David Calnitsky and John Clegg: In Part 1: On the Commodity Law of Exchange you described the “commodity law of exchange” as an essential starting point for Marx’s theory of value. However, you don’t think it is sufficient to understand value under capitalism. Why not?
Duncan Foley: The commodity law of exchange expresses the abstract conditions in which an economy of independent producers who own or produce their own means of production would self-organize through monetary market exchange. The key idea of Smith’s “long-period method” is the formation of “natural prices” as averages of market prices over many cycles of production that equalize the “advantages and disadvantages” of the various branches of production. The advantages consist mainly, though not exclusively, of the money income the producer receives, and the disadvantages consist mainly, though not exclusively, of the effort required to acquire the skills necessary to the branch of production and to carry on production. Under the commodity law of exchange, natural prices are enforced by the movement of producers (assumed to be freely mobile) between branches of production, and make it possible to staff all the branches. These natural prices include the costs of the means of production, but not a markup on those costs to provide a profit.
Capitalist commodity production, by contrast, is carried out by capitalist firms that own the means of production and charge a profit rate on them, and by means of wage labor. Both of these changes in what Marx calls “social relations of production” lead to modifications of the commodity law of exchange. The “advantages” of a branch of production from the point of view of a capitalist firm consist primarily of the profitability of production, and, as Adam Smith points out, specifically the profit rate. The “disadvantages” are the capital investment required to carry on production in any branch. The wage labor contract is an exchange of a money wage for “labor-power”, the capacity of workers to add value to the means of production by producing useful goods and services. Like the independent producers in the commodity law of exchange, wage workers under the ideal conditions of “perfect mobility” are free to move among available employments, and as a result will tend to equalize the “advantages and disadvantages” of different employments in all branches of production. The advantages to the wage laborer of employment are primarily, though not exclusively, the money wage from that employment, and the disadvantages are primarily, though not exclusively, the effort required to acquire the skills required for the job and to accomplish the work. Mobility of labor as a result tends to equalize the ratio of labor effort to the money wage across the system of capitalist production.
Because the wage falls short of the money equivalent of the labor effort capitalists extract from their workers, there is a fund of “unpaid labor effort” created in the production process, which is the source of the pool of money surplus value capitalist firms (and other claimants of surplus value such as landlords and intellectual property owners) compete for. But because mobility of labor tends to equalize the ratio of labor effort to the money wage across the system, it also enforces an equivalence between labor effort and money value added at the level of the system as a whole. As a result, in the aggregate, money value added is proportional to labor effort, as is the case in the commodity law of exchange: competition among capitalist firms and other claimants to money surplus value redistributes the money surplus value but cannot change its total. This is the capitalist law of exchange. The ratio of money value added to labor effort is the Monetary Expression of Labor Time.
In the commodity law of exchange each independent producer is a miniature model of the system as a whole, with a common ratio of money income to labor effort. In the capitalist law of exchange the money surplus value an individual capitalist firm may appropriate through competition can deviate sharply from the unpaid labor effort that firm extracts in production. The extreme example is landowners who in Ricardian terms produce nothing and exploit no labor, but participate in the appropriation of money surplus value in the form of land rent.
Can you say more about the social transformations involved in the move from the commodity to the capitalist law of exchange?
The very success of the division of labor and commodity production in increasing real incomes tends to enlarge the scale of each branch of production. The wealth of individual producers becomes insufficient to finance the means of production required, and at the same time the scale of production dictates larger teams of producers in each production process. As Marx makes much clearer than Smith, these factors tend to lead to the appropriation of the means of production as the property of capitalists who are not the direct producers, while the direct producers (workers) tend to become wage laborers hired by the capitalist proprietor of a firm. This transformation of what Marx calls the social relations of production (whether we think of it as primarily theoretical, or possibly historical) has major consequences for the analysis of the division of labor and commodity production.
