Page 39: “We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour-time socially necessary for its production. Each individual commodity, in this connexion, is to be considered as an average sample of its class. Commodities, therefore, in which equal quantities of labour are embodied, or which can be produced in the same time, have the same value.”
This is probably a good place to drop in an historical note: Up until this point, what we have is clear statement of something that the serious political economists of the time (Adam Smith, David Ricardo, Benjamin Franklin, &c &c) would have agreed with. The stumbling block to political economists, was this: If commodities all sell at their value, and value is determined by the amount of labor embodied in it, and labor is a commodity–where does the profit come from? Smith, as we know, invented “ordinary profits of stock” to sidestep the issue. Franklin simply ignored it, and Ricardo, from my limited understanding (I haven’t read him), expresses the problem in the clearest terms without solving it. In the footnotes, there are quotes of various efforts to solve this, my favorite being the guy who explained that profit comes from capitalists denying themselves luxuries. I kid you not.
Page 40: “The value of a commodity would therefore remain constant, if the labour-time required for its production also remained constant. The latter changes with every variation in the productiveness of labour. This productiveness is determined by various circumstances, amongst others, by the average amount of skill of the workmen, the state of science, and the degree of its practical application, the social organization of production, the extent and capabilities of the means of production, and by the physical conditions.”
The more productive a given form labour is, the lower the value of the commodity produced by that form of labour. This will become very important later.
“For example, the same amount of labour in favorable seasons is embodied in 8 bushels of corn, and in unfavorable seasons only in four. The same labour extracts from rich mines more metal than from poor mines. Diamonds are of very rare occurrence on the earth’s surface, and hence their discovery costs, on an average, a great deal of labour-time. Consequently much labour is represented in a small compass.”
I think there was a question earlier about diamonds &c, and there’s the answer. Makes sense to me. What I don’t understand is why “8” is given as a numeral, and “four” is spelled out. But this mystery may be less important, in the cosmic scheme of things, than others, so we’ll pass over it.
“A thing can be a use-value, without having value. This is the case whenever its utility to man is not due to labour. Such are air, virgin soil, natural meadows, &c. A thing can be useful, and the product of human labour, without being a commodity. Whoever directly satisfies his wants with the produce of his own labour, creates, indeed, use-values, but not commodities. In order to produce the latter, he must not only produce use-values, but use-values for others, social use-values. ”
This is followed by a parenthetical comment about medieval peasant’s quit-rent-corn and tithe-corn, which is, in turn, followed by a footnote by Engels; the point being that not all use-values produced for others are commodities; they must be produced for exchange to be commodities.
Page 41: “Lastly nothing can have value, without being an object of utility. If the thing is useless, so is the labour contained in it: the labour does not count as labour, and therefore creates no value.”
And here, at lest, we have reached the end of Section 1. Huzzah.
Aha, here’s where we pull a fast one due to using a funny definition of value. No commodity can “sell at its value”, because we’ve earlier defined value as the amount of labour needed to produce the commodity, and hours of labour aren’t a currency. Commodities sell at exchange-values, which in the definitions that we’re using here are not particularly correlated with values.
Profit is thus easy to understand. It’s the difference between the exchange-value of your inputs (labour, raw materials, land, etc.) and the exchange-value of your outputs. Value, in the sense that we’re using it here, simply doesn’t enter into the equation.
Also, we discover here that value isn’t that which is produced by labour, because something that has no use-value has no value even though if it requires labour to produce it. This means that there’s a step-function in the definition of value, and those are always suspicious. If something takes four hours to make, and its use-value is 100 (on some arbitrary scale) then its value is four person-hours. Use-value 10, value four person-hours. Use-value 1, value four person-hours. Use-value 0,1, value four person-hours. Use value 0, value 0. It’s a funny looking graph, that in fact you can’t even draw. Highly suspicious.
Mike: “No commodity can “sell at its value”, because we’ve earlier defined value as the amount of labour needed to produce the commodity, and hours of labour aren’t a currency.”
