Reconstructing the Labour Theory of Value: An Interview with Duncan Foley (Part 1: The Commodity Law of Exchange)

Part I: The Commodity Law of Exchange

Marxists tend to like the labor theory of value because it provides a vivid account of exploitation and highlights a basic antagonism at the core of capitalism: capitalists and workers are locked in a battle over the appropriation of the surplus that workers produce. But many commentators assume it is either internally inconsistent or hopelessly outdated. The theory is thus hotly contested, but arguably poorly understood by both critics and advocates alike. The debate has also sometimes been mired in arcane mathematical issues. As a consequence, interesting philosophical and empirical questions have received less attention. We put a number of these questions to Duncan Foley, author of Understanding Capital: Marx’s Economic Theory.

David Calnitsky and John Clegg: The labor theory of value is today widely dismissed by both mainstream economists and commentators on Marx’s work. You disagree. What distinguishes your approach?

Duncan Foley: In reconstructing any writer’s thinking it is necessary to employ both close reading and a synthetic perspective that seeks to situate particular texts in a broad context. Because Marx’s ideas were genuinely original and dangerous to capitalist society, hostile or skeptical critics have tended to emphasize the analytical, close reading, aspect of reconstruction, largely with the aim of finding inconsistencies or fallacies in Marx’s arguments. This is particularly true, in my opinion, of the literature on Marx’s theory of value, with a few notable exceptions, such as I. I. Rubin’s Essays on Marx’s Theory of Value. As a result, there tends to be a broad and rarely questioned consensus that Marx’s theory of value (or the “labor theory of value”) is fundamentally flawed. As I’ll explain in more detail in answer to your questions, I think this consensus is far off the mark: Marx’s theory, grounded in his critical reading of Adam Smith’s analysis of capitalist commodity production based on what we now call the “long-period method”, is consistent and answers the questions Marx intended to address through it. These questions, however, are not in general the questions the critics of Marx’s theory want it to answer, and this discrepancy is responsible for much of the misunderstanding that has dogged the labor theory of value since Marx published the first volume of Capital. It is possible to disagree with certain of the explicit and implicit premises of Marx’s theory, and on those grounds to reject the theory and its conclusions, but I believe Marx’s conclusions follow from his premises, properly understood. It is also possible to conclude that Marx’s findings cannot address what some people may regard as the crucial questions about capitalism and value. But these grounds for rejecting or questioning the relevance of Marx’s thinking to present day capitalism are quite different from the charge of inconsistency in his reasoning.

Your “synthetic” interpretation is not just about situating Marx in his time. You also argue that Marx’s theory of value, properly reconstructed, may still be relevant today. What are some of the challenges we face in reconstructing that theory?

We can never know with certainty exactly how a historical figure thought about complex issues, for example, to answer questions like “What would Marx have to say about the information economy?” The best we can do is to use what someone (in this case Marx) wrote to reconstruct a possible version of their views and use that version as a framework within which to extrapolate cautiously. This process of reconstruction inevitably involves “filling in” certain parts of arguments that the original texts leave obscure, and runs the risk of misinterpreting key ideas from the original texts.

There are some particularly important issues that arise in trying to reconstruct Marx’s thinking. One is the enormous volume of Marx’s surviving writing, which makes it all too easy to find apparent contradictions or inconsistencies between different texts. Another is the fact that much of Marx’s text consists of unrevised first drafts and notes, which contain mistakes and inconsistencies that Marx would have corrected in revision and in some cases did. Yet another is language. Many of us read Marx in translation, which creates another layer of potential distortion in understanding what he had in mind. Marx read and had considerable fluency in German, French, and English, so that even his predominantly German texts very likely reflect influences from terms and ideas he encountered in other languages. I view these considerations as calling for considerable humility and caution in trying to reconstruct Marx’s thinking, and it is in that spirit that I put forward the ideas we are discussing here.

You referred to Marx as having a “long period method”, what do you mean by that?

