These include, among others, big business, big bureaucracies and big armies, redistribution and
restructuring
by government, international struggles, segmented labour markets, core-periphery interactions, ideological persuasion, material cooptation and, last but not least, the extensive use of force and violence at every level of society.
Nitzan Bichler - 2012 - Capital as Power
Although suffering from deep logical contradictions and serious empirical anomalies, neoclassical theory hasn't broken down.
On the con- trary, it has only grown stronger.
Its overall structure has remained more or less intact for more than a century - a feat unparallel by any other science - and it has managed, with the help of massive business and government subsi- dies, to strangle pretty much all of its theoretical competitors.
But then, this victory shouldn't surprise us, simply because neoclassical political economy is not a science, but a church. And like every church with forged scriptures, the neoclassical priests go on with their daily business, spreading the faith by building 'elegant-seeming arguments in terms which they cannot define' and searching for 'answers to unaskable questions' (Robinson 1970: 317).
Neoclassical parables 83
6 The Marxist entanglement I
Values and prices
. . . the whole substance of the bread is changed into the whole substance of Christ's body, and the whole substance of the wine into the whole substance of Christ's blood. Hence. . . it can be called 'transubstantiation. '
--Thomas Aquinas, Summa Theologica
As radical thinkers, we find it far more difficult to criticize Marx than the neoclassicists. So much of our thinking about capitalism originates from his writings. The very concept of the 'capitalist system'; the view of capital as a political institution and of political critique as part of the class struggle; the emphasis on the ruling class and the socio-historical context in which it emerges; the dialectical development of history in general and of capital accu- mulation in particular; the imperative of empirical research; the universal- izing tendencies of capital - these ideas and emphases are all due to Marx. It is hard to approach contemporary social phenomena - from globalization, to economic crisis, to militarization, imperialism, ecology, price movements, the modern corporation, cultural development, elite dynamics and technical change, to name a few - without feeling indebted to Marx and the controver- sies he opened up. His insights, along with the debates among his followers and critics, are deeply embedded in our current thinking.
But then it is precisely this crucial importance of Marx - along with his emphasis on dialectical thinking - that forces us to re-examine his underlying framework. Capitalism, he argued, is a system of commodities, driven by the accumulation of capital and denominated in prices. To decipher the secrets of this process is to look behind the front window of prices, and to do so we need a theory of value. This is the starting point, the 'algorithm' that Marx uses to develop much of his subsequent concepts and analysis. Marx chose to develop a value theory based on labour, and it is here that his analysis went wrong. Our purpose in this and the next chapter is to examine why. What are the inconsistencies in Marx's logic, how has the development of capitalism under- mined that logic, and most importantly, what can we learn from these theoretical and historical considerations as we seek to develop a radical alternative?
Content and form
Throughout Das Kapital there is no 'analytical' definition of capital, perhaps for a good reason. In contrast to his classical predecessors, Marx saw capital not as a 'thing', but as a comprehensive social relation whose description was intertwined with its explanation. The context of capital included the produc- tion process, the division of labour and technological progress, as well as the institutional and power arrangements shaping the collective consciousness. According to Erik Olin Wright (1977: 198), the notion that capital accumula- tion involves merely the tangible augmentation of machinery, buildings, raw materials and alike is alien to Marxist thinking. Instead, he maintains, 'capital accumulation must be understood as the reproduction of capitalist social relations on an ever-expanding scale through the conversion of surplus value into new constant and variable capital'. Emphasizing this aspect of Marx's writing, Anwar Shaikh (1990: 73) similarly reiterates that 'capital is not a thing, but rather a definite set of social relations', and that in order to under- stand it we must 'decipher its character as a social relation'.
Marx started with three fundamental principles. The first was that human history is driven largely by a struggle over surplus. The second was that production and redistribution are inseparable: surplus presupposes a class society, and classes mean a struggle over how this surplus is created, who is going to get it and how it is to be used and abused. The third principle was that, regardless of its particular form, surplus is always generated through the labour process. The analysis of every class society therefore has to begin with the underlying process of production: 'A distinct mode of production thus determines a specific mode of consumption, distribution, exchange and the specific relations of these different phases to one another' (Marx 1859: 205). This latter conviction created the infamous 'materialistic' bias underlying Marx's theory of accumulation.
The consequence of this bias was an over-preoccupation with content and less attention to form. The content of capitalism is the concrete technological fusion of workers and instruments through an ever-expanding social process of production and consumption. The form of capitalism is capitalist control; that is, the manipulation of human beings via the quantitative accumulation of universal ownership titles. As a historian of capitalism, Marx repeatedly emphasized the inherent interdependence of these two aspects. As a theoreti- cian, though, he failed to integrate this interdependence into his analytical framework of accumulation. When it came to describing accumulation in abstract terms, his attention was focused almost solely on a relatively narrow understanding of production, leaving much of the power dynamics ignored. And so although Marx saw accumulation as an antagonistic social process, in the end his theorizing got entangled in the same 'materialistic' trap that would later confound the neoclassicists.
The Marxist entanglement I 85
86 The enigma of capital
The labour theory of value
For the capitalist, accumulation is a simple process in which 'money makes money'. The capitalist invests M dollars, ends up with M+? M dollars, and the key challenge is how to make ? M as big as possible. For Marx the ques- tion is different. He asks not so much how, but why: where does ? M come from? And the answer, he argues, can be given only by looking over the capi- talist's shoulder, peering beyond the phenomenon and into the kernel.
What appears on the surface as the self-expansion of money, in fact, is a reflection of a social process. Money can 'make' money, Marx says, only through the exploitation of productive labour.
Conceptually, the process of capital accumulation can be represented by the following expression:
1. M? c+v? Production? c+v+s? M+? M
The capitalist uses money (M) to buy constant capital (c) and variable capital (v). The first of these capitals consists of used-up raw materials and semi- finished goods, as well as machinery and structures that depreciate during production; the second form of capital comprises labour power. All commod- ities, including c and v, are assumed to be exchanged at prices proportionate to their value; that is, proportionate to the socially necessary abstract labour- time required for their reproduction (a concept which we define in the next section and examine more closely in Chapter 8).
Constant and variable capital nevertheless differ in that, when they go through production, c simply transfers its own value to the new products and in that sense remains 'constant', whereas v transfers its own value as well as generates new value, which is why it is called 'variable'. Once the product is sold on the market, this new value, denoted by s for 'surplus' value, is realized by the capitalist in the form of money profit (? M).
How is surplus value created? The answer is based on the distinction between labour power and labour. Labour power is the ability to work, which is what the worker sells. By contrast, labour is the actual time he or she ends up working for the capitalist. Since labour power is treated as a commodity, its price, like that of every commodity, is proportionate to the socially neces- sary cost of its own reproduction. In this case, it is proportionate to the average cost, counted in labour time, of having the worker replenish herself or himself for yet another day of labour. 1
1 Some, like Karl Polanyi (1944: Ch. 6), argue that labour (or labour power from a Marxist perspective) is really a fictitious commodity, since, unlike true commodities, human beings generally are not produced for the purpose of sale on the market. This reasoning is vulner- able on three counts, all related to the notion of 'purpose'. First, it is not at all clear that labour power isn't produced for the market (aren't capitalist institutions geared very specifically for the production and reproduction of human workers, and isn't it true that most people in capitalist societies indeed raise their children with an eye to their future
? The Marxist entanglement I 87
But this price of labour power, when measured in labour time, is, as a rule, smaller than the actual labour time the worker works for the capitalist. And here lies the crux of the matter: the secret of accumulation rests on the unique ability of labour power to create surplus value - a surplus which the institu- tion of private property then allows the capitalists to appropriate.
Three challenges
This elegant exposition of both the social character of production and the conflictual-exploitative basis of accumulation enabled Marx to excite genera- tions of followers and alter the course of history. And yet Marx's conception of capital - particularly his Smithian emphasis on production as the engine of accumulation and his Ricardian belief that labour values reflect the inner quantitative code of the process - was far too restrictive and, in the final analysis, misleading.
Socially necessary abstract labour
The problem is threefold. The first difficulty concerns the underlying unit of measurement: socially necessary abstract labour time. 2 Marx was appalled yet fascinated by the 'mechanized' order of capitalism, a social system that objectifies its human subjects and fetishizes their social interactions. His method reflected this double-sided sentiment. On the one hand, he subjected the transformations of capitalism to dialectical analysis. On the other hand, he viewed capitalist processes as obeying historical 'laws of motion' and therefore as amenable to scientific inquiry. This latter view was deeply influ- enced by the contemporary revolutions in physics and chemistry, and it drove Marx, just as it drove natural scientists, to search for basic units. He looked for the underlying building blocks, for the simplest elements with which the complex processes of capitalism are socially constructed and ideologically articulated.