That’s something else we’ll be getting to later in this chapter, but, in brief, yes hours of labor are a currency. Or, to put it another way, money is simply another expression of labor time.
No fast one.
“Also, we discover here that value isn’t that which is produced by labour, because something that has no use-value has no value even though if it requires labour to produce it”
You must have missed the part where we said what we were exploring was the *commodity.” Labor-time is value as expressed *in a commodity* . Is it your opinion that something that no one wants qualifies as a commodity? I suppose you could define it that way, but I don’t see how that definition advances our understanding of economics.
The graph, then, when speaking of commodities, would look like this: Four labor-hours = 100, 2 labor-hours = 50, 1 labor-hour = 25.
The fact that it is possible for someone to put a lot of labor into a useless thing does not mean that the economy functions on the basis of people doing so (although, to bolster your argument, it seems a lot of Microsoft programmers make something of a career doing exactly that).
I’m not actually suggesting that something no one wants should qualify as a commodity. What I’m suggesting is that it’s a funny definition of value in which something that’s almost but not quite useless, and something that’s very useful indeed, have the same value if they take the same amount of labour to produce. I would suggest that a more productive definition would hold that something that’s almost useless has almost no value. This gets rid of that troubling discontinuity where the value is the same for all levels of usability, except for usability zero where the value suddenly drops to zero.
I’m certainly prepared to defer the discussion of the relationship between value (as defined here in terms of labour) and exchange-value (which I think you’re asserting to be equivalent), if it’s going to be examined in more detail later.
“What I’m suggesting is that it’s a funny definition of value in which something that’s almost but not quite useless, and something that’s very useful indeed, have the same value if they take the same amount of labour to produce.”
Ah, I see. And yet, it seems to match one’s own experience, where the price of a commodity doesn’t change in any way related to how much I want it.
It seems, in other words, that you very much want to tie value to usefulness. And yet, usefulness is qualitative, whereas value is quantitative. I cannot think of any way in which “degree of usefulness” can reasonably become a number. Nor, in fact, in the real world, do I see signs that this happens.
I’m still struggling with “value” vs “exchange-value” as Marx is using the terms, but I think it is something like this: Value refers to the intrinsic value in a commodity; exchange-value refers to this value in relation to other commodities.
“I’m still struggling with “value” vs “exchange-value” as Marx is using the terms, but I think it is something like this: Value refers to the intrinsic value in a commodity; exchange-value refers to this value in relation to other commodities.”
In those terms it is easy to sea the difference between value and xchange value, the difference is profit.
“the price of a commodity doesn’t change in any way related to how much I want it.”no but the price you are willing to pay does, and it is the average price that people are willing to pay that determines the value of an object.
I agree with Mike Scott here that he is pulling a fast one.
“it is the average price that people are willing to pay that determines the value of an object.”
Wow. It is an amazingly fortunate thing that the price people are willing to pay happens to be greater than the cost of production, doesn’t it? Otherwise, geez, we couldn’t afford to produce anything. Dodged a bullet there, didn’t we?
The maximum price that a customer is willing to pay for an item is determined by its usefulness to them. The price of a purchase must be less than the utility to the customer. The margin between the price and the utility can be thought of as consumer profit.
The minimum price at which a producer is willing to sell an item is determined by the cost of producing the item. The price of the sale must be greater than the cost to the producer. The margin between the cost and the price is the producer profit.
There can be a wide range of consumers and producers with different inherent utilities and costs. These can be plotted on a graph as two curves, the demand curve and the supply curve. The price tends to end up where they cross the market clearing price at which supply and demand are equal.
If an items cost of production exceeds the utility to any consumer then there will be no market as making it is a value-subtracting enterprise.
Brett: Interesting. Do you have any explanation for how a quality (use) transforms itself into a quantity (value)? Intuitively, it makes no sense. That by itself doesn’t mean it’s wrong, it just requires explanation. So far, all I’ve heard is assertion.
I’m also curious about the mechanism. When a new commodity goes on the market, do they take surveys, asking people what they’ll pay in order to set the price? I wonder how they’re worded.