One fundamental point that emerges from my synthetic reading is that the labor theory of value addresses the question of the determination of what Adam Smith called long-period “natural prices” of produced commodities as an integral part of a more general account of the approximate self-regulation of a decentralized commodity producing system. It is impossible to separate these two aspects of the theory without distorting its logic and conclusions.

I see Marx as developing the “long-period method” analysis of capitalist commodity production employed by Adam Smith and his successors, particularly David Ricardo. In my own view, Marx is much closer to Smith in his views than to Ricardo on those points where Smith’s and Ricardo’s views diverge. The version of the labor theory of value defended by Marx derives from Smith’s long-period method as applied to the allocation of labor across the branches of production. The labor theory of value is in this sense contingent on assumptions about the free mobility of labor among sectors and the exchange of products as private property through the mediation of money, not an independent, free-standing hypothesis. Failure to grasp this key point has led many commentators on Marx’s theory of value to misunderstand the status of the theory’s claims about the origin of surplus value in the exploitation of labor.

What specific aspects of Smith’s approach do you see Marx as drawing on?

Smith, like Ricardo and the other classical political economists, regards human beings as being essentially identical in their potential productivity, and Marx adopts this point of view. Smith characteristically makes this point in the form of a charming comparison of the “philosopher” and the “common street porter” in chapter 2 of Book I of The Wealth of Nations, with the implication that, somewhat like stem cells, all human beings have a similar potential to develop in any direction. The key point here for Marx is not so much the precise equality in potential of all human beings, as the essential fungibility of human labor due to its ability to adapt to changing concrete production technologies. The time scale of this adaptation, as Smith’s story of the porter and the philosopher suggests, may be on the order of the human life cycle, as human beings adapt, by training and sorting, to the concrete production requirements of a complex division of labor. It seems to me this assumption of the fungibility of human labor, its ability to adapt to the particular division of labor in any epoch, and generationally over time to the changing demands of the division of labor, is essential to both Smith’s long-period analysis and to Marx’s theory of value.

Smith’s conceptual starting point for the long-period method is the division of labor, a misleadingly familiar idea. In my thinking, the division of labor at any historical epoch resembles the spokes of a wheel, each spoke representing specialization in a particular product that meets some human need, that is, is a use value. The central point is that a team of human producers can produce a much larger volume of use values by specializing and occupying the spokes of the wheel than they can as diversified producers who produce all or most of their needs themselves. It is worth noting that this assumes economies of scale in production that are inconsistent with the almost-universal assumption of diminishing returns in Ricardo and later marginalist economics.

What is the connection between this account of the division of labor and the theory of value?

Smith argues that potential increase in average productivity from economies of scale due to specialization and division of labor creates two social coordination problems, the decentralized solution of which is one of Smith’s great themes. The first problem is to assure a reasonably balanced occupation of the specialized spokes of the wheel to meet average social requirements for production and reproduction. The second problem is to redistribute the specialized products, so that each producer winds up with a share of the social product that matches their needs. The individual specialized producer winds up with far more of her own product than she needs, so the product ceases to be a use-value to the producer.

Smith assumes that the solution to the problem of distribution is an exchange of products as the private property of producers, in line with what he regards as the “natural” human propensity to “truck and barter”. Marx more formally calls this “commodity production”, and views it as only one possible, historically specific and limited, solution to the distribution problem, which can and will be transcended by the socialization of production. Both Smith and Marx argue that the exchange of products through barter is unstable and inevitably evolves into a system of monetary exchange where some produced commodity, such as gold, or some other asset, such as the debt of the State, becomes what Marx calls the “socially accepted general equivalent”. While Smith views the monetization of exchange as largely a matter of convenience and reduction of transaction costs, it has, much wider ramifications for Marx’s theory.