The visible building block of capitalism, he argued, is the commodity. On the face of it, commodities are qualitatively different from each other and in that sense incommensurate: a meal in a restaurant is different from a barrel of oil, and both are unlike an automobile. And yet all commodities share a common denominator: their price. A meal may cost $50, a barrel of oil $100 and an automobile $20,000. Although incommensurate qualitatively, they
saleability? ). Second, it isn't clear whose purpose counts here: the purpose of the worker's parents? Of the worker herself? Of her employer? Of the capitalist class more broadly? Finally, why is the original purpose of conceiving a child of any significance - given that most people end up selling their labour power regardless of anybody's intentions?
2 Marx commonly refers to 'socially necessary labour' as shorthand for 'socially necessary abstract labour'. Although Marx himself didn't, we use the latter expression since, as we shall see, only abstract labour can be added up.
? 88 The enigma of capital
nonetheless display a strict quantitative relationship, expressed by their price ratio of 1:2:400.
How is it possible for qualitatively different commodities to have quantita- tively comparable prices? Marx isn't puzzled. Commodities, he admits, indeed differ in their use value. But they nonetheless share one property in common: they are all products of human labour. And it is this human labour - understood as an undifferentiated universal quantum - that gives commodi- ties their value and makes them commensurate. Marx defined this universal quantum as socially necessary abstract labour. This is the elementary particle of his system, the hidden entity that both underlies and embodies the entire architecture of the capitalist order. 3
The significance of socially necessary abstract labour can hardly be over- stated. Capitalism is a system organized through prices, and, according to Marx, socially necessary abstract labour time - mediated through the labour theory of value - provides the ultimate code of prices. It is the basic unit that gives commodities quantity and capital magnitude and, therefore, the common denominator with which all the important ratios of capitalism are expressed. It is crucial for understanding the profit rate of capitalists, the subsistence wage of workers, the distribution of income and the balance of class power. It is essential for explaining the historical development of capi- talism, its short-term crises and long-term tendencies. It underlies the system's eventual demise. Without this universal unit, it is doubtful that Marx's grand theory can remain standing. Although Marx's insights go beyond his labour theory of value, the hallmark of his system lies in its completeness: the claim that there is a single, universal logic that underlies the entire order of capi- talism. And this latter claim depends crucially on abstract labour.
It turns out, though, that this elementary particle, the unit on which every- thing else stands, is deeply problematic. The key difficulty is that this particle - like God or the Ether - is forever beyond our reach. We can observe actual labour, but that still tells us nothing about socially necessary abstract labour. The latter term differs from the former on two counts. First, socially neces- sary labour time refers not to the specific time a given capitalist enterprise takes to produce the commodity, but to the average time society requires to produce this type of commodity. This is the 'socially necessary' aspect of the term. Second, socially necessary labour time is counted not in heterogeneous
3 'Value, therefore, does not stalk about with a label describing what it is. It is value, rather, that converts every product into a social hieroglyphic. Later on, we try to decipher the hiero- glyphic, to get behind the secret of our own social products; for to stamp an object of utility as a value, is just as much a social product as language. The recent scientific discovery, that the products of labour, so far as they are values, are but material expressions of the human labour spent in their production, marks, indeed, an epoch in the history of the development of the human race, but, by no means, dissipates the mist through which the social character of labour appears to us to be an objective character of the products themselves' (Marx 1909, Vol. 1: 83).
? The Marxist entanglement I 89
units of concrete labour, but in homogenous units that can be added up. This is the 'abstract' dimension of the concept. The problem is that both conver- sions - from actual to socially necessary and from concrete to abstract - are difficult if not impossible to perform. As noted, this is a make-or-break predicament - for, if we cannot perform these conversions, we don't have a basic unit to work with and therefore no theory at all.
Production
The second difficulty concerns the concept of 'production'. Even if we can agree on what constitutes socially necessary abstract labour, there is still the issue of which labour is relevant and which is not. Although all values derive from the productive labour of workers, not all labour is productive. According to Marx, there are two types of workers: productive workers who create value and unproductive workers who do not. In order to render the labour theory of value meaningful, we need to count only the former and ignore the latter. Now, this selection assumes that we can distinguish between these two types of workers in the first place - and it is here that the theory runs into a second roadblock. It turns out that there is no objective basis, a priori or a posteriori, on which to decide that the labour of a Volvo engineer or Fluor crane operator is productive, while that of a government accountant or a stock broker is not.
Transformation
And there is a third problem. Even if we could somehow identify and measure the socially necessary abstract labour time of productive workers, there is still the issue of 'transforming' the resulting labour values into money prices. The transformation has two steps. The first, analytical, step is to translate labour values into so-called production prices. The purpose here is to show how labour values determine equilibrium prices in a perfectly competitive capitalist economy. This step, though, takes us only half way. A real capitalist economy is neither perfectly competitive nor equilibrated, so we need an additional conversion to translate theoretical production prices into actual market prices. Attempts to achieve these transformations began with Marx himself, and the fact that they still continue today attests to their degree of success.
The road ahead
Together, these three problems make for a rather treacherous path. The value theorist is forced to begin with a highly ambiguous unit of abstract labour; to continue by applying this unit to a non-delineable sphere of production; and to conclude by converting the labour values that emerge from this procedure into prices, using a dubious if not circular calculation. Marxists have written thousands of learned books and articles to evade and bypass the hazards of
90 The enigma of capital
this journey, with the effect of making Marx's original value theory practi- cally impenetrable to the laity.
This chapter and the following two explore this journey - in reverse. Our starting point is the observed phenomenon of actual prices. From there, we trace our way backwards to the underlying relationships and, eventually, to the elementary concepts of the theory. We begin in this chapter with the trans- formation of labour values into prices. We continue in Chapter 7 with the delineation of production. And we conclude in Chapter 8, which deals with the elementary particle of abstract labour, along with the elementary particle of the liberal universe - the util.
The second transformation
As noted, Marx's labour theory of value requires a double transformation in which labour values are first converted into production prices, and then into market prices:
2. labour values ? ? production prices ? ? market prices
The first step is analytical. It implies a mathematical relationship between values and prices, one that ostensibly exists in a perfectly competitive capi- talism. In this context, if we take two commodities - say a computer chip and a bag of potato chips - having a labour-value ratio of (lv1/lv2), the ratio of their prices of production (pp1/pp2) would be given by:
3. pp1=? lv1 pp2 lv2
with ? representing a known coefficient reflecting differences in the 'organic compositions', or the c/v ratios, across the various sectors of the system.
This first step of converting production prices into market prices, although merely analytical, is far from trivial and - in the opinion of many Marxists - in fact impossible to make. However, we postpone these doubts for later in the chapter and assume, for the time being, that the first transformation is logically consistent and practically feasible. So if we know relative values, we also know relative production prices. 4
This assumption, though, takes us only half way. We still have to take the second step and show that the production prices of a hypothetical perfectly competitive capitalism explain the market prices of an actually functioning capitalism. And here we run into a significant problem. As it stands, Marx's labour theory of value does not even try - and indeed refuses - to take this step.
4 Knowledge of prices enables computation of the various stock and flow ratios of the price system, such as the money rates of profit and exploitation, money income shares, the money rate of accumulation, etc. Hence, for the sake of brevity, whenever we refer to prices we also refer to the ratios that can be derived from them.
? ? ? Why only labour?
This latter point was made early on by one of Marx's fiercest critics, the Austrian economist Eugen von Bo? hm-Bawerk (1884; 1896). Marx wasn't incorrect to search for the common property of commodities, Bo? hm-Bawerk conceded. But his insistence that this common property consists only of labour - to the exclusion of all other properties - was logically indefensible.
Commodities, argued Bo? hm-Bawerk, can also vary in other respects. They can differ in the degree of their 'scarcity' as expressed by supply and demand, in whether they are produced by people or gifted by nature, and in the extent to which their temporal production and consumption profile makes them sensitive to the discounting impact of interest rates.
Now, unlike the neoclassicists who translate all such factors into the language of utility, Marxists exclude them from their explanation on the ground that they are 'subjective', or otherwise external to the commodity itself. But since they also acknowledge that these factors do affect market prices, their theory becomes incomplete, by definition.
Excluding power
In fact, the theory is incomplete in ways that extend beyond Bo? hm-Bawerk's utilitarian individualism. Note that the labour theory of value requires perfect competition. Firms and workers have to be 'price takes', unable to individ- ually affect prices and wages - for otherwise, market prices could be set 'arbi- trarily' without any necessary link to production prices. Moreover, capital and labour must be able to move freely between industries in order to equalize the rates of profit and exploitation across different sectors (for instance, Sweezy 1942: 270-74; and Howard and King 1992: 282).
And yet, these conditions of perfect competition do not - and, as we argue later in the book, cannot - exist in the capitalist reality. Instead of atomistic competition in the so-called economic sphere, the history of capitalism impresses on us a broader myriad of restrictive social institutions and power processes.
These include, among others, big business, big bureaucracies and big armies, redistribution and restructuring by government, international struggles, segmented labour markets, core-periphery interactions, ideological persuasion, material cooptation and, last but not least, the extensive use of force and violence at every level of society.