Certainly, when a new commodity hits the market, there is no sign of the immediate and rapid fluctuations that one would expect if price were determined by seeing what people are willing to pay.
I’m not seeing either evidence in the real world, or theoretical justification for your hypothesis. Care to expand?
It isn’t all that complicated. The utility is the value to the consumer that is how much the product is worth to the consumer. The maximum the consumer will pay for it rather than either doing without, doing something themselves or finding a substitute. Utility is the mirror of a producer’s cost and both can be expressed as a price. This obviously differs from consumer to consumer. This means that demand varies inversely with price. While different producers have a range of costs, some can produce an item much more cheaply than others, food for example some land is naturally more productive than others. They may also have limits on the quantity they can produce, as the price rises higher cost producers can enter the market, supply varies with price. If you draw a graph then the two lines should cross at this point supply and demand are equal the market should seek this price. Drawing a sketch graph will make this a great deal more obvious
Some products do have a highly volatile price, oil for example, supply is highly variable and the elasticity of demand is fairly low. If the supply is stable or the elasticity of demand is high the prices are fairly stable.
The market is the price seeking mechanism. The item goes on sale and is purchased by those consumers to whom it is worth more than the price and not purchased by those to whom it isn’t. The market thereby reveals that to a certain number of consumers the product is worth at least that price. Unsold items tell you that the price is too high while if it sells out you may be able to raise prices, while still having enough demand to sell all of the product.
In the context of a auction the utility is the maximum price than the bidder is willing to pay, the seller sets the reserve at the minimum price it is worthwhile selling for. The item then sells at just above the utility of the highest unsuccessful bidder. As that is the lowest price at which demand and supply are equal.
Brett: The first part of your comment is merely a restatement of supply and demand, which explains the fluctuations of price around value, but doesn’t explain where the value comes from. It is as if I asked you what chemicals made up water, and you explained about freezing and boiling points.
The second part is even further from the mark. You said the value is determined by how much people want it–yet if this were true, when a new commodity–say, an improved Hi Def TV set–was introduced, we would see price changes several times a day as stores eagerly worked to find out what consumers would pay. That doesn’t happen. It has never happened. The value of commodities must lie elsewhere than use value.
Auctions are interesting, and it will be fun to talk about them later, but they are not to the point. At the classic sort of auction, the things being auctioned are not commodities. There are other things called auctions that do involve commodities, but what they have in common with classic auctions is little more than the name.
It’s more like you asking about if discussing electromagnetism you asked about the luminiferous ether and me explaining that why wasn’t needed and was simply introducing useless complexity. Most schools of economics have rejected the concept of an intrinsic value independent of price. An item is worth what it sells for. Price is determined dynamically by the interaction of supply and demand and that is all that you need. It also provides a clear explanation of profit, profit is the margin between how much it costs you to produce something and how much it costs the marginal producer to produce something.
That doesn’t follow. Most new products are variants of existing ones that is there are variously close substitutes which provide information about what price is reasonable. The price of some products does vary widely for example hotel rooms become very expensive during the school holidays as while supply is constant, no elasticity of supply, demand at any given price point greatly increases so the price increases.
Commodities are commonly traded by an auction, the mechanism is the same as any other multiple item auction. The price starts out low, bidders drop out as the price rises and at the point where enough bidders have dropped out that the demand matches the supply is the marginal price.
“Most schools of economics have rejected the concept of an intrinsic value independent of price. An item is worth what it sells for.”
Yes, most schools have accepted this. Later, we can discuss why; what social forces are at work on these schools. For now, it is sufficient to say this: schools of thought of bourgeois economy that arise in the epoch of capitalism’s decay are not going to have any interest in scientific truth. A convincing argument, therefore, must go beyond citing the authority of these schools.
“An item is worth what it sells for. Price is determined dynamically by the interaction of supply and demand and that is all that you need.”