In principle large-scale production might be organized either in the form of a capitalist firm that owns the means of production or through worker cooperatives that would finance large-scale means of production through some type of credit arrangement. If we look at the history of the division of labor, a relatively small sector of worker cooperatives has in fact coexisted with capitalist production. This sector never disappears completely, but also does not exhibit any tendency to grow and displace the dominant capitalist organization of production. Marx seems to have had an ambivalent attitude toward worker cooperatives, and focuses his analytical attention on the workings of commodity production organized by capitalist firms.
How does this transformation give rise to a new law of exchange?
There are two broad sets of consequences of the social relations of production that organize the division of labor through capitalist firms that own the means of production, control the process of production, and hire labor in exchange for wages.
In the commodity law of exchange where individual producers own or produce their own means of production, the decision to pursue any branch of production depends on the balance of advantages (primarily money income) and disadvantages (primarily labor effort and training) in one branch compared to others. When capitalist firms organize production, however, it is the capitalist owners of the means of production or their agents who decide what branch of the division of labor to pursue, and, as a result, where labor and other resources will be directed. One of Smith’s remarkably far-reaching theoretical insights was that the goal of a capitalist owner of means of production would be the maximization of the profit rate, the ratio of profits to the value of capital tied up in production. This contrasts with the goal of the independent producer in the commodity law of exchange, which is to maximize the ratio of money income to labor effort.[1] Smith argues that the general principle of equalization of advantages and disadvantages in the employment of money as capital financing means of production will lead to the tendency for profit rates to be equal in different branches of production. The logic is exactly the same that Smith uses to analyze the commodity law of exchange system: capitalists will move their capital out of employments with lower than average profit rates and into employments with higher than average profit rates. The result will be a rise in the profit rate in sectors capital is leaving due to diminished competition, and a fall in the profit rate in sectors capital is entering due to increased competition, a process tending to equalize profit rates.
The organization of the division of labor through capitalist firms that own the means of production and hire labor in exchange for wages also has important implications for workers. Wage workers are free (in principle and abstractly, as Smith indicates with the phrase “perfect liberty”) to choose their employments, just as the independent producers in the law of commodity exchange are free to choose the branch of production to pursue. Wage workers, moreover, face the same balance of advantages and disadvantages as independent producers: the advantage of any employment is the money wage income it provides, and the prime disadvantage is the labor effort the worker is required to expend to keep the job.
How does the mobility of wage labor in the capitalist law of exchange differ from the mobility of independent producers in the commodity law of exchange?
Marx distinguishes between labor-power, the capacity to do useful labor for which wage workers are paid wages, and labor effort itself, which is what produces a useful and exchangeable product. The ratio of (externally unobservable) labor effort to money wage income is a measure of the degree of exploitation of workers in any particular employment. According to Smith’s principle of equalization of advantages and disadvantages, labor that is mobile, and thus free in principle to move from one employment to another under capitalist relations of production, will tend to equalize the rate of exploitation in different employments. This leaves considerable freedom for the natural prices of individual commodities to adjust through competition to equalize rates of profit over the branches of production in the division of labor. As I read it, the Marx manuscripts Engels published as the first two books volume 3 of Capital represent Marx’s reformulation of Smith’s long-period reasoning incorporating his distinction between labor-power and labor effort.
Thus the capitalist law of exchange version of the labor theory of value depends on the operation of both of Smith’s long-period principles of equalization through competition and the mobility of capital and labor. The mobility of capital tends to equalize profit rates, while the mobility of labor tends to equalize rates of exploitation. The equalization of the rate of exploitation across the system of capitalist commodity production is the key to the principles of the conservation of labor effort in the value of the net product, and the conservation of unpaid productive labor effort in the system-wide monetary surplus value. Attempts to understand Marx’s theory that rely only on the logic of the equalization of the rate of profit inevitably fall short of explaining these principles. John Cogliano has made important contributions to our understanding of Marx’s theory as a development of both sides of Smith’s long-period analysis.