The existence of these power institutions and processes makes labour values (and therefore prices of production) practically useless for the study of actual prices and accumulation. In fact, under such conditions, the value of labour power - the basic input in all production processes and the ultimate anchor of accumulation - is already contaminated by power relations (a point to which we return in Chapter 8).
Ironically, Marx was the first to predict these deviations from competition, particularly the centralization of capital and the growth of state power - yet
The Marxist entanglement I 91
92 The enigma of capital
he did not explore their detrimental implications for his own labour theory of value. Part of the reason was that these phenomena were only starting to emerge and therefore were still difficult to examine with some rigour. But there was a deeper cause.
Marx's analytical framework, like that of the neoclassicists, was hostage to the mechanical worldview of static equilibrium. The neoclassicists, whose purpose was to eviscerate history from their positive economics and demon- strate the eternal harmony of capitalism, found mechanical equilibrium useful. But Marx tried to do the very opposite. He attempted to understand the transformative dynamics of social conflict - the very antithesis of mechan- ical equilibrium. The result was a lingering dissonance between his dialectical analyses of capitalist development and crisis, on the one hand, and his attempts to mimic physics and chemistry in his labour theory value, on the other. The former uses as its raw material the full plethora of power relations; the latter expunges power to retain the determinism of labour time.
Omitting capitalization
Finally, as we shall see in Part III, labour values and production prices can tell us very little about what really matters to capitalists: the capitalization of their assets on the stock and bond markets. Marx, who didn't know exactly what to do with these forward-looking assets, got himself off the hook by dubbing them 'fictitious capital'. It was a choice of words for which his adher- ents were to pay dearly.
Following Marx's death, the trajectory of financial markets has diverged from the underlying amassment of (what Marx considered) 'real' capital. As will be amply demonstrated in Chapter 10, nowadays the corporation's market value commonly is much bigger than the price of its underlying plant and equipment (however estimated). Similarly, comparing any two corpora- tions, we usually find the ratio of their market values to be markedly different from the price ratio of their plant and equipment (however measured).
As a result of these developments, those who have accepted Marx's classi- fication and exclude 'financial' capitalization from their 'materialist' labour theory of value now find themselves boxed into a corner. Being unable to explain the trajectory of financial markets with Marxist tools, they face the unpalatable choice of dismissing their movements as irrelevant, classifying them as 'distortions' or simply surrendering to the bourgeois theory of corpo- rate finance and injecting its neoclassical econometrics into their Marxist dialectics.
What does the labour theory of value theorize?
The ambivalence of Marxists toward subjective considerations, power and 'fictitious' capital has had an important consequence: by excluding the role of these factors in principle while recognizing it in practice, they have made their
The Marxist entanglement I 93
labour theory of value logically 'weightless'. As it stands, there is nothing in the theory itself to tell us whether labour values explain 1 per cent of prices, 99 per cent, or anything in between, and whether this explanatory power remains stable or changes over time.
This predicament hasn't been lost on Marxists, and rather than fight a losing battle most have opted out. Marx's labour theory of value, many now argue, is not a 'price theory' - at least not in the conventional liberal sense. Marx was primarily a critic of classical political economy, they say, and as such, he wasn't concerned with the precise determination of price levels:
Whatever may be the way in which the prices of various commodities are first fixed or mutually regulated, the law of value always dominates their movement. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.
(Marx 1909, Vol. 3: 208, emphases added)
Note the emphases: value does not determine but merely dominates market prices, and it affects not their level but their movement. More broadly, according to this view Marx was not really interested in the price of chewing gum or the day-to-day fluctuations of a particular sector. These were epiphe- nomenal:
Magnitude of value expresses a relation of social production, it expresses the connection that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as the magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity.
(Marx 1909, Vol. 1: 114)
For Marx, then, the issue was not individual prices but the general tenden- cies of capitalism. And this broad emphasis shouldn't be surprising. The period he was writing in had witnessed great strides in probability and statis- tics. The concept of least-squares deviations from mean, developed by both Gauss and Legendre in the late eighteenth century, was already widely used, while Galton's reversion to mean was just around the corner. The notion of approximating the underlying truth from multiple imprecise measurements, first applied in the geodesic derivation of the standard metre, was gaining adherents in every science. 5
5 On the intertwined evolution of probability and statistics, scientific measurements and liberal political economy, see Hacking (1975; 1990), Porter (1995), Alder (1995; 2002) and the collection of Klein and Morgan (2001).
? 94 The enigma of capital
In line with these developments, Marx, too, was searching for the long- term 'fundamentals', the mean equilibrium values around which prices oscillate and to which they ultimately revert:
The assumption that the commodities of the various spheres of produc- tion are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.
(Marx 1909, Vol. 3: 210)
Now, here we have a possible re-entry point. Marx's pronouncement was difficult to corroborate in his own time, but nowadays, with abundant statis- tics and cheap computing power, it shouldn't be too hard to assess. All it takes is a simple chart. You plot the historical trajectories of labour values and prices of production; on these you superimpose the historical movement of actual prices; and then you look and see. The resulting pattern, mediated if need be by statistical paraphernalia, should be able to tell you both the extent to which the law of value governs prices - with short-term precision, in the long run only, or not at all - and how this pattern may have changed over time.
And, indeed, as we shall see in the next section, Marxists have taken on this task. Since the late 1970s, they have subjected the labour theory of value to rigorous testing - with results that seem to prove more than Marx could ever have hoped for. In general, the studies show that values govern prices not only in the long run, but also in the fairly immediate term, and that they do so very tightly and consistently across space and over time.
And so, in the end, everything falls into place. Although we do not live in a perfectly competitive capitalism, and although prices are subject to the impact of numerous factors other than labour time, none of this matters a great deal. In the final empirical analysis, Marx was right. Capitalism does seem to obey his law of value.
Or does it?
Testing the labour theory of value
The problem is surprisingly simple. The purpose of testing the labour theory of value is to show that market prices are positively correlated with labour values (or with their corresponding prices of production). Now, irrespective of how one approaches this task, two things must be known beforehand: prices and values. And yet it turns out that these seemingly trivial magnitudes are not so easy to 'know' and that, contrary to their explicit proclamation, the empirical studies do not appear to even try to correlate prices and values.
The price of what?
Begin with prices. Most people think of these as attributes of individual commodities - the price of a Toyota Corolla, the price of a bushel of wheat, the price of a United Airlines flight from New York to Tokyo. Price could also be an attribute of a group of commodities. The GDP deflator of the beverage industry, for instance, denotes the weighted average price of all newly produced commodities in that industry, while similar deflators express the weighted average price for entire sectors such as consumer and investment goods, or even the economy as a whole.
Marxist studies of price-value correlations, however, deal with neither of these concepts. Instead of looking at the price of a single commodity or the average price of a group of commodities, they focus on the price of total output - that is, on the unit price of the commodity multiplied by its quantity. Typically, the researcher divides an economy into a few dozen sectors as delineated by the national statistical service, estimates the price and value of total output in each of these sectors, and then correlates these two magnitudes across sectors for one or more years.
This shift in focus has significant statistical implications. Correlations measured in this way reflect the co-variations not only of unit prices and values, but also of their associated quantities. Now, note that the unit value and unit price of each sector are multiplied by the same output. This fact means that, all other things being equal, the greater the size-variability of output across the different sectors, the tighter the correlation between their total price and total value. 6 And since different sectors do vary in their output size, the common result is to make the overall correlation bigger than the underlying correlation between unit prices and values. The extent of this impact is revealed when sectors are controlled for their size: the value-price correlations usually drop sharply, often to insignificant levels. 7
6 Denote, for the i-th sector, unit market price by mpi, unit labour value by lvi and the level of output by qi. The correlation across sectors between unit price and unit value associates mpi ? lvi, whereas the correlation across sectors between the total price of the output and the total value of the output associates qi * mpi ? qi * lvi. Note that in the latter correlation qi is common to both magnitudes.
7 On the issue of spurious correlation, see Freeman (1998) and the debate between Kliman (2002; 2005; 2007: Ch. 11) and Cockshott and Cottrell (2005). The latter writers argue that, since commodities have no universal quantities (a box of breakfast cereal cannot be directly compared to a passenger aircraft), the correlation between their unit price and unit value is meaningless. This problem of incomparable units could easily be bypassed by correlating relative prices with relative values. In our example here, we would correlate the ratio between the price of cereals and the price of aircraft on the one hand with the ratio between the value of cereal and the value of aircraft on the other.
The Marxist entanglement I 95
? 96 The enigma of capital
Absence of value
The other problem with empirical studies has to do with values - or rather the lack thereof. To our knowledge, all Marxist models that purport to correlate prices with values do no such thing. Instead of correlating prices with values, they in fact correlate prices with . . . prices!
The reason is simple enough. Recall that, according to Marx, the value of a commodity denotes the abstract labour time socially necessary for its production. Yet, as we already mentioned and elaborate further here and in Chapter 8, this quantum is impossible to measure. And so the researcher makes assumptions.