Let’s look at this. First of all, it contradicts what you said earlier by leaving off the minimum of production cost. If you no longer believe production cost matters, you should say so, otherwise “all you need” is clearly not all you need.
But if we have set production cost as our baseline, then we are already dealing with an intrinsic value–namely, production cost. That is, if Marx is wrong in his explanation of surplus value (we’ll get to that later), then we’ve returned to Ricardo, Franklin, and Smith: value is the cost of labor.
By attempting to tie value to use-value, they are trying to assign a degree to want: X wants it THIS much, Y wants it THAT much, so we take the average. But how can a degree of want be given a number? Simple, they say: the number is PRICE, thus proving their premise by their conclusion.
And this passes for science?
Commodities auctions are fascinating critters, and I hope we get into them later, but until we do, I won’t accept them as a universal example.
actually I’m with the “deny themselves luxuries” theory of where profits come from. The profits are actually disguised interest payments on the stored labor-value that needed to be initially exchanged with whomever put their labor into making the industrial sewing machine or whatever other kind of equipment is needed to allow for the “minimum socially necessary” labor. What modern economics calls “stocks” were invented in the Middle Ages to get around anti-usury regulation. Once invented, it developed that “stocks” had many advantages in how they spread risk and made companies easier to organize. But they also have the disadvantage that there are many dis-incentives to ever paying back the principal of the loan. So in exchange for a flexible and dynamic economy we are caught in the trap of perpetual interest payments.
I have no idea where you got the idea that I am leaving off production costs. The costs of production are included explicitly, the supply curve is defined by the producer’s costs. While the the demand curve is defined by the consumer’s utility. At the point the curves intersect is a price point at which demand and supply are equal.
The quantification of utility as a price is a prerequisite of any economic exchange, that is you need to know what you are prepared to pay for something. You need to know what it is worth to you.
The supplier needs to know what the it cost to produce the item, how much the raw materials cost, how much the labour cost, what the overheads are &c.. This produces a minimum price for which they can afford to can sell the item. The price at which they are barely covering their costs.
With a fungible commodity producers can have widely differing costs, the profit is the difference between the minimum for which they can sell and the minimum at which the marginal producer can sell.
I got the idea that you were leaving off production costs because the term “production costs” or an equivalent term never appears in post number 9 or 11. In fact, you said, “Price is determined dynamically by the interaction of supply and demand and that is all that you need. ”
Now you are introducing production cost as the definition of supply, which I have no problem with. You haven’t yet reached Marx, but at least with this you’ve caught up to Ricardo and Franklin, which is good progress: they said that price was determined by production cost. They then went on to say production cost was determined by the cost of labor; maybe you’ll get there too; then you’ll at least have reached the 18th Century.
So then, you have the baseline of production cost, and demand sets an upper limit. In a certain sense, this is true, especially for new products: demand can force prices extremely high indeed. But let’s look at the other end of the curve.
When demand falls so low that it approaches the cost of production (I’m accepting your argument that the quality of use-value can transform itself into a quantity) does profit then approach zero? Is that your opinion?
(You still haven’t addressed the mechanism by which a newly introduced commodity furiously spins until it achieves the magic price that reflects user demand, but we’ll just say that’s the palm of the invisible hand of the market, and come back to it later.)
Marginal pricing works best at describing the pricing of fungible commodities, such as oil or crops. Other goods mostly display enough commodity like behaviour to fit.
The costs determine what the minimum acceptable price is for a specific supplier. The price will be at the point where the marginal supplier is making just enough to cover their costs and it is just worthwhile for the marginal consumer to buy. A lower cost supplier has no incentive to charge less than the marginal price as they can sell all they produce at that price and would get no additional sales by cutting the price. The profit may be substantial look at oil for example the lowest cost producer (Saudi Arabia) was profitable when oil was about $10 a barrel in the early 1990s the price is now about $80 so they may be making $70 a barrel. Alberta has a cost of about $60 a barrel so at the same price is making $20 a barrel profit.
If you are buying something you have already decided how much it is worth to you, you’ve decided that the item is worth more to you than what you are exchanging for it.