This is an interesting feature of your interpretation. Most Marxists emphasize the equalization of the rate of profit, but on your account the equalization of the rate of exploitation is just as important. What are the implications of this second equalizing tendency?
Regardless of what relative prices of commodities are, workers face the immediate tradeoff of money wage income for labor effort, and their mobility will tend to equalize the ratio of money wage income to labor effort across the productive system. If the degree of exploitation tends to uniformity over all branches of production, then a single degree of exploitation will tend to characterize the system of capitalist commodity production as a whole, just as a single ratio of money to labor effort characterizes the system of commodity production by independent producers governed by the commodity law of exchange.
If we knew this degree of exploitation we could measure the labor effort in the system as a whole by multiplying the total wage bill by that degree of exploitation, thereby computing an index of the monetary equivalent of the total labor effort. Marx calls the difference between this monetary index of labor effort and the wage bill “surplus value”. In effect, workers receive compensation in the form of the wage for only a fraction of the total labor effort they expend. The uncompensated or “unpaid” labor creates a fund from which capitalists can realize surplus value in various monetary forms as profit, rents, interest, and the other phenomena that are the subject of the rest of the manuscripts comprising the remainder of volume 3 of Capital. The key conclusion for Marx was that the exploitation of productive labor was the source of monetary surplus value in a capitalist commodity-producing economy.
Another way of putting this is to regard the money value of the net product (equivalent to value-added) as the monetary equivalent of the total productive labor effort: the wage bill is the money equivalent workers receive for the paid fraction of their labor effort, and the difference between the money value of the net product and the wage bill is monetary surplus value to be realized in competition among capitalists and other claimants, such as landowners and owners of intellectual property in various forms as profit, interest, rent, royalties, and the like. This is the starting point of the New Interpretation Gérard Duménil and I independently formulated in the 1970s and published in the early 1980s. Other previous scholars including Joan Robinson, John Eatwell, and Bertram Schefold had formulated similar or equivalent interpretations of Marx’s reasoning already, and I. I. Rubin’s thinking in my reading points firmly in this direction.
The capitalist law of exchange appears to differ greatly from the commodity law of exchange in these respects, in what sense are they still related?
The capitalist law of exchange retains some of the key features of the commodity law of exchange version: the Monetary Expression of Labor Time continues to translate between labor effort and the money value of net output at the level of the system as a whole, and the aggregate surplus value is the monetary equivalent of the unpaid productive labor effort. Furthermore, the system is just as much a system of allocating labor (and other) resources among the branches of production as it is a system for determining long-period natural money prices, and each of the two aspects of the system work only because of the other.
But there is an important difference, in that in the commodity law of exchange system each producer expending labor effort and receiving on average a proportional money income is effectively a scale model of the whole system of commodity production, but the individual capitalist firm may not be a scale model of the whole system of capitalist commodity production. In particular the part of the aggregate pool of surplus value appropriated by a particular capitalist firm as profit is not necessarily proportional to the unpaid labor effort extracted in the course of that firm’s operation. The extreme case of this is the Ricardian landowner, who hires no labor-power at all, and contributes nothing to the pool of unpaid labor effort, but shares in the pool of money surplus value in the form of rent. The capitalist law of exchange is a generalization of the commodity law of exchange at the level of the system as a whole, but not at the level of the individual capitalist firm.
What role does competition play in the capitalist law of exchange?
