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The Labor Theory of Value: A Marginal Analysis
Abstract
This article presents the marginal approach to the labor theory of value. The difficulties of the classical and Marxian labor theory of value are overcome when labor value is understood as marginal labor value analogously to marginal cost. Marginal labor value is the reciprocal of the marginal productivity of labor. Under perfect competition, relative prices are equal to the ratio of marginal labor values; indeed, Pareto-optimality implies the validity of the labor theory of value but in general, even in a Pareto-optimal state, there is exploitation. It is shown that in principle, a capitalist system can never be in a Pareto-optimal state. To assure a maximum productivity of labor and therefore minimum socially necessary labor values, society has to assure the socially necessary accumulation of capital and to organize the formation and control over capital democratically and collectively, a Pareto-optimum without exploitation.
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The free gifts of Nature are ignored as they would not suffice to maintain humanity alive without labor.
Alfred Marshall comments on Jevons:[Jevons'] success was aided even by his faults. For under the honest belief that Ricardo and his followers had rendered their account of the causes that determine value hopelessly wrong by omitting to lay stress on the law of satiable wants, he led many to think he was correcting great errors; whereas he was really only adding very important explanations. (Marshall 1890, 84–85)
Marginal analysis has been introduced long before Jevons, Walras, and Menger in the 1870s. Augustin Cournot (1838) used marginal analysis even before Gossen (1854). It is Cournot's work which has inspired Walras general equilibrium model. Furthermore, also in Germany marginal analysis was well established even if one believes that Gossen's work had been totally ignored.
See Richard Goodwin (1982) and Branko Horvat (1989) for a discussion on this point.
An exception is Flaschel (2010), but he provides only an axiomatic definition claimed as being plausible. No discussion of labor values in relation to the theory of cost is found. On the other hand, in Soviet economics, in contrast to Western Marxism, this was a core issue.
This has been introduced by Morishima (1974). We shall see below that this method can easily be adjusted to calculate the proper labor values as total costs by incorporating the “κ-rate,” which is based on Kantorovich's “norm of effectiveness” (see Kantorovich and Vainshtein 1976) into the program.
Maurice Allais provides a long list of them (Allais 1947).
It must be noted here that, contrary to orthodox Marxists but in conformity with reality, we consider wages not as capital.
The reader familiar with Morishima's (1974) work will recognize this as a devastating criticism of his approach.
This is the Marxian term referring to Capital (Marx [1867] 1906) on how labor values would be transformed into prices of production (= average cost).
It needs to be emphasized here that at this stage we are not discussing a capitalist economic model but the general economic equilibrium model which does not represent, in its pure form, a capitalist economic system. In fact, in a capitalist economic system, prices are usually not proportional to labor values, which is one of the causes of the inefficient and wasteful use of labor. In order to have a general economic equilibrium model of capitalism, important modifications of the basic perfect competition model have to be introduced as imperfections, some of them being systemic.
This is a criticism of Rosa Luxemburg's position:In order to find the value of a commodity, we must start by assuming that demand and supply are in a state of equilibrium, that the price of a commodity and its value closely correspond to one another. Thus the scientific problem of value begins at the very point where the effect of demand and supply ceases to operate. (Luxemburg [1913] 1951, 36)On the contrary, supply and demand are the forces which establish via the establishment of equilibrium prices the law of value. One may concede to Rosa Luxemburg that she wanted to exclude the erratic movements of prices from their equilibrium values, but by eliminating supply and demand she throws the baby out with the bath water. Our cost analysis centers on the establishment of supply and demand functions in terms of labor values. The labor value of a commodity is determined on the market by supply and demand.
This is by no means an exclusively Marxian proposition, e.g., Fisher (1906, 173ff.).
Tugan-Baranovskii (1905, 133ff.) explains this point very well, but we do not share his distinction between cost and labor value which is due to his (and Ricardo's) error regarding profits; see below the explanation of the κ-rate.
In what follows, we ignore rent as our analysis is strictly limited to perfect competition, implying the assumption that the rent for marginal land (natural resources) is zero.
This is loosely speaking as the labor value of the means of production is not the labor time having been spent to produce them but the labor time being socially necessary at the time of evaluation to produce them. So the labor value is not a substance of the commodity but an attribute an economic agent attaches to a commodity.
Cost of production is the Marxian and Neo-Ricardian term for average cost. Marxian terminology distinguishes between constant cost (capital cost), variable cost (paid labor cost), and surplus value (value of unpaid labor time). Surplus value is either absolute or relative surplus value depending on being obtained via the lengthening of the working hours at a constant wage or the intensification of work.
Orthodox economists and even Western Marxists usually deny this as they exclude the surplus labor embodied in profits (capital accumulation) from their definitions of labor value, e.g., Morishima, Steedman, H. D. Kurz, etc.
See the authors in the previous footnote.
The mathematics of the following discussion can be found in (Henderson and Quandt 1980), but of course one does not find any analysis of labor values.
In these equations, the meaning of L is the usual one of directly paid labor input only; in the following, L is also denoted as Lv . From Equation (23) onward, we use the term Lv to distinguish it from total labor time, Lt , including direct labor, indirect labor, and surplus labor.
We conduct the analysis using the term K, denoting the value of capital goods. This is for convenience only as the analysis can also be conducted by using quantities of heterogeneous capital goods.
See Note 21.
Notice that this is leading to the solution of Adam Smith's paradox of labor values and the adding-up-theorem of labor, profit, and rent (we ignore rent) as the L comprises them all, including also indirect labor, stored up in the means of production (constant capital).
The reader must be careful here. Commonly the term average productivity of labor refers to the productivity of direct labor only that is to Q/L or Q/Lv and not to Q/Lt , the indirect labor in the capital goods (constant capital) is ignored and therefore the reciprocal of the so-defined productivity is not average labor value. Average labor value, Lt/Q, is the reciprocal of the average productivity of total labor, Q/Lt , (direct, indirect, and surplus labor).
We have omitted rent but there is no problem if the return of marginal land is zero. If there is no marginal land, then nature contributes to the creation of value, but marginal labor value remains proportional to price.
Notice, that here interest, the price for money, has its rationale as being the monetary counterpart for the real cost in terms of labor time spent for the accumulation of the means of production, that is capital.
At present times, this is no longer true and we are facing a monopoly capitalistic system where the well-informed ruling classes are planning the exploitation of labor on a global scale.
The French original:Je prie qu'on y fasse attention; ce n'est point contre les machines, ce n'est point contre les découvertes, ce n'est point contre la civilisation que portent mes objections, c'est contre l'organisation moderne de la société, organisation qui, en dépouillant l'homme qui travaille de toute autre propriété que celle de ces bras, ne lui donne aucune garantie contre une concurrence, contre une folle-enchère dirigée à son préjudice, et dont il doit nécessairement ětre victime. (De Sismondi 1827, 433; emphasis added)
A presentation of the Leontief Model as well as the neo-Ricardian theory is in Luigi Pasinetti (1977), but he uses the orthodox bourgeois interpretation of labor values, and in addition he rejects marginal reasoning. In other words, he ignores the Soviet economists, in particular Victor V. Novozhilov's theoretical advances.