even if labour is equally available to all the capitalists in a given field, the nature of its deployment within capitalism requires that it be undervalued—that, in other words, workers receive less value than they create. While machinery and other non-labour inputs are thus a condition of the creation of value, they cannot be said to create it. Indeed, their function is not to create value, but to enable the exploitation of labour that is the real basis of value creation.

What if the machinery used by two capitalists were to diverge widely? This brings us to our second point: Marx concedes that under certain conditions machines are capable of generating profits beyond the industry standard. In Capital he explains that “a manufacturer who makes use of a new discovery before this has become general sells more cheaply than his competitors and yet still sells above the individual value of his commodity, valorising the specifically higher productivity of the labour he employs as surplus labour. He thus realizes a surplus profit.”

Marx stops short of saying that machines can directly create value. Value, after all, is a socially necessary quantity: the fact that one capitalist can make goods faster than another won’t suffice to alter the industry standard. But by acknowledging that—in cases where technological breakthroughs have not yet become widespread—firms can “valorise” the fact that they have raised the productivity of labour beyond normal market levels, he admits that profits can be affected by the implementation of extraordinary technologies. Nor is this only about the application of technology. For, as Marx points out, the ability to increase labour productivity beyond the industry standard will be in evidence wherever a firm has privileged access to a factor of production. A manufacturer with exceptionally zippy automated machinery is like a Saudi Arabian oil company: since they can both bring goods to market more efficiently than their competitors, they can make exceptional profits even if they sell them at the same price.

Marx’s strategy, then, for preserving the coherence of his labour theory of value when faced with the question of uncommonly productive non-labour inputs is to separate value and price: the former indexes to labour-time and is a general, social metric; but the latter can fluctuate considerably (such as when the “surplus labour” bestowed by a privileged factor of production allows a product to be made more cheaply than usual). However, in our economy, many companies are not labour-intensive. Since they cannot all be kept afloat by novel, non-labour inputs, how are they able to compete for investment with firms in more labour-intensive fields? How can a military contractor compete with a family diner if labour is the basis of value? To resolve this conundrum, Marx appeals to the discrepancy between value and price. Under capitalism, Marx reasons, certain sectors necessarily require less labour investment than others. Thus, when goods made by these companies are brought to the market, they must be sold above their value, to ensure that these enterprises remain viable. Likewise, when labour-intensive firms bring goods to the market, they must sell them below their value, thereby permitting companies fettered by extensive non-labour investments to suck up the surplus value they’ve created. The irony, for Marx, is that while capitalists decry communism, they practise it amongst themselves by conspiring to equalize the rate of profit across diverse sectors.

The Strengths and Weaknesses of Marx’s Labour Theory of Value

To make his labour theory of value palatable, Marx adds a number of stipulations. The correlation between labour-time and value, he claims, requires that the labour-time in question be socially necessary. It is also historically conditioned—in the past, labour-time and value did not correspond as closely. Moreover, while value—and thus labour-time—establishes the baseline for setting prices under capitalism, the two must necessarily diverge. This happens when non-labour inputs, such as technology, are applied and are not universally available. It also occurs when prices are set so as to compensate for the different labour needs of different branches of production.

This is, surely, a fusillade of provisos. Marx insists:

The possibility, therefore, of a quantitative incongruity between price and magnitude of value, i.e. the possibility that the price may diverge from the magnitude of value, is inherent in the price-form itself. This is not a defect: it makes this form the adequate one for a mode of production whose laws can only assert themselves as blindly operating averages between constant irregularities.

By claiming that values and prices frequently do not align, Marx is able to safeguard his labour theory of value from the criticism that price doesn’t map tidily onto labour-time (even socially necessary labour-time). But if value and prices cannot be meaningfully correlated, how can an underlying substrate of value, or socially necessary labour-time really exist? This dilemma could have been overcome if Marx had produced mathematical proofs that elucidated the relation of value to price. But he did not. Mainstream economics has, since Marx’s death, accordingly turned its back on his thought, preferring to see value as arising from the subjective desires of consumers (as with marginal-utility economics).

Marxists have responded to this in a number of ways. Some claim that the focus on correlating value and price is misplaced. Marx, after all, was critical of capitalism. His point was that under capitalism labour-time is not the means through which profits are realized. Some have tried to reconstruct Marx’s political thinking atop different economic foundations, dispensing with the notion of an underlying substrate of value altogether. And some have stayed within the contours of Marx’s economic thinking while leveraging current economics to try to solve the problem of how to transform values into prices.

The last option—trying to update the labour theory of value—may seem counterintuitive. Yet Marx may have been onto something. The past few decades have witnessed a ceaseless exportation of jobs, particularly in the field of manufacturing, from the west to less developed parts of the world. One might argue that this is simply motivated by a desire to lower labour costs. A Chinese worker, after all, is cheaper than an American one. But Chinese workers are often not truly employed (contra common wisdom) to replace American workers—they’re hired to prevent companies from having to remain in the United States and automate their workforce.

Why, then, lower labour costs by employing foreign labour when you could do it by automating? Some jobs may be resistant to automation on account of their complexity. But in other cases, one possible answer is the one suggested by Marx. If labour-time is the basis of value, and value is the (fluctuating) basis of price, it could be more lucrative to hire cheap workers than to automate. This is sometimes even true when the costs of hiring cheap labour exceed those of automation. For if automation is an economic deadweight, it may be preferable to expend more on labour so that goods can be brought to market at a price that doesn’t need to be upwardly adjusted to compensate for it.

Capitalism’s thirst—nay, need—for cheap labour challenges the notion that Marx’s labour theory of value is obsolete. Marx was many things: a dogmatic proponent of socialism, an autodidact who often bit off more than he could chew, an inspiration to despotic regimes that existentially menaced the west. But he was rarely just wrong. Just as capitalists attempt to liberate themselves from labour, but must endlessly double back to it, like Sisyphus chasing the boulder down the mountain—so the legacy of Marx persists. And by reducing his thought to a caricature, critics of Marx risk strengthening, rather than diminishing, this legacy.