Marx The Economist

Marx’ theory of value is unsatisfactory.

The right is not all on one side.

Many faulty arguments have been used by its opponents.

The essential point is not whether labor is the true “source” or “cause” of economic value.

This question may be of primary interest to social philosophers who want to deduce from it ethical claims to the product, and Marx himself was of course not indifferent to this aspect of the problem.

For economics as a positive science, however, which has to describe or explain actual processes, it is much more important to ask how the labor theory of value works as a tool of analysis, and the real trouble with it is that it does so very badly.

• It does not work at all outside of the case of perfect competition.
• Even with perfect competition it never works smoothly except if labor is the only factor of production and, moreover, if labor is all of one kind. 3

If either of these two conditions is not fulfilled, additional assumptions must be introduced and analytical difficulties increase to an extent that soon becomes unmanageable. Reasoning on the lines of the labor theory of value is hence reasoning on a very special case without practical importance, though something might be said for it if it be interpreted in the sense of a rough approximation to the historical tendencies of relative values.

The theory which replaced it—in its earliest and now outmoded form, known as the theory of marginal utility—may claim superiority on many counts but the real argument for it is that it is much more general and applies equally well, on the one hand, to the cases of monopoly and imperfect competition and, on the other hand, to the presence of other factors and of labor of many different kinds and qualities.

Moreover, if we introduce into this theory the restrictive assumptions mentioned, proper tionality between value and quantity of labor applied follows from it. 4 It should be clear, therefore, not only that it was perfectly absurd for Marxists to question, as at first they tried to do, the validity of the marginal utility theory of value (which was what confronted them), but also that it is incorrect to call the labor theory of value “wrong.” In any case it is dead and buried.

3 The necessity for the second assumption is particularly damaging. The labor theory of value may be able to deal with differences in quality of labor that are due to training (acquired skill): appropriate quota of the work that goes into the process of training would then have to be added to every hour of skilled work so that we might, without leaving the range of the principle, put the hour of work done by a skilled workman equal to a determined multiple of an hour of unskilled work. But this method fails in the case of “natural” differences in quality of work due to differences in intelligence, will power, physical strength or agility Then recourse must be had to the difference in value of the hours respectively worked by the naturally inferior and the naturally superior workmen— a value that is not itself explainable on the labor-quantity principle. In fact Ricardo does precisely this: he simply says that those different qualities will somehow be put into their right relation by the play of the market mechanism so that we may after all speak of an hour’s work done by workman A being equivalent to a definite multiple of the work done by workman B. But he completely overlooks that in arguing in this way he appeals to another principle of valuation and really surrenders the labor-quantity principle which thus fails from the start, within its own precincts, and before it has the chance to fail because of the presence of factors other than labor.

4 In fact, it follows from the marginal utility theory of value that for equilibrium to exist each factor must be so distributed over the productive uses open to it that the last unit allocated to any use produces the same value as the last unit allocated to each of the other uses. If there be no other factors except labor of one kind and quality, this obviously means that the relative values or prices of all commodities must be proportional to the numbers of man-hours contained in them, provided there is perfect competition and mobility.

2. Though neither Ricardo nor Marx seems to have been fully aware of all the weaknesses of the position in which they had placed themselves by adopting this starting point, they perceived some of them quite clearly.

In particular, they both grappled with the problem of eliminating the element of Services of Natural Agents which of course are deprived of their proper place in the process of production and distribution by a theory of value that rests upon quantity of labor alone. The familiar Ricardian theory of the rent of land is essentially an attempt to accomplish that elimination and the Marxian theory is another. As soon as we are in possession of an analytical apparatus which takes care of rent as naturally as it does of wages, the whole difficulty vanishes. Hence nothing more need be said about the intrinsic merits or demerits of Marx’s doctrine of absolute as distinguished from differential rent, or about its relation to that of Rodbertus. But even if we let that pass we are still left with the difficulty arising out of the presence of capital in the sense of a stock of means of production that are themselves produced. To Ricardo it presented itself very simply: in the famous Section IV of the first chapter of his Principles he introduces and accepts as a fact, without attempting to question it, that, where capital goods such as plant, machinery and raw materials are used in the production of a commodity, this commodity will sell at a price which will yield a net return to the owner of those capital goods. He realized that this fact has something to do with the period of time that elapses between the investment and the emergence of salable products and that it will enforce deviations of the actual values of these from proportionality to the man-hours “contained” in them—including the man-hours that went into the production of the capital goods themselves—whenever these periods are not the same in all industries. To this he points as coolly as if it followed from, instead of contradicting, his fundamental theorem about value, and beyond this he does not really go, confining himself to some secondary problems that arise in this connection and obviously believing that his theory still describes the basic determinant of value. Marx also introduced, accepted and discussed that same fact and never questioned it as a fact. He also realized that it seems to give the lie to the labor theory of value. But he recognized the inadequacy of Ricardo’s treatment of the problem and, while accepting the problem itself in the shape in which Ricardo presented it, set about to attack it in earnest, devoting to it about as many hundreds of pages as Ricardo devoted sentences.