The capitalist law of exchange is compatible not only with the principle of profit rate equalization through competition, but also with other patterns of distribution through competition, such as land rents and intellectual property incomes. Marx’s theory explains the origin of system-wide surplus value in system-wide exploitation of labor separately from the exploitation of labor in individual capitalist firms. Marx refers to this separation in saying that competition is the mechanism through which the imperatives of the capitalist system are imposed on the individual capitalists. I think what he means by this is that while it is to the competitive interest of each capitalist firm to exploit its labor as much as it can by increasing the intensity of labor effort and reducing money wage compensation, two competitive effects put limits to the individual firm’s exploitation of labor. Other capitalist firms will adopt the same methods to the degree that they can, thereby lowering their costs and lowering the price of the produced commodity, thereby reducing the returns to excess exploitation toward the system-wide average. At the same time, workers will tend to move from firms imposing a higher rate of exploitation toward other firms to the degree they can, limiting the access of firms imposing higher than average rates of exploitation to labor-power. These competitive forces tend to shift the extra surplus value potentially appropriated in the individual firm into the pool of system-wide surplus value.
From this point of view every individual capitalist firm, like landowners who appropriate surplus value without exploiting labor at all, is a free-rider on the capitalist system as a whole. Even the largest individual capitalist firms see the system-wide pool of surplus value as effectively infinite in relation to their profits. In a global economy with a net product of over $100 trillion per year, the pool of surplus value is likely to be on the order of $50 trillion per year, while no capitalist firm has profits of even $1 trillion per year. There are powerful incentives for individual capitalists to seek methods to increase the exploitation of their own workers, but in the end their efforts primarily bolster the system-wide pool of surplus value. Marx explains these points in his discussions of absolute and relative surplus value in volume 1 of Capital.
The fact that surplus value has its source in the exploitation of productive labor is unlikely to make much difference to individual capitalist firms, although it can become important at the level of large regional or national economies where economic policies are contested. Marx’s theory of value envisions the competition of individual capitalist firms in ways that are not so different from what he called “vulgar economics”, though as Anwar Shaikh has emphasized, Marx steers clear of the fantasies of “pure” or “perfect” competition that sanitize the often brutal reality of competition by looking at it only as a benign process of social resource allocation.
The system-wide character of capitalist exploitation suited Marx’s own political position, which was the advocacy of system-wide change of social relations of production through revolutionary action led by proletarian parties, very well. Because Marx thought the problems of class society could ultimately be resolved only by thorough-going system-wide change, and thought that centralized political institutions were adequate to manage a system-wide change, he saw no problems in an analysis that located exploitation primarily at the level of the system as a whole. The implications of his discoveries for those of us living with a very different view of the available real alternative systems of organization of social production are less comforting.
We’d like to turn soon to the question of revolution and alternatives to capitalism, but first we’d like to return to some of the issues with the labor theory we discussed in Part 1 of this interview. Since the capitalist law of exchange has more moving parts there would seem to be more ways reality might violate the assumptions of the law. How does one apply the law to the real world?
As Marx explains in the very helpful Introduction to the Grundrisse, applying theoretical concepts to real-world problems often raises seemingly insuperable problems. Some of these problems arise because people perceive the world in terms that are inconsistent with the classical political-economic approach: for example, for many people individual human differences seem essential to understanding social outcomes like wealth and class. In these cases there is not much to be said except to wonder what genuine alternative explanations are available. In many cases, however, the problems concern what Marx called the “level of abstraction”.
What Marx means by the concept of level of abstraction is subtle. An example may help. Smith’s and Marx’s theories of value assume mobility of labor (which tends to equalize the rate of exploitation). But in the real world, despite fairly widespread legal and institutional guarantees of freedom of movement of workers from one job to another, there are clearly many significant obstacles to the free movement of labor. Within national economies there may be licensing and certification requirements for some professions; labor unions or professional societies may impose requirements of apprenticeship or educational level; some ethnic groups may effectively discriminate against others in ways that limit free mobility of labor; gender and racial discrimination can have similar effects. In the global economy, transportation costs and immigration restrictions limit free mobility of labor and very likely prevent the equalization of rates of exploitation. In the face of these glaring empirical discrepancies with the assumptions of the Smith-Marx theory, many people decide that the theory is a pure abstraction with little relevance to concrete social reality.
