The Labour Theory Defended, Part 1 - The Theory

"I have criticized the law of Labour Value with all the severity that a doctrine so utterly false seemed to me to deserve. It may be that my criticism also is open to many objections. But one thing at any rate seems to me certain: earnest writers concerned to find out the truth will not in future venture to content themselves with asserting the law of value as has been hitherto done.

In future any one who thinks that he can maintain this law will first of all be obliged to supply what his predecessors have omitted--a proof that can be taken seriously. Not quotations from authorities; not protesting and dogmatising phrases; but a proof that earnestly and conscientiously goes into the essence of the matter. On such a basis no one will be more ready and willing to continue the discussion than myself." - Eugen von Bohm-Bawerk.

Thesis

I contend that the debate on the question of value was caused by a complete misunderstanding and that the neoclassicals actually agree completely with the classical economists on the question. That the neoclassicals merely clarified the steps in the chain of logic that the classicals already held in a vague implicit sense but that in doing so, the neoclassicals lost the forest for the trees.

Furthermore, since Marxian economics is nothing but classical economics taken to its logical conclusion, so too does neoclassical economics inevitably lead to Marx's radical thought.

In short, my contention is that neoclassical economics is a complement to the Marxian system and not, as is generally thought, a rival theory and that Marxists should take up neoclassical economics, most specifically modified Austrian economics, as its banner, instead of rejecting it.

The Law of Labour Value

We must start, firstly, with what the Labor Theory of Value was, and is, so that we may understand it before we hear the marginalists criticisms of the strawman.

"The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour." - David Ricardo

This is the Labour Theory of Value. It says firstly that what determines the exchange value of a commodity, or the average price, is the amount of "socially necessary labor hours" needed for its production during "normal conditions".

Why is this? Imagine, if you will, that this was not the case. Imagine two identical men, Bob and Larry. They have all of the same skills and all of the same tools at their disposal and hence all of the same opportunities. It takes two hours for Bob to catch a fish and four hours for him to make a chair. As they are the same, it takes Larry just as long and they get the same amount of enjoyment, or boredom, from the task.

Now imagine that Bob comes to Larry and wants to purchase his chair. If Larry says he'll trade it for 3 fish, then Bob would not make the trade. And why would he? He could make the chair himself AND catch himself a fish in the time it would take him to get the three fish for Larry.

Now it is true, that if Bob is desperate enough for a chair, say his mother-in-law is coming over and he doesn't have enough chairs to seat everyone, and if he doesn't have enough time to make a chair for himself, he might make the trade. But this violates the clause "under normal conditions".

This ratio of 3 fish to 1 chair is not sustainable in the long run. It is merely a temporary exchange rate due to unexpected disaster and hence is not a valid criticism of the Labour Theory. In fact, the classical economists and Marx had this entirely incorporated into their theory.

"The value of commodities determined by labour time is only their average value....

The market value of commodities is always different from this average value and always stands either below or above it.

The market value equates itself to the real value by means of its continual fluctuations, not by an equation with real value as some third thing, but precisely through continued inequality to itself....

Price, therefore, differs from value, not only as the nominal differs from the real; not only by its denomination in gold and silver; but also in that the latter appears as the law of the movements to which the former is subject. But they are always distinct and never coincide, or only quite fortuitously and exceptionally. The price of commodities always stands above or below their value, and the value of commodities itself exists only in the UPS AND DOWNS of commodity prices. Demand and supply continually determine the prices of commodities; they never coincide or do so only accidentally; but the costs of production determine for their part the fluctuations of demand and supply." - Karl Marx

As we can see then, there definitely is a link between the exchange value of a commodity, the price of a commodity and the labour that it takes to produce it. Now, in the real world, all men are not the same in their faculties and they all take different degrees of pleasure and discomfort from different operations but nonetheless the tendency is there and in a large way. Any short run drift away from the proper proportion of labor to price in the short run has a tendency to correct itself in the long run.

Of course, the implication of this theory is that it is the labourer that begets wealth and creates value not the capitalist, nor the landlord, nor he who lends at usury. This is the crucial point which Marx rightly seized upon and brought to its logical conclusion.


Constructive criticism is welcomed.

It's not clear what criticism is being offered here, but my own reading of Bohm-Bawerk indicates that his criticism is solely related to the market fluctuation of commodity value. That is to say, they consider the LTV discredited because, as Marx points out (and indeed Marx's words are heavily cited to this end), it is not a theory which fully explains pricing in a market.

Marx was not a classical economist. It's called the critique of political economy for a reason. The idea that Marx was the continuation of classical economics, or that neo-classical economics inevitably leads to Marx's ideas is totally at odds with reality. For the classical and neo-classical economists capitalism was and is a form of society in accordance with a set of natural, eternal laws of economics. They frequently transpose the categories of capitalist society back onto previous social formations (Or even make them eternal laws of human action!) to "prove" capitalism's accordance with nature, or else all of human history is seen as a march towards it's inevitable end in liberal capitalism. "Thus, there has been history, but there is no longer any." For Marx, on the contrary, capitalism is a transitory social formation that provides a transition between earlier social formations based on personal domination (Slavery and Feudalism) and the future classless society based on the union of the producers with their conditions of production and the carrying on of social production according to a common plan. What is more, capitalism is said to be an inherently unstable system because the drive to improve productivity causes a tendential fall in the profit rate which is only corrected by the destruction of capital through crises. To say that the two views are substantially similar and that the only difference is that the neo-classicals fail to follow through with their own logic is patently absurd.

So wait, a school of thought which believes in the inherently transitory nature of capitalism and champions planned production is supposed to take up the banner of a school of thought which declares the categories of capitalism to be eternal laws of human action and is perhaps most famous for explicitly denying the possibility of rationally planning production?

Er, no.

http://www.marxists.org/archive/marx...1/ch05.htm#n24

The labour theory of value is intended to describe the "economic law of motion of modern society", the tendential fall in the profit rate. For that to occur the only thing we need is for total value to equal total prices and for total profit to equal total surplus-value. Wether or not prices converge with values in the short or long terms is a secondary question.

It looks to me like that quotation from chapter 5 is saying the average price.

I would only change this phrase:

"average price, is the amount of 'socially necessary labor hours' needed for its production during 'normal conditions'."

to say this instead:

"average price, IS DETERMINED BY the amount of 'socially necessary labor hours' needed for its production during 'normal conditions'."

The word "is" is wrong. "Determined by" would be right. "Proportional to" would also be right. The value is not in units of hours. The value is in units of money.

Well, yes, although a Bastiatite did concede:

They wouldn't word it precisely like that, but essentially, yes. I'll go more into the criticisms in part 2.

Correct.