The most important of these assumptions are that the value of labour power is proportionate to the actual wage rate, that the ratio of variable capital to surplus value is given by the price ratio of wages to profit, and occa- sionally also that the value of the depreciated constant capital is equal to a fraction of the capital's money price. In other words, the researcher assumes precisely what the labour theory of value is supposed to demonstrate. 8
Duncan Foley tries to put on a brave face on this circularity by describing it as a matter of convenience:
. . . the choice of an embodied labor coefficients [sic] or a market price accounting system does not make much practical difference to estimates of Marxian categories like the rate of exploitation, or the ratio of unpro- ductive to productive labor in real economies. Given the wide availability of market price accounting data in financial and government sources, and the expense, difficulty, and possible error involved in reconstructing embodied labor coefficients for many periods and economies from input/ output tables, most empirical work. . . will use market price data as a first approximation to an embodied labor coefficients system of accounts.
(Foley 2000: 35)
But this account is misleading. The issue isn't convenience, it's necessity. The imperative of this procedure was succinctly if opaquely stated in one of the first statistical studies:
In order to compute the rate of surplus value, input/output flows in market prices (hereafter prices) must be converted into input/output flows in labor time (hereafter values).
(Wolff 1975: 936, emphasis added)
8 To avoid undue attention, these assumptions are often tucked in endnotes and technical appendices. Commonly, the researcher will state them cryptically, with minimal discussion and seldom with an apology. See, for example, Wolff (1975: 936), Ochoa (1989: 427-29), Shaikh and Tonak (1994: 80-81), Alemi and Foley (1997: 2) and Cockshott and Cottrell (2005: 312).
? The Marxist entanglement I 97
In short, we have to pretend. Since values are forever unknown, we need to first convert prices into 'values' and then correlate the result with prices. It seems reasonable to expect the outcome to be positive and tight. After all, we are correlating prices with themselves. What remains unclear is why one would bother to show this correlation and, more puzzling still, how the whole excise relates to the labour theory of value. 9
Recap
All in all, then, it seems that the second transformation does not take us very far, and that values and prices of production in fact tell us very little about actual prices. To summarize the difficulties: most Marxists concede that market prices are affected by an array of factors other than values; they none- theless insist on excluding these factors from their theory and therefore make the theory logically incomplete to an unknown extent. Some researchers have tried to circumvent this problem statistically, by showing prices and values to be consistently and tightly correlated in practice. Their methodology, though, is highly questionable for two reasons. First, they usually focus not on indi- vidual commodities but on total output, and second, their 'value' data are in fact nothing but converted prices. The consequence is that the estimated correlations, no matter how tight, are irrelevant to the labour theory of value.
The first transformation
So far we have focused on moving from production prices to market prices, assuming that the former were merely transformed labour values. This assumption, though, isn't trivial. In fact, most of Marx's followers agree with his critics that this first step is impossible to take.
To explain the problem, begin with Marx's value equation: 4. lv = c + v + s,
where the commodity's labour value is given by lv, the value of constant capital by c, the value of variable capital by v and surplus value by s.
Marx used these categories to spell out a definite relationship between three ratios across the political economy, a relationship that in turn bridges labour values with prices of production. The first is the rate of profit (? ), given by the ratio of surplus value to the sum of constant and variable capital:
9 Some Marxists have questioned the wisdom of empirically testing the labour theory of value, lest the results prove inconclusive: 'Suppose, for example, that the correlations between embodied labor coefficients and market prices had turned out to be much lower, or to fall over time, or to be low in certain capitalist economies. Are we to conclude that the labor theory of value does not hold, or is weakening over time, or holds only in some capitalist economies? ' (Foley 2000: 20). The writer leaves these questions unanswered.
? 98 The enigma of capital 5. ? = s
? c+v
The second is the rate of exploitation (? ), denoted by ratio of surplus value to variable capital:
6. ? =vs
And the third is the organic composition of capital (? ), defined as ratio of
constant to variable capital:
7. ? =vc
Dividing the numerator and denominator on the right-hand side of Equation (5) by v, and then substituting ? for s/v and ? for c/v, gives us the three-sided relationship between the rate of profit, the rate of exploitation and the organic composition of capital:
8. ? = s/v = ? c/v+1 ? +1
According to Marx, competition among capitalists pushes capital from low- profit to high-profit industries, creating a tendency for the rate of profit (? ) to equalize across the economy. Similarly, competition between workers triggers labour mobility, causing a parallel equalization tendency of the rate of exploi- tation (? ). Now, if these two rates tend to equality across different industries, by definition so must the organic composition of capital (? ).
And yet, unlike the first two movements, the third one has no reason to happen. 10 On the contrary: the ratio of constant to variable capital depends not on competition, but on the technical nature of production and therefore tends to differ across industries (the organic composition of capital in the computer industry, for instance, may be lower than in the steel industry, in dairy farming lower than in microchip production, in banking lower than in automobiles, and so on).
The only way to square the circle is to accept that prices of production and money profits in different industries are not proportionate to their respective labour values and surplus values. Specifically, industries with a higher-than- average organic composition of capital will have prices and profits that are higher than their respective labour values and surplus values, while in indus- tries with a lower-than-average organic composition of capital the opposite will be the case.
10 In fact, it is not entirely clear why labour mobility should equalize the rate of exploitation rather than the wage rate only, although for some reason this question has attracted rela- tively little attention.
? ? ? ? ? The Marxist entanglement I 99
The theory therefore isn't true to the letter, but the damage is limited. Recall that Marx emphasizes the overall processes of capitalist development, and in that regard, argue his followers, his theory remains intact and, indeed, indispensable. The reason is that, although prices and profits differ from their respective labour values and surplus values in individual industries, their aggregates remain the same.
These aggregate equalities are crucial. Since, according to Marxists, the sum of all profits is equal to the sum of all surplus values, and since the sum of all prices is equal to the sum of all labour values, the rate of profit in price terms is equal to the rate of profit in value terms. It is through this determin- ation of the rate of profit that the value system anchors the price system. Compared with this overall causality, price-value and profit-surplus inequal- ities across the individual industries are secondary. They represent a mere redistribution of the overall equalities, and ones that could be fully explained with value categories.
Inconsistency, redundancy, impossibility
The dual system
This understanding of 'pulling and redistributing' labour values was domi- nant among Western and Russian socialists until the Second World War. There were early challenges to this view, but Nazism and Stalinism helped keep them obscure. It was only in the 1940s, with the introduction to English readers of the work of German statistician Ladislaus von Bortkiewicz, that the problem with this view became widely recognized. 11
Bortkiewicz (1907a; 1907b) demonstrated that Marx's solution of pulling and redistributing is logically inconsistent. It turns out that, as we move from labour values to prices of production, the results do not 'add up': the outputs of the price system generally differ from its inputs. 12 According to Bortkiewicz, the inconsistency occurs because Marx's transformation is incomplete. It converts surplus value counted in labour time into profits counted in prices, but it does not do the same for constant and variable capital. The resulting price system therefore is half-baked - partly price denominated, partly value denominated.
Capitalists and workers, though, buy and sell commodities in prices rather than values, so it makes sense to specify two distinct systems - one
11 Bortkiewicz's arguments were summarized in Paul Sweezy's Theory of Capitalist Development (1942) and later included in his translated collection, Karl Marx and the Close of his System (1949).
12 Save for special assumptions, this inequality means that in simple reproduction the overall price of the wage goods produced by the system differs from the total value of wages (so workers consume less or more than capitalism makes available to them); that the overall price of investment goods differs from the total value of the used up constant capital (so there is net investment or divestment); and that the overall price of luxuries is different from the total profits of capitalists (so they must save or dissave).
? 100 The enigma of capital
denominated in values, the other in prices of production. And, indeed, with a dual-system specification, Bortkiewicz showed the transformation of values into prices of production to be mathematically consistent.
But there was a hefty price to pay for this consistency: the dual system no longer satisfies Marx's aggregate conservation principle. With separate systems for prices and values, there is no longer a single ? that would satisfy Equation (3) for all commodities. The result is that total prices need not be equal to total labour values and total profit does not have to be the same as total surplus value. And given these inequalities, the rate of profit denomi- nated in price terms is no longer the same as the rate of profit calculated from labour values.
This was no longer a secondary problem. Marx claimed his theory to be superior to the bourgeois alternatives, partly because it did something they couldn't: it objectively derived the rate of profit from the material conditions of the labour process. 13 Bortkiewicz turned this asset into a liability: he showed that Marx's original framework was logically inconsistent and that it could be fixed only by making the rate of profit independent of the value system.
The complicating detour
Adding insult to injury, in 1957 Paul Samuelson demonstrated that, mathe- matically, the first transformation was a pointless 'complicating detour'. Whether consistent or not, the theory was largely irrelevant. Marx stipulated a two-stage analytical process, moving from the conditions of production to labour values, and from labour values to prices of production. In fact, argued Samuelson, the process requires only one step - from the conditions of production to prices of production - without any intermediate resort to labour values. 'Marxolaters, to use Shaw's term', he suggested triumphantly, 'should heed the basic economic precept, valid in all societies, cut your losses' and dump the labour theory of value (1957: 892).