Some commodities display huge price volatility, oil and food especially. Demand for these is fairly inelastic so if supply drops the price shoots up dramatically food prices during a famine for an extreme example or the oil price spike a couple of years ago for a less extreme example. Other commodities display far less volatility.
For items produced in small quantities and traded infrequently an auction can be used to determine the marginal price. The auction price is the lowest where the number of bidders is equal to the quantity available.
Most new goods are close substitutes to existing goods that means they don’t function as entirely new products anyway and you can price by comparison to existing similar products.
Either way some goods display high volatility and others don’t. Food for example is volatile depending upon the harvest.
This isn’t complicated; marginalism replaced the various versions of labour theory over a century ago as it was both simpler and worked better. The idea was to look at how a free market sets prices, it turned out that no concept of intrinsic value was needed, only that supply and demand vary with price.
Iterated auctions are simply a more obvious case of a marginal price seeking mechanism. Ongoing commodity markets operate in a similar way, the spot price determines both supply and demand. If you are a supplier there is a price below which it isn’t worthwhile you selling, if you are a buyer there is a point above which it isn’t worthwhile you buying. It should be obvious that if your costs are substantially below those of the marginal supplier your profits will be substantial.
“When demand falls so low that it approaches the cost of production (I’m accepting your argument that the quality of use-value can transform itself into a quantity) does profit then approach zero? Is that your opinion?”
That doesn’t make sense. Demand is not a price, it is a quantity the demand curve describes what the how much of a good would sell at a specific price is at a specific point of time. Supply is also a quantity not a price it describes the amount which would be available at at specific price at a specific time. These can be compiled into lines on a chart which cross at a specific point.
Certainly, supply and demand will answer all the easy questions; just as simple arithmetic will answer all the easy questions; you don’t need quantum theory or even algebra until you start getting into how things actually work. Those who particularly do not want to know how market economies actually work are very happy to invent theories that justify avoiding these questions. But you see, commodities really do have intrinsic value, and when you try to pretend they don’t, you end up with money being treated as if it is it’s own thing, not tied to any real-world factor, and this leads to speculation in money markets building itself up to absurd heights, until it crashes.
Sound familiar?
“Demand is not a price, it is a quantity the demand curve describes what the how much of a good would sell at a specific price is at a specific point of time.”
Um. What say you swing around and take another pass at that one. I think it just needs a couple of words removed to become a sentence, but I’m not exactly sure which ones they are.
Demand is a quantity at a price. It varies with price. Or at least it is usually most useful to use cash as one of the axes. You can define the value of anything in terms of anything else for example in bartering goods directly without cash. Cash however is usually more convenient.
If you have a sealed bid commodity auction it is possible for the auctioneer to explicitly chart the demand curve. At any specific price point you can determine what the quantity that would be purchased at that price is. If you also have a range of sellers with a variety of reserve prices you can also determine that would be available for sale at that point. You can then define functions describing those curves and solve them.
Things are worth different amounts to different people. This means that things don’t have a universal value, just a local value. A market can set a price without ever needing to know an intrinsic value.
One consequence of believing that a thing has an intrinsic value is you feel justified , even perhaps obligated, to force the price to that value. This can lead to the imposition of price controls leading to either a shortage or a glut. A worse consequence can happen if the market price of labour is above what you believe to be justified, slavery. Bonded labour is a consequence of a labour shortage. A free market would see the price of labour rise until supply and demand equalise either by bringing more workers into the labour force and pricing some employers out. If you believe that there is an intrinsic value to labour than you can feel justified in using coercion to punish any worker attempting to get paid more that the value of their labour or even to force the provision of labour at that price.
Demand is not a price, it is a quantity. The demand curve describes how much of a good would sell at a specific price at a specific point of time.
You can draw a demand curve by charting the bids in a sealed bid second price commodity auction. One axis is the price and the other is the sum of the demand of all of the bidders whose maximum is above that price. Define the function of this curve as D(p).