Smith’s analysis of the way in which a decentralized commodity-producing economy solves the coordination problem of staffing the spokes of the division of labor wheel to meet social requirements is the heart of the long-period method, and, I will argue, also the heart of Marx’s analysis of capitalist commodity production. It is worth quoting Smith’s brief but far-reaching account verbatim:

The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to choose what occupation he thought proper, and to change it as often as he thought proper. Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment. (Smith, 1937, Book I, ch 10)

What are “advantages and disadvantages of different employments” in a society where specialized producers own or produce their own means of production and exchange their products through money? The disadvantage to a producer of an employment is the time and trouble of practicing the employment, together with the longer-term costs of acquiring the necessary concrete skills through formal or informal training or experience. The primary advantage to the producer is the monetary income to be expected from the employment on average over many cycles of production, though Smith (as Marx recognizes) carefully itemizes other advantages/disadvantages such as the inherent attractiveness or distastefulness of the production activity.

Smith notes that day-to-day money prices of products vary due to vagaries of the market, and calls these “market prices”, but argues that the need to staff the branches of the division of labor to meet social requirements dictates that these fluctuating market prices average out over time to “natural prices” (also money prices) that secure to each employment at least a roughly equivalent balance of advantages and disadvantages. If we interpret the time and trouble above as “labor effort” in a broad sense including life-time costs of training, then Smith’s logic implies that natural prices of commodities will tend to proportionality with labor effort, a simple and transparent version of the labor theory of value. Gérard Duménil and I have called this the “commodity law of exchange”.

In the second part of this interview we will explore the difference between the commodity law of exchange and what you call the “capitalist law of exchange”, but before that we’d like to interrogate some of the assumptions underlying the argument thus far.

First, does the commodity law of exchange assume that there is an objective measure of labor effort to which prices could be compared?

Not as an empirical matter. If labor effort could be observed objectively, the capitalist employer could contract for it. Their inability to do so is the central point of efficiency wage theory. But while external observers struggle to measure empirically labor effort, workers themselves have a direct experience of labor effort they can compare to the money return from an employment. Theoretically this contrast is akin to questions of interpersonal comparisons of utility or disutility. How do we know just how hard someone experiences a particular labor task as being? Framed in this way the solution I’m suggesting is along the lines of revealed preference: workers reveal the labor effort in moving from jobs with lower to higher ratios of money income to labor effort. The monetary nature of commodity exchange makes the decision of producers as to which branch of production to pursue much simpler, since the advantages of all the branches of production become directly comparable as money income.

The commodity law of exchange, which is simultaneously a theory of the allocation of social labor across branches of production and a theory of long-period natural prices, enforces a uniform ratio of labor effort to money income on average across the branches of production. This ratio, which plays a key role in Marx’s exposition of the theory of value, has come to be known in modern Marxist economic terminology as the Monetary Expression of Labor Time (MELT). The commodity law of exchange makes each branch of production effectively a scale model of the whole commodity production system: on average in terms of natural prices, producers in each branch of production receive a money income proportional to the labor effort required to pursue that branch of production. Looked at from the point of view of allocating social labor, this balancing of advantages and disadvantages of different employments is a necessary condition for the balanced staffing of all the branches of the division of labor to meet the social needs of production and reproduction.

If the dis/advantages are subjectively assessed from the workers’ perspective doesn’t this move us away from the objective value tradition? Couldn’t these net advantages be reasonably interpreted as utility? 

Marx tends to view individual behavior as reflecting class positions. Just as it is the class characteristic of capitalists to seek the highest profit rate on their capital, it is the class characteristic of wage workers to seek the highest money wage for any level of labor effort broadly understood to include costs of training and experience. Marx does not use the concept of “utility” or “utility maximization” in this context, but if you prefer to think of choices in terms of utility maximization, you could interpret Smith’s phrase “balance of advantages and disadvantages” in terms of the utility of a given employment. The important insight is that competition among mobile laborers (or among mobile capitals that hire mobile wage laborers) will tend to increase employment when the ratio of money income to the disadvantages of the employment is high and vice versa.