Many Marxists, although silent on Samuelson's mathematics, rejected his conclusion as typical bourgeois misunderstanding. The crux of value analysis, they argued, was never to explain prices per se, but to emphasize the under- lying social essence of their formation - the class conflict in production, the social imperative of technical change and the workings of the capitalist mode of production as whole.
But then, this victory shouldn't surprise us, simply because neoclassical political economy is not a science, but a church. And like every church with forged scriptures, the neoclassical priests go on with their daily business, spreading the faith by building 'elegant-seeming arguments in terms which they cannot define' and searching for 'answers to unaskable questions' (Robinson 1970: 317).
Neoclassical parables 83
6 The Marxist entanglement I
Values and prices
. . . the whole substance of the bread is changed into the whole substance of Christ's body, and the whole substance of the wine into the whole substance of Christ's blood. Hence. . . it can be called 'transubstantiation. '
--Thomas Aquinas, Summa Theologica
As radical thinkers, we find it far more difficult to criticize Marx than the neoclassicists. So much of our thinking about capitalism originates from his writings. The very concept of the 'capitalist system'; the view of capital as a political institution and of political critique as part of the class struggle; the emphasis on the ruling class and the socio-historical context in which it emerges; the dialectical development of history in general and of capital accu- mulation in particular; the imperative of empirical research; the universal- izing tendencies of capital - these ideas and emphases are all due to Marx. It is hard to approach contemporary social phenomena - from globalization, to economic crisis, to militarization, imperialism, ecology, price movements, the modern corporation, cultural development, elite dynamics and technical change, to name a few - without feeling indebted to Marx and the controver- sies he opened up. His insights, along with the debates among his followers and critics, are deeply embedded in our current thinking.
But then it is precisely this crucial importance of Marx - along with his emphasis on dialectical thinking - that forces us to re-examine his underlying framework. Capitalism, he argued, is a system of commodities, driven by the accumulation of capital and denominated in prices. To decipher the secrets of this process is to look behind the front window of prices, and to do so we need a theory of value. This is the starting point, the 'algorithm' that Marx uses to develop much of his subsequent concepts and analysis. Marx chose to develop a value theory based on labour, and it is here that his analysis went wrong. Our purpose in this and the next chapter is to examine why. What are the inconsistencies in Marx's logic, how has the development of capitalism under- mined that logic, and most importantly, what can we learn from these theoretical and historical considerations as we seek to develop a radical alternative?
Content and form
Throughout Das Kapital there is no 'analytical' definition of capital, perhaps for a good reason. In contrast to his classical predecessors, Marx saw capital not as a 'thing', but as a comprehensive social relation whose description was intertwined with its explanation. The context of capital included the produc- tion process, the division of labour and technological progress, as well as the institutional and power arrangements shaping the collective consciousness. According to Erik Olin Wright (1977: 198), the notion that capital accumula- tion involves merely the tangible augmentation of machinery, buildings, raw materials and alike is alien to Marxist thinking. Instead, he maintains, 'capital accumulation must be understood as the reproduction of capitalist social relations on an ever-expanding scale through the conversion of surplus value into new constant and variable capital'. Emphasizing this aspect of Marx's writing, Anwar Shaikh (1990: 73) similarly reiterates that 'capital is not a thing, but rather a definite set of social relations', and that in order to under- stand it we must 'decipher its character as a social relation'.
Marx started with three fundamental principles. The first was that human history is driven largely by a struggle over surplus. The second was that production and redistribution are inseparable: surplus presupposes a class society, and classes mean a struggle over how this surplus is created, who is going to get it and how it is to be used and abused. The third principle was that, regardless of its particular form, surplus is always generated through the labour process. The analysis of every class society therefore has to begin with the underlying process of production: 'A distinct mode of production thus determines a specific mode of consumption, distribution, exchange and the specific relations of these different phases to one another' (Marx 1859: 205). This latter conviction created the infamous 'materialistic' bias underlying Marx's theory of accumulation.
The consequence of this bias was an over-preoccupation with content and less attention to form. The content of capitalism is the concrete technological fusion of workers and instruments through an ever-expanding social process of production and consumption. The form of capitalism is capitalist control; that is, the manipulation of human beings via the quantitative accumulation of universal ownership titles. As a historian of capitalism, Marx repeatedly emphasized the inherent interdependence of these two aspects. As a theoreti- cian, though, he failed to integrate this interdependence into his analytical framework of accumulation. When it came to describing accumulation in abstract terms, his attention was focused almost solely on a relatively narrow understanding of production, leaving much of the power dynamics ignored. And so although Marx saw accumulation as an antagonistic social process, in the end his theorizing got entangled in the same 'materialistic' trap that would later confound the neoclassicists.
The Marxist entanglement I 85
86 The enigma of capital
The labour theory of value
For the capitalist, accumulation is a simple process in which 'money makes money'. The capitalist invests M dollars, ends up with M+? M dollars, and the key challenge is how to make ? M as big as possible. For Marx the ques- tion is different. He asks not so much how, but why: where does ? M come from? And the answer, he argues, can be given only by looking over the capi- talist's shoulder, peering beyond the phenomenon and into the kernel.
What appears on the surface as the self-expansion of money, in fact, is a reflection of a social process. Money can 'make' money, Marx says, only through the exploitation of productive labour.
Conceptually, the process of capital accumulation can be represented by the following expression:
1. M? c+v? Production? c+v+s? M+? M
The capitalist uses money (M) to buy constant capital (c) and variable capital (v). The first of these capitals consists of used-up raw materials and semi- finished goods, as well as machinery and structures that depreciate during production; the second form of capital comprises labour power. All commod- ities, including c and v, are assumed to be exchanged at prices proportionate to their value; that is, proportionate to the socially necessary abstract labour- time required for their reproduction (a concept which we define in the next section and examine more closely in Chapter 8).
Constant and variable capital nevertheless differ in that, when they go through production, c simply transfers its own value to the new products and in that sense remains 'constant', whereas v transfers its own value as well as generates new value, which is why it is called 'variable'. Once the product is sold on the market, this new value, denoted by s for 'surplus' value, is realized by the capitalist in the form of money profit (? M).
How is surplus value created? The answer is based on the distinction between labour power and labour. Labour power is the ability to work, which is what the worker sells. By contrast, labour is the actual time he or she ends up working for the capitalist. Since labour power is treated as a commodity, its price, like that of every commodity, is proportionate to the socially neces- sary cost of its own reproduction. In this case, it is proportionate to the average cost, counted in labour time, of having the worker replenish herself or himself for yet another day of labour. 1
1 Some, like Karl Polanyi (1944: Ch. 6), argue that labour (or labour power from a Marxist perspective) is really a fictitious commodity, since, unlike true commodities, human beings generally are not produced for the purpose of sale on the market. This reasoning is vulner- able on three counts, all related to the notion of 'purpose'. First, it is not at all clear that labour power isn't produced for the market (aren't capitalist institutions geared very specifically for the production and reproduction of human workers, and isn't it true that most people in capitalist societies indeed raise their children with an eye to their future
? The Marxist entanglement I 87
But this price of labour power, when measured in labour time, is, as a rule, smaller than the actual labour time the worker works for the capitalist. And here lies the crux of the matter: the secret of accumulation rests on the unique ability of labour power to create surplus value - a surplus which the institu- tion of private property then allows the capitalists to appropriate.
Three challenges
This elegant exposition of both the social character of production and the conflictual-exploitative basis of accumulation enabled Marx to excite genera- tions of followers and alter the course of history. And yet Marx's conception of capital - particularly his Smithian emphasis on production as the engine of accumulation and his Ricardian belief that labour values reflect the inner quantitative code of the process - was far too restrictive and, in the final analysis, misleading.
Socially necessary abstract labour
The problem is threefold. The first difficulty concerns the underlying unit of measurement: socially necessary abstract labour time. 2 Marx was appalled yet fascinated by the 'mechanized' order of capitalism, a social system that objectifies its human subjects and fetishizes their social interactions. His method reflected this double-sided sentiment. On the one hand, he subjected the transformations of capitalism to dialectical analysis. On the other hand, he viewed capitalist processes as obeying historical 'laws of motion' and therefore as amenable to scientific inquiry. This latter view was deeply influ- enced by the contemporary revolutions in physics and chemistry, and it drove Marx, just as it drove natural scientists, to search for basic units. He looked for the underlying building blocks, for the simplest elements with which the complex processes of capitalism are socially constructed and ideologically articulated.
The visible building block of capitalism, he argued, is the commodity. On the face of it, commodities are qualitatively different from each other and in that sense incommensurate: a meal in a restaurant is different from a barrel of oil, and both are unlike an automobile. And yet all commodities share a common denominator: their price. A meal may cost $50, a barrel of oil $100 and an automobile $20,000. Although incommensurate qualitatively, they
saleability? ). Second, it isn't clear whose purpose counts here: the purpose of the worker's parents? Of the worker herself? Of her employer? Of the capitalist class more broadly? Finally, why is the original purpose of conceiving a child of any significance - given that most people end up selling their labour power regardless of anybody's intentions?
