Law of value
The law of the value of commodities, known simply as the law of value, is a central concept in Karl Marx's critique of political economy first expounded in his polemic The Poverty of Philosophy against Pierre-Joseph Proudhon with reference to David Ricardo's economics. Most generally, it refers to a regulative principle of the economic exchange of the products of human work, namely that the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labor-time which are currently socially necessary to produce them within the capitalist mode of production.
Thus, the fluctuating exchange value of commodities is regulated by their value, where the magnitude of their value is determined by the average quantity of human labour which is currently socially necessary to produce them. Theorizing this concept and its implications preoccupied Marx for more than two decades.
When Marx talked about "value relationships" or "value proportions", he did not mean "the money" or "the price". Instead, he meant the ratio of value that exist between products of human labour. These relationships can be expressed by the relative replacement costs of products as labour hours worked. The more labour it costs to make a product, the more it is worth and inversely the less labour it costs to make a product, the less it is worth. Money-prices are at best only an expression or reflection of Marx's value relationships—accurately or very inaccurately. Products can be traded above or below their value in market trade and some prices have nothing to do with product-values at all because they refer to tradeable objects which are not regularly produced and reproduced by human labour, or because they refer only to claims on financial assets.
Theorizing the value of labour-products
The "law of value" is often equated with the "labour theory of value", but this is strictly speaking an error, for five reasons.- The law of value only states a general regulative principle about the necessary and inevitable relationship between the trading values of commodities, and the socially average labour-time required to supply them. It is simply a law governing commodity exchange.
- The labour of value in economics aims to explain that determination actually work, what kinds of causal relationships are involved, how the law of value interacts with other economic laws, etc.
- For Marx himself, the "labour theory of value" referred only to the theory of value upheld by some of the classical political economists from William Petty to David Ricardo, who regarded human labour as the real substance of product value.
- Marx's own value theory is not a theory of value, but only of the value-system involved in commodity production and commodity trade.
- Marx never referred to his own theory as a "labour theory of value"; his own critique of the political economists was, that they all failed to explain satisfactorily the determination of product-value by labour-time actually worked—they assumed it, but they did not explain it consistently. Thus, Marx often regarded himself as perfecting a theory which had already existed for a long time, but which had never been consistently presented before.
Gold referent
In Das Kapital Marx normally thinks of the quantity of labour that determines product-value as the ratio between the average total amount of labour-time required to produce a reproducible good, and the corresponding average amount of labour required to produce a unit of gold. Already in 1844, long before he wrote Das Kapital, Marx was very aware of credit money. Whereas "commodity money" played an important role in the earlier stages of capitalist development, the growth of integrated capital markets meant increased use of credit money. Marx felt that the initial assumption of gold-money as a standard of value was justified, in analysing the capitalist relations of production and distribution. Thus, as follows:For Marx, the value of a commodity is determined by socially necessary labor time, or the amount of time "required to produce an article under the normal conditions of production, and with the average degree of skill
and intensity". It is important to note that Marx rejects, contra-classical political economy, any notions of the "value of labor" or "price of labor". Instead, it is labor itself which is constitutive of value, the substance of value. Consequently, it is not labor, but labor-power which has value —a value determined, as in the case of every other commodity, by the labour time necessary for the production, and consequently also the reproduction, of this special article." The importance of labour is its ability to preserve capital value, increase already existing value, and create wholly new value. How any individual happens to regard a particular product normally cannot change that social valuation at all; it's simply a "social fact" in the same way as "the state of the market" is a social fact, even though particular products can at any time trade at prices above or below their socially established value.
Marx realized very well, that the assumption of gold-money was a simplification—there might not be such a stable relationship between price-levels, average commodity values, and gold quantities — but he regarded the assumption as helpful, in explaining the basic laws of motion of the capitalist mode of production "in its ideal average".
Formalization
While Marx used the concept of the law of value in his works Grundrisse, A Contribution to the Critique of Political Economy, Theories of Surplus Value and Das Kapital, he did not explicitly formalise its full meaning in a mathematical sense, and therefore how it should be exactly defined remains to some extent a controversial topic in Marxian economics. Different economists dispute how the proportionality between exchange-value and labour-time should be mathematically understood or modeled, and about the measures which are relevant.Underlying this debate are difficult conceptual questions about how the causal relationships in the economy between price relativities and time worked should be understood. Marx's analysis of value was dialectical, in the sense that he thought value phenomena could only be understood dynamically, holistically and relationally, but he did not spell out all the conceptual, quantitative and logical implications of his position with great exactitude. The scholarly debate about those implications continues even today.
Basic definition of the concept
Supply and demand
Excess demand can raise the prices of products traded, and excess supply can lower them; but if supply and demand are relatively balanced, the question arises of what regulates the settled exchange-ratios of products traded in that case, and this is what the law of value is intended to explain. According to the law of value, the trading ratios of different types of products reflect a real cost structure of production, and this cost structure ultimately reduces to the socially average amounts of human labor-time required to produce different goods and services.Cost structures and price structures
Simply put, if product A takes 100 hours of human work to produce in total, and product B takes 5 hours to produce, the normal trading-ratio of A and B will gravitate to a rate of around 1:20, because A is worth much more than B. Moreover, if A and B are combined and used up to make product C in 40 hours, then product C is likely to be worth the equivalent of around 145 hours of human work in total, including the work of actually making product C. For that reason, most market trade in products is regular and largely predictable as far as price levels are concerned, rather than chaotic and arbitrary. According to Marx, price movements were not simply random, arbitrary or chaotic, but governed by causal laws that limited price variability.The concept of a cost structure refers to the current labour inputs required to make a product, reflected in its price level. The concept of a price structure refers to the fact that prices rarely exist, or change, in isolation; instead, price-levels are interdependent on other price-levels, so that, if some prices would change, a lot of other prices would start to change as well—transmitting a change in valuation across the economy. A structure exists if there is a fairly stable relationship across time between price-levels which are interdependent. Marx argues that the cost structures and price structures for products are, in general, determined by the law of value.
Terms of exchange
The law of value originates in the "terms of exchange" established for different products. If a producer has to supply too much of his own product to get a different product, this has direct consequences for the additional time he has to work to sustain himself and the trading of his product. Over time, and with more market integration, relatively stable values for products are established in accordance with production norms which exist independently of the productivity of individual producers. In that situation, each producer has to adapt his own production to those socially accepted values, the average terms of trade for products vary only within fairly narrow margins, and thus producers' activities fall under the sway of the law of value, which links "the economy of labour-time" with "the economy of trade". Paradoxically, as Marx says, the more that the producers become dependent on exchange, the more exchange appears to become independent of them. Product-markets begin to operate according to their own laws, to which the producers can only adjust themselves. If some prices go up, many other prices will go up as well because people have to cover their increased costs. If some prices go down, many other prices will go down as well since products otherwise fail to sell when cheaper alternatives become available, but no individual is in control of these price fluctuations, or in control of how all the price changes will impact on each other. All they can really do to influence the market is to raise or lower their own prices, but even so they can do that only within certain limits. Ordinarily, people have to accept and work with many given cost-price levels and given sale-price levels which they cannot do anything about. If a product cannot be produced at a certain cost, or if it cannot be sold at a certain price-level, it is unlikely that it will be available much at all.In this way, Marx argues, production activities actually become dominated by the values of the products being produced and exchanged, often quite irrespective of what human needs might be, because these product-values will determine whether and how it is "economic" or "uneconomic" to produce and trade particular products.