Here’s another classic objection along the same lines: A nice pair of shoes might require the same amount of labor as an ugly pair, and beaver and deer could both require an hour of hunting but be unequally appetizing or nutritious. Could use-values affect the long-term ratios at which products exchange?

The Smith-Marx formulation of the long-period theory has a definite place for effective social demand, which determines the scale of the different sectors of production on average over the long period. Because social labor is fungible, fluctuations in effective social demand can raise or lower market prices relative to natural prices or prices of production, but over the long period cannot influence the natural prices themselves. Over the long period ugly shoes cannot be produced unless they have some use value advantage to offset their ugliness.

Aren’t there other advantages and disadvantages that workers consider in addition to effort and reward? What about the level of danger or risk of an industry, how sociable the work is, how routine it is, how much training is required, etc? 

The broad interpretation of “labor” as the whole of the advantages and disadvantages of an employment including the money income arising from it that I’m advocating requires us precisely to acknowledge that workers are sensitive to the level of danger and risk and the other factors you mention. As Smith’s formulation makes clear, this broad interpretation must also include the costs of training and experience. Whatever factors influence the movement of social labor from one sector to another (except for money income) will influence the formation of natural prices. In Volume 3 of Capital Marx remarks that he accepts Smith’s general account of these various dimensions of the advantages and disadvantages of the employments of labor.

How strong is the fungibility requirement in this theory? Do we need to make a strong claim that anyone could be a fireman, an athlete, or a scientist? 

You do need to make a strong enough claim to allow for the movement of social labor in response to differences in the ratio of money income to labor effort. The claim that “by and large” anyone can adapt to do any of the ordinary tasks involved in production and reproduction is a simple and plausible sufficient condition. One could think of slightly more relaxed assumptions that would have the same analytical consequences: for example, if human temperaments and talents differed, but in such a way that complementary balanced teams of labor were completely substitutable for each other, that would do the trick as well.

On the other hand, significant essential differences among human beings would prevent the mobility of labor and capital from enforcing the tendency of market prices to gravitate around natural prices. The classical political economists associated long-period deviations from natural prices with the phenomenon of rent. On this view certain unusual and rare types of talent could be seen as parallel to rare and unreproducible works of art, the prices of which are not subject to the law of value, but to the law of rent. The neoclassical tradition, heavily influenced by Böhm-Bawerk’s critique of Marx based on the premise of essentially heterogeneous labor, sees all wages as rents, not as the reproduction cost of labor-power. This is one of the core divisions between the classical-Marxist and marginalist-neoclassical schools.

Finally, do you view the commodity law of exchange more as a simplifying abstraction or an actual historical period?

I think it’s important to address this question as much in the context of Adam Smith’s original discussion as in the context of Marx’s adaptation and extension of Smith’s argument. It’s useful to remember that for Marx the central question is the impact of social relations of production on social outcomes. The commodity law of exchange is going to hold for independent producers who own or produce their own means of production, because it is under those social relations of production that Smith’s natural prices of products will tend to proportionality with the broadly defined labor effort required to produce them. I’d characterize this as a “starting point” rather than as a “simplifying abstraction”: if we can work out the thought experiment of how a society of independent producers would allocate social labor, that is a good starting point from which to move on to the question of how a capitalist society would allocate social labor.

This raises the question of whether there are any historical examples of societies where production is organized through “independent producers”. This is a slippery question to answer, because it depends on how faithfully you require the historical example to reflect the analytical assumptions in order to accept it as an example. For instance, in the late Middle Ages and early Modern periods in Europe commodity production (of art objects, textiles, musical instruments, and the like) was organized through the workshops of independent master craftsmen who employed apprentices as trainees. While this kind of production required inputs, if the masters accounted for the value of those inputs as costs rather than as capital investments on which they charged a rate of profit, this kind of commodity production would have approximated the conditions of Smith’s “independent producer” thought experiment.

Interview continues in Part 2: The Capitalist Law of Exchange