2 Marx commonly refers to 'socially necessary labour' as shorthand for 'socially necessary abstract labour'. Although Marx himself didn't, we use the latter expression since, as we shall see, only abstract labour can be added up.
? 88 The enigma of capital
nonetheless display a strict quantitative relationship, expressed by their price ratio of 1:2:400.
How is it possible for qualitatively different commodities to have quantita- tively comparable prices? Marx isn't puzzled. Commodities, he admits, indeed differ in their use value. But they nonetheless share one property in common: they are all products of human labour. And it is this human labour - understood as an undifferentiated universal quantum - that gives commodi- ties their value and makes them commensurate. Marx defined this universal quantum as socially necessary abstract labour. This is the elementary particle of his system, the hidden entity that both underlies and embodies the entire architecture of the capitalist order. 3
The significance of socially necessary abstract labour can hardly be over- stated. Capitalism is a system organized through prices, and, according to Marx, socially necessary abstract labour time - mediated through the labour theory of value - provides the ultimate code of prices. It is the basic unit that gives commodities quantity and capital magnitude and, therefore, the common denominator with which all the important ratios of capitalism are expressed. It is crucial for understanding the profit rate of capitalists, the subsistence wage of workers, the distribution of income and the balance of class power. It is essential for explaining the historical development of capi- talism, its short-term crises and long-term tendencies. It underlies the system's eventual demise. Without this universal unit, it is doubtful that Marx's grand theory can remain standing. Although Marx's insights go beyond his labour theory of value, the hallmark of his system lies in its completeness: the claim that there is a single, universal logic that underlies the entire order of capi- talism. And this latter claim depends crucially on abstract labour.
It turns out, though, that this elementary particle, the unit on which every- thing else stands, is deeply problematic. The key difficulty is that this particle - like God or the Ether - is forever beyond our reach. We can observe actual labour, but that still tells us nothing about socially necessary abstract labour. The latter term differs from the former on two counts. First, socially neces- sary labour time refers not to the specific time a given capitalist enterprise takes to produce the commodity, but to the average time society requires to produce this type of commodity. This is the 'socially necessary' aspect of the term. Second, socially necessary labour time is counted not in heterogeneous
3 'Value, therefore, does not stalk about with a label describing what it is. It is value, rather, that converts every product into a social hieroglyphic. Later on, we try to decipher the hiero- glyphic, to get behind the secret of our own social products; for to stamp an object of utility as a value, is just as much a social product as language. The recent scientific discovery, that the products of labour, so far as they are values, are but material expressions of the human labour spent in their production, marks, indeed, an epoch in the history of the development of the human race, but, by no means, dissipates the mist through which the social character of labour appears to us to be an objective character of the products themselves' (Marx 1909, Vol. 1: 83).
? The Marxist entanglement I 89
units of concrete labour, but in homogenous units that can be added up. This is the 'abstract' dimension of the concept. The problem is that both conver- sions - from actual to socially necessary and from concrete to abstract - are difficult if not impossible to perform. As noted, this is a make-or-break predicament - for, if we cannot perform these conversions, we don't have a basic unit to work with and therefore no theory at all.
Production
The second difficulty concerns the concept of 'production'. Even if we can agree on what constitutes socially necessary abstract labour, there is still the issue of which labour is relevant and which is not. Although all values derive from the productive labour of workers, not all labour is productive. According to Marx, there are two types of workers: productive workers who create value and unproductive workers who do not. In order to render the labour theory of value meaningful, we need to count only the former and ignore the latter. Now, this selection assumes that we can distinguish between these two types of workers in the first place - and it is here that the theory runs into a second roadblock. It turns out that there is no objective basis, a priori or a posteriori, on which to decide that the labour of a Volvo engineer or Fluor crane operator is productive, while that of a government accountant or a stock broker is not.
Transformation
And there is a third problem. Even if we could somehow identify and measure the socially necessary abstract labour time of productive workers, there is still the issue of 'transforming' the resulting labour values into money prices. The transformation has two steps. The first, analytical, step is to translate labour values into so-called production prices. The purpose here is to show how labour values determine equilibrium prices in a perfectly competitive capitalist economy. This step, though, takes us only half way. A real capitalist economy is neither perfectly competitive nor equilibrated, so we need an additional conversion to translate theoretical production prices into actual market prices. Attempts to achieve these transformations began with Marx himself, and the fact that they still continue today attests to their degree of success.
The road ahead
Together, these three problems make for a rather treacherous path. The value theorist is forced to begin with a highly ambiguous unit of abstract labour; to continue by applying this unit to a non-delineable sphere of production; and to conclude by converting the labour values that emerge from this procedure into prices, using a dubious if not circular calculation. Marxists have written thousands of learned books and articles to evade and bypass the hazards of
90 The enigma of capital
this journey, with the effect of making Marx's original value theory practi- cally impenetrable to the laity.
This chapter and the following two explore this journey - in reverse. Our starting point is the observed phenomenon of actual prices. From there, we trace our way backwards to the underlying relationships and, eventually, to the elementary concepts of the theory. We begin in this chapter with the trans- formation of labour values into prices. We continue in Chapter 7 with the delineation of production. And we conclude in Chapter 8, which deals with the elementary particle of abstract labour, along with the elementary particle of the liberal universe - the util.
The second transformation
As noted, Marx's labour theory of value requires a double transformation in which labour values are first converted into production prices, and then into market prices:
2. labour values ? ? production prices ? ? market prices
The first step is analytical. It implies a mathematical relationship between values and prices, one that ostensibly exists in a perfectly competitive capi- talism. In this context, if we take two commodities - say a computer chip and a bag of potato chips - having a labour-value ratio of (lv1/lv2), the ratio of their prices of production (pp1/pp2) would be given by:
3. pp1=? lv1 pp2 lv2
with ? representing a known coefficient reflecting differences in the 'organic compositions', or the c/v ratios, across the various sectors of the system.
This first step of converting production prices into market prices, although merely analytical, is far from trivial and - in the opinion of many Marxists - in fact impossible to make. However, we postpone these doubts for later in the chapter and assume, for the time being, that the first transformation is logically consistent and practically feasible. So if we know relative values, we also know relative production prices. 4
This assumption, though, takes us only half way. We still have to take the second step and show that the production prices of a hypothetical perfectly competitive capitalism explain the market prices of an actually functioning capitalism. And here we run into a significant problem. As it stands, Marx's labour theory of value does not even try - and indeed refuses - to take this step.
4 Knowledge of prices enables computation of the various stock and flow ratios of the price system, such as the money rates of profit and exploitation, money income shares, the money rate of accumulation, etc. Hence, for the sake of brevity, whenever we refer to prices we also refer to the ratios that can be derived from them.
? ? ? Why only labour?
This latter point was made early on by one of Marx's fiercest critics, the Austrian economist Eugen von Bo? hm-Bawerk (1884; 1896). Marx wasn't incorrect to search for the common property of commodities, Bo? hm-Bawerk conceded. But his insistence that this common property consists only of labour - to the exclusion of all other properties - was logically indefensible.
Commodities, argued Bo? hm-Bawerk, can also vary in other respects. They can differ in the degree of their 'scarcity' as expressed by supply and demand, in whether they are produced by people or gifted by nature, and in the extent to which their temporal production and consumption profile makes them sensitive to the discounting impact of interest rates.
Now, unlike the neoclassicists who translate all such factors into the language of utility, Marxists exclude them from their explanation on the ground that they are 'subjective', or otherwise external to the commodity itself. But since they also acknowledge that these factors do affect market prices, their theory becomes incomplete, by definition.
Excluding power
In fact, the theory is incomplete in ways that extend beyond Bo? hm-Bawerk's utilitarian individualism. Note that the labour theory of value requires perfect competition. Firms and workers have to be 'price takes', unable to individ- ually affect prices and wages - for otherwise, market prices could be set 'arbi- trarily' without any necessary link to production prices. Moreover, capital and labour must be able to move freely between industries in order to equalize the rates of profit and exploitation across different sectors (for instance, Sweezy 1942: 270-74; and Howard and King 1992: 282).
And yet, these conditions of perfect competition do not - and, as we argue later in the book, cannot - exist in the capitalist reality. Instead of atomistic competition in the so-called economic sphere, the history of capitalism impresses on us a broader myriad of restrictive social institutions and power processes.
These include, among others, big business, big bureaucracies and big armies, redistribution and restructuring by government, international struggles, segmented labour markets, core-periphery interactions, ideological persuasion, material cooptation and, last but not least, the extensive use of force and violence at every level of society.
The existence of these power institutions and processes makes labour values (and therefore prices of production) practically useless for the study of actual prices and accumulation. In fact, under such conditions, the value of labour power - the basic input in all production processes and the ultimate anchor of accumulation - is already contaminated by power relations (a point to which we return in Chapter 8).