You can draw a supply curve by charting the reserves on the offers in a commodity auction. One axis is the price and the other is the sum of supply of all of the sellers whose minimum is below that price. Define the function of this curve as S(p).
The value p such that S(p)=D(p) is the marginal price. The curves change over time and the marginal price changes.
Where is an intrinsic value and what is it for?
Those are the questions that led to the idea of intrinsic value being largely abandoned. Replaced by the idea of value as a purely local thing. Marx’s labour-value is related to supply (you need to include non-labour costs as well like rent and tax), while his use-value is related to demand. Price acts as an intermediary between them. Despite looking for it no non-local value emerged.
“Things are worth different amounts to different people. This means that things don’t have a universal value, just a local value. ”
Things are worth different amounts to different people, and yet the market does not adjust its price for how much they want it. It costs what it costs, regardless if what I’m willing to pay.
The intrinsic value is contained in the commodity. It is what happens to human labor in the abstract when it expended in useful labor on a commodity–it becomes value. What is it for? It permits exchange.
The value to me determines what I am willing to pay for it. The value to others determines what they are willing to pay for it. The costs of the suppliers determine what they are willing to sell for.
The market adjusts the price until demand equals supply i.e. S(p)=D(p). The price is such that all the supply that can be produced at that price or below is equal to all the demand that is willing to pay that price or above. The price you and other buyers are prepared to pay determines the shape of the demand curve and therefore helps determine the market clearing price.
Something that may be illuminating: http://www.marginalrevolution.com/marginalrevolution/2010/03/what-is-the-biggest-flaw-in-the-labor-theory-of-value.htm
Dan R., a loyal MR reader, poses this question:
I would be curious to know what you consider the biggest flaw in the labor theory of value to be. Also, would you say that it is disproven, unnecessarily bulky, or simply marginalized?
There is a simple model in which the labor theory of value is true. If inputs are homogeneous and constant returns to scale hold, the proportions of labor input will indeed be proportional to price. If not, labor inputs will be reallocated until this proportionality holds (Much ink has been spilled on whether this is what Smith, Ricardo, and others had in mind; it is one way of reading Smith’s deer-beaver-hunting example.)
One problem is that we need labor, capital, and land for production, not just labor. The so-called “transformation problem” tries to square this circle. The simplest response, however, is to give up the labor theory of value.
Another problem is that inputs are heterogenous. They have to be valued in dollar terms, and that requires imputation, a’la Friedrich Wieser, and that in turn requires information from the demand side. Price determines cost of production at least as much as cost of production determines price.
Compared to Marshallian supply and demand scissors, the labor theory of value is at best awkward and most of the time it is wrong. There are some economic sectors where constant returns to scale hold and thus demand has little influence over market price. But those are special cases, even if some Cambridge-U.K. linked economists promote them as the main show.
Marshall’s model allows price to be determined without needing to define value. The transformation problem http://en.wikipedia.org/wiki/Transformation_problem lacks an answer.
This has important consequences. Marx’s prediction of a general tendency of the rate of profit to fall was dependent on there being a direct relationship between competitive prices and value. As there is no such relationship the prediction is false, this is on the whole a good thing.
Marx thought he had an answer to the transformation problem (that is how to convert value to price), however there was a mistake in his work and he hadn’t actually managed to do this. Later Marxists attempted to fix Marx’s mistake but were unable to do so, ultimately accepting that Marx’s hypothesis was wrong. Some Marxists (for example the analytical Marxists) responded by using marginal pricing instead of the LTV.
Marginal pricing is a little counter-intuitive at first, but once understood is quite simple. It can deal with a much wider range of market conditions than LTV.
This migh be of interest: http://crookedtimber.org/2010/01/06/marxian-economics-mia/
One of John Quiggin’s comments in the replies to his blog entry.
As the post says, once you accept marginalist price theory, most of the questions that led people to worry about value theory, as opposed to price theory, turn out to be more or less meaningless. Austrians disagree with this and try to argue that marginalism proves that value is entirely subjective, but this is silly and ends up relying on argument by definition.