Ironically, Marx was the first to predict these deviations from competition, particularly the centralization of capital and the growth of state power - yet
The Marxist entanglement I 91
92 The enigma of capital
he did not explore their detrimental implications for his own labour theory of value. Part of the reason was that these phenomena were only starting to emerge and therefore were still difficult to examine with some rigour. But there was a deeper cause.
Marx's analytical framework, like that of the neoclassicists, was hostage to the mechanical worldview of static equilibrium. The neoclassicists, whose purpose was to eviscerate history from their positive economics and demon- strate the eternal harmony of capitalism, found mechanical equilibrium useful. But Marx tried to do the very opposite. He attempted to understand the transformative dynamics of social conflict - the very antithesis of mechan- ical equilibrium. The result was a lingering dissonance between his dialectical analyses of capitalist development and crisis, on the one hand, and his attempts to mimic physics and chemistry in his labour theory value, on the other. The former uses as its raw material the full plethora of power relations; the latter expunges power to retain the determinism of labour time.
Omitting capitalization
Finally, as we shall see in Part III, labour values and production prices can tell us very little about what really matters to capitalists: the capitalization of their assets on the stock and bond markets. Marx, who didn't know exactly what to do with these forward-looking assets, got himself off the hook by dubbing them 'fictitious capital'. It was a choice of words for which his adher- ents were to pay dearly.
Following Marx's death, the trajectory of financial markets has diverged from the underlying amassment of (what Marx considered) 'real' capital. As will be amply demonstrated in Chapter 10, nowadays the corporation's market value commonly is much bigger than the price of its underlying plant and equipment (however estimated). Similarly, comparing any two corpora- tions, we usually find the ratio of their market values to be markedly different from the price ratio of their plant and equipment (however measured).
As a result of these developments, those who have accepted Marx's classi- fication and exclude 'financial' capitalization from their 'materialist' labour theory of value now find themselves boxed into a corner. Being unable to explain the trajectory of financial markets with Marxist tools, they face the unpalatable choice of dismissing their movements as irrelevant, classifying them as 'distortions' or simply surrendering to the bourgeois theory of corpo- rate finance and injecting its neoclassical econometrics into their Marxist dialectics.
What does the labour theory of value theorize?
The ambivalence of Marxists toward subjective considerations, power and 'fictitious' capital has had an important consequence: by excluding the role of these factors in principle while recognizing it in practice, they have made their
The Marxist entanglement I 93
labour theory of value logically 'weightless'. As it stands, there is nothing in the theory itself to tell us whether labour values explain 1 per cent of prices, 99 per cent, or anything in between, and whether this explanatory power remains stable or changes over time.
This predicament hasn't been lost on Marxists, and rather than fight a losing battle most have opted out. Marx's labour theory of value, many now argue, is not a 'price theory' - at least not in the conventional liberal sense. Marx was primarily a critic of classical political economy, they say, and as such, he wasn't concerned with the precise determination of price levels:
Whatever may be the way in which the prices of various commodities are first fixed or mutually regulated, the law of value always dominates their movement. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.
(Marx 1909, Vol. 3: 208, emphases added)
Note the emphases: value does not determine but merely dominates market prices, and it affects not their level but their movement. More broadly, according to this view Marx was not really interested in the price of chewing gum or the day-to-day fluctuations of a particular sector. These were epiphe- nomenal:
Magnitude of value expresses a relation of social production, it expresses the connection that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as the magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity.
(Marx 1909, Vol. 1: 114)
For Marx, then, the issue was not individual prices but the general tenden- cies of capitalism. And this broad emphasis shouldn't be surprising. The period he was writing in had witnessed great strides in probability and statis- tics. The concept of least-squares deviations from mean, developed by both Gauss and Legendre in the late eighteenth century, was already widely used, while Galton's reversion to mean was just around the corner. The notion of approximating the underlying truth from multiple imprecise measurements, first applied in the geodesic derivation of the standard metre, was gaining adherents in every science. 5
5 On the intertwined evolution of probability and statistics, scientific measurements and liberal political economy, see Hacking (1975; 1990), Porter (1995), Alder (1995; 2002) and the collection of Klein and Morgan (2001).
? 94 The enigma of capital
In line with these developments, Marx, too, was searching for the long- term 'fundamentals', the mean equilibrium values around which prices oscillate and to which they ultimately revert:
The assumption that the commodities of the various spheres of produc- tion are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.
(Marx 1909, Vol. 3: 210)
Now, here we have a possible re-entry point. Marx's pronouncement was difficult to corroborate in his own time, but nowadays, with abundant statis- tics and cheap computing power, it shouldn't be too hard to assess. All it takes is a simple chart. You plot the historical trajectories of labour values and prices of production; on these you superimpose the historical movement of actual prices; and then you look and see. The resulting pattern, mediated if need be by statistical paraphernalia, should be able to tell you both the extent to which the law of value governs prices - with short-term precision, in the long run only, or not at all - and how this pattern may have changed over time.
And, indeed, as we shall see in the next section, Marxists have taken on this task. Since the late 1970s, they have subjected the labour theory of value to rigorous testing - with results that seem to prove more than Marx could ever have hoped for. In general, the studies show that values govern prices not only in the long run, but also in the fairly immediate term, and that they do so very tightly and consistently across space and over time.
And so, in the end, everything falls into place. Although we do not live in a perfectly competitive capitalism, and although prices are subject to the impact of numerous factors other than labour time, none of this matters a great deal. In the final empirical analysis, Marx was right. Capitalism does seem to obey his law of value.
Or does it?
Testing the labour theory of value
The problem is surprisingly simple. The purpose of testing the labour theory of value is to show that market prices are positively correlated with labour values (or with their corresponding prices of production). Now, irrespective of how one approaches this task, two things must be known beforehand: prices and values. And yet it turns out that these seemingly trivial magnitudes are not so easy to 'know' and that, contrary to their explicit proclamation, the empirical studies do not appear to even try to correlate prices and values.
The price of what?
Begin with prices. Most people think of these as attributes of individual commodities - the price of a Toyota Corolla, the price of a bushel of wheat, the price of a United Airlines flight from New York to Tokyo. Price could also be an attribute of a group of commodities. The GDP deflator of the beverage industry, for instance, denotes the weighted average price of all newly produced commodities in that industry, while similar deflators express the weighted average price for entire sectors such as consumer and investment goods, or even the economy as a whole.
Marxist studies of price-value correlations, however, deal with neither of these concepts. Instead of looking at the price of a single commodity or the average price of a group of commodities, they focus on the price of total output - that is, on the unit price of the commodity multiplied by its quantity. Typically, the researcher divides an economy into a few dozen sectors as delineated by the national statistical service, estimates the price and value of total output in each of these sectors, and then correlates these two magnitudes across sectors for one or more years.
This shift in focus has significant statistical implications. Correlations measured in this way reflect the co-variations not only of unit prices and values, but also of their associated quantities. Now, note that the unit value and unit price of each sector are multiplied by the same output. This fact means that, all other things being equal, the greater the size-variability of output across the different sectors, the tighter the correlation between their total price and total value. 6 And since different sectors do vary in their output size, the common result is to make the overall correlation bigger than the underlying correlation between unit prices and values. The extent of this impact is revealed when sectors are controlled for their size: the value-price correlations usually drop sharply, often to insignificant levels. 7
6 Denote, for the i-th sector, unit market price by mpi, unit labour value by lvi and the level of output by qi. The correlation across sectors between unit price and unit value associates mpi ? lvi, whereas the correlation across sectors between the total price of the output and the total value of the output associates qi * mpi ? qi * lvi. Note that in the latter correlation qi is common to both magnitudes.
7 On the issue of spurious correlation, see Freeman (1998) and the debate between Kliman (2002; 2005; 2007: Ch. 11) and Cockshott and Cottrell (2005). The latter writers argue that, since commodities have no universal quantities (a box of breakfast cereal cannot be directly compared to a passenger aircraft), the correlation between their unit price and unit value is meaningless. This problem of incomparable units could easily be bypassed by correlating relative prices with relative values. In our example here, we would correlate the ratio between the price of cereals and the price of aircraft on the one hand with the ratio between the value of cereal and the value of aircraft on the other.
The Marxist entanglement I 95
? 96 The enigma of capital
Absence of value
The other problem with empirical studies has to do with values - or rather the lack thereof. To our knowledge, all Marxist models that purport to correlate prices with values do no such thing. Instead of correlating prices with values, they in fact correlate prices with . . . prices!
The reason is simple enough. Recall that, according to Marx, the value of a commodity denotes the abstract labour time socially necessary for its production. Yet, as we already mentioned and elaborate further here and in Chapter 8, this quantum is impossible to measure. And so the researcher makes assumptions.
The most important of these assumptions are that the value of labour power is proportionate to the actual wage rate, that the ratio of variable capital to surplus value is given by the price ratio of wages to profit, and occa- sionally also that the value of the depreciated constant capital is equal to a fraction of the capital's money price. In other words, the researcher assumes precisely what the labour theory of value is supposed to demonstrate. 8
Duncan Foley tries to put on a brave face on this circularity by describing it as a matter of convenience:
. . . the choice of an embodied labor coefficients [sic] or a market price accounting system does not make much practical difference to estimates of Marxian categories like the rate of exploitation, or the ratio of unpro- ductive to productive labor in real economies. Given the wide availability of market price accounting data in financial and government sources, and the expense, difficulty, and possible error involved in reconstructing embodied labor coefficients for many periods and economies from input/ output tables, most empirical work. . . will use market price data as a first approximation to an embodied labor coefficients system of accounts.
(Foley 2000: 35)
But this account is misleading. The issue isn't convenience, it's necessity. The imperative of this procedure was succinctly if opaquely stated in one of the first statistical studies:
In order to compute the rate of surplus value, input/output flows in market prices (hereafter prices) must be converted into input/output flows in labor time (hereafter values).
(Wolff 1975: 936, emphasis added)
8 To avoid undue attention, these assumptions are often tucked in endnotes and technical appendices. Commonly, the researcher will state them cryptically, with minimal discussion and seldom with an apology. See, for example, Wolff (1975: 936), Ochoa (1989: 427-29), Shaikh and Tonak (1994: 80-81), Alemi and Foley (1997: 2) and Cockshott and Cottrell (2005: 312).
? The Marxist entanglement I 97
In short, we have to pretend. Since values are forever unknown, we need to first convert prices into 'values' and then correlate the result with prices. It seems reasonable to expect the outcome to be positive and tight. After all, we are correlating prices with themselves. What remains unclear is why one would bother to show this correlation and, more puzzling still, how the whole excise relates to the labour theory of value. 9
Recap
All in all, then, it seems that the second transformation does not take us very far, and that values and prices of production in fact tell us very little about actual prices. To summarize the difficulties: most Marxists concede that market prices are affected by an array of factors other than values; they none- theless insist on excluding these factors from their theory and therefore make the theory logically incomplete to an unknown extent. Some researchers have tried to circumvent this problem statistically, by showing prices and values to be consistently and tightly correlated in practice. Their methodology, though, is highly questionable for two reasons. First, they usually focus not on indi- vidual commodities but on total output, and second, their 'value' data are in fact nothing but converted prices. The consequence is that the estimated correlations, no matter how tight, are irrelevant to the labour theory of value.
The first transformation
So far we have focused on moving from production prices to market prices, assuming that the former were merely transformed labour values. This assumption, though, isn't trivial. In fact, most of Marx's followers agree with his critics that this first step is impossible to take.
To explain the problem, begin with Marx's value equation: 4. lv = c + v + s,
where the commodity's labour value is given by lv, the value of constant capital by c, the value of variable capital by v and surplus value by s.
Marx used these categories to spell out a definite relationship between three ratios across the political economy, a relationship that in turn bridges labour values with prices of production. The first is the rate of profit (? ), given by the ratio of surplus value to the sum of constant and variable capital:
9 Some Marxists have questioned the wisdom of empirically testing the labour theory of value, lest the results prove inconclusive: 'Suppose, for example, that the correlations between embodied labor coefficients and market prices had turned out to be much lower, or to fall over time, or to be low in certain capitalist economies. Are we to conclude that the labor theory of value does not hold, or is weakening over time, or holds only in some capitalist economies? ' (Foley 2000: 20). The writer leaves these questions unanswered.
? 98 The enigma of capital 5. ? = s
? c+v
The second is the rate of exploitation (? ), denoted by ratio of surplus value to variable capital:
6. ? =vs
And the third is the organic composition of capital (? ), defined as ratio of
constant to variable capital:
7. ? =vc
Dividing the numerator and denominator on the right-hand side of Equation (5) by v, and then substituting ? for s/v and ? for c/v, gives us the three-sided relationship between the rate of profit, the rate of exploitation and the organic composition of capital:
8. ? = s/v = ? c/v+1 ? +1
According to Marx, competition among capitalists pushes capital from low- profit to high-profit industries, creating a tendency for the rate of profit (? ) to equalize across the economy. Similarly, competition between workers triggers labour mobility, causing a parallel equalization tendency of the rate of exploi- tation (? ). Now, if these two rates tend to equality across different industries, by definition so must the organic composition of capital (? ).
And yet, unlike the first two movements, the third one has no reason to happen. 10 On the contrary: the ratio of constant to variable capital depends not on competition, but on the technical nature of production and therefore tends to differ across industries (the organic composition of capital in the computer industry, for instance, may be lower than in the steel industry, in dairy farming lower than in microchip production, in banking lower than in automobiles, and so on).
The only way to square the circle is to accept that prices of production and money profits in different industries are not proportionate to their respective labour values and surplus values. Specifically, industries with a higher-than- average organic composition of capital will have prices and profits that are higher than their respective labour values and surplus values, while in indus- tries with a lower-than-average organic composition of capital the opposite will be the case.
10 In fact, it is not entirely clear why labour mobility should equalize the rate of exploitation rather than the wage rate only, although for some reason this question has attracted rela- tively little attention.
? ? ? ? ? The Marxist entanglement I 99
The theory therefore isn't true to the letter, but the damage is limited. Recall that Marx emphasizes the overall processes of capitalist development, and in that regard, argue his followers, his theory remains intact and, indeed, indispensable. The reason is that, although prices and profits differ from their respective labour values and surplus values in individual industries, their aggregates remain the same.
These aggregate equalities are crucial. Since, according to Marxists, the sum of all profits is equal to the sum of all surplus values, and since the sum of all prices is equal to the sum of all labour values, the rate of profit in price terms is equal to the rate of profit in value terms. It is through this determin- ation of the rate of profit that the value system anchors the price system. Compared with this overall causality, price-value and profit-surplus inequal- ities across the individual industries are secondary. They represent a mere redistribution of the overall equalities, and ones that could be fully explained with value categories.
Inconsistency, redundancy, impossibility
The dual system
This understanding of 'pulling and redistributing' labour values was domi- nant among Western and Russian socialists until the Second World War. There were early challenges to this view, but Nazism and Stalinism helped keep them obscure. It was only in the 1940s, with the introduction to English readers of the work of German statistician Ladislaus von Bortkiewicz, that the problem with this view became widely recognized. 11
Bortkiewicz (1907a; 1907b) demonstrated that Marx's solution of pulling and redistributing is logically inconsistent. It turns out that, as we move from labour values to prices of production, the results do not 'add up': the outputs of the price system generally differ from its inputs. 12 According to Bortkiewicz, the inconsistency occurs because Marx's transformation is incomplete. It converts surplus value counted in labour time into profits counted in prices, but it does not do the same for constant and variable capital. The resulting price system therefore is half-baked - partly price denominated, partly value denominated.
Capitalists and workers, though, buy and sell commodities in prices rather than values, so it makes sense to specify two distinct systems - one
11 Bortkiewicz's arguments were summarized in Paul Sweezy's Theory of Capitalist Development (1942) and later included in his translated collection, Karl Marx and the Close of his System (1949).
12 Save for special assumptions, this inequality means that in simple reproduction the overall price of the wage goods produced by the system differs from the total value of wages (so workers consume less or more than capitalism makes available to them); that the overall price of investment goods differs from the total value of the used up constant capital (so there is net investment or divestment); and that the overall price of luxuries is different from the total profits of capitalists (so they must save or dissave).
? 100 The enigma of capital
denominated in values, the other in prices of production. And, indeed, with a dual-system specification, Bortkiewicz showed the transformation of values into prices of production to be mathematically consistent.
But there was a hefty price to pay for this consistency: the dual system no longer satisfies Marx's aggregate conservation principle. With separate systems for prices and values, there is no longer a single ? that would satisfy Equation (3) for all commodities. The result is that total prices need not be equal to total labour values and total profit does not have to be the same as total surplus value. And given these inequalities, the rate of profit denomi- nated in price terms is no longer the same as the rate of profit calculated from labour values.
This was no longer a secondary problem. Marx claimed his theory to be superior to the bourgeois alternatives, partly because it did something they couldn't: it objectively derived the rate of profit from the material conditions of the labour process. 13 Bortkiewicz turned this asset into a liability: he showed that Marx's original framework was logically inconsistent and that it could be fixed only by making the rate of profit independent of the value system.
The complicating detour
Adding insult to injury, in 1957 Paul Samuelson demonstrated that, mathe- matically, the first transformation was a pointless 'complicating detour'. Whether consistent or not, the theory was largely irrelevant. Marx stipulated a two-stage analytical process, moving from the conditions of production to labour values, and from labour values to prices of production. In fact, argued Samuelson, the process requires only one step - from the conditions of production to prices of production - without any intermediate resort to labour values. 'Marxolaters, to use Shaw's term', he suggested triumphantly, 'should heed the basic economic precept, valid in all societies, cut your losses' and dump the labour theory of value (1957: 892).
Many Marxists, although silent on Samuelson's mathematics, rejected his conclusion as typical bourgeois misunderstanding. The crux of value analysis, they argued, was never to explain prices per se, but to emphasize the under- lying social essence of their formation - the class conflict in production, the social imperative of technical change and the workings of the capitalist mode of production as whole.