Another stumbling block is that the Smith-Marx framework often has sharp conclusions that are not in agreement with what the person using it wanted to find out to begin with. For example, because of the long-period focus on, well, the long period, it predicts that many forms of policy intervention in the economy will have small or no effects in the long run, because they will be eroded by gradual but inexorable adjustments of behavior to restore natural prices. Within Marx’s framework attempts to raise after-tax wage incomes by taxing surplus value will be offset by lower pre-tax wages, since Marx’s theory is that worker’s after-tax wages settle at a historically and socially determined subsistence level. This implication is unsettling to many on the left who are heavily invested in redistribution as a goal of policy.
Marx addresses these concerns straightforwardly in the Introduction to the Grundrisse. He argues that the understanding of social phenomena consists of reconstructing them as the intersection or layering of many determinations. In this process the fundamental abstractions, if they reflect the human institutions and behavior underlying the phenomenon, continue to be relevant as the ground on which further, more concrete, determinations rest. For Marx the equalization of the rate of exploitation is a fundamental tendency of a capitalist-commodity producing system, even if it is frustrated by legal and practical obstacles to the completely free mobility of labor. We see this in flows of migration in response to persistent differences in rates of exploitation among regional economies, and black markets in human trafficking. Similarly, the equalization of the rate of exploitation over time in an economy with free mobility of labor is not instantaneous: at any moment some employments will have higher rates of exploitation than others, reflecting deviations of market money wages from natural wages. But again, the underlying tendency in this case expresses itself in specific further phenomena: strikes against low-wage employers, the emergence of educational institutions that hope to provide entry to high-wage employments for their students, and the like.
Most people associate the term “exploitation” with low or declining living standards, and for that reason it is sometimes seen as a key driver of revolution. But exploitation in the Marxian sense is compatible with relatively high and rising living standards. Is there indeed a gap between the technical and lay usage of the word? If so can they have the same moral implications?
The world “exploitation” in ordinary language has two somewhat different connotations. Between human beings “exploitation” connotes an unequal and unfair appropriation of something that belongs to one person by another. In Marx’s theory the capitalists as a class exploit workers in this sense by appropriating unpaid labor time in the form of money surplus value including profit, rents, and interest. We also speak of “exploiting” natural resources, such as deposits of ores, which generally involves investing in order to access the resource and mobilize it for social use. Capitalism also exploits labor in this sense, which sometimes involves investment in workers’ capabilities through public education, public health and sanitation, and social welfare safety nets. Over much of the history of capitalist development wages have risen roughly at the same rate as labor productivity, keeping the rate of exploitation roughly constant. In this type of “trajectory a la Marx” as Gérard Duménil and Dominique Lévy have called it, the fruits of economic development are at least shared between workers and capitalists, despite capitalists appropriating unpaid labor, and the standard of living of workers improves roughly in line with their productivity. The disruption of this pattern of distribution in the neoliberal period starting in the 1980s in most advanced capitalist economies has exacerbated the growth of inequality and destabilized the political consensus between capital and labor on which the burst of prosperity after the Second World War rested.
The point where the “moral” and the “instrumental” connotations of the word “exploitation” come into conflict seems to me to be the same as the point at which revolutionaries need to explain their plans for organizing a social division of labor without exploitation. Is it through worker cooperatives interacting on markets, through some kind of central planning under democratic political control, or a system based like the “open source” movement in computer programming that depends on the voluntary participation of producers in production and the free distribution of the product?
This interview has raised as many questions as it has answered. But now that we have clarified your reconstruction of Marx’s theory of value we’d like to return to the question with which we began: why do you think these core features of Marx’s theory have proved so controversial?
As we discussed in part 1, many commentators on Marx, including, for example, Eugen Böhm-Bawerk, John Bates Clark, Paul Samuelson, and others, set out to prove that his theory of exploitation is incorrect. In general these critiques rest either on a rejection of one of the premises of the Smith-Marx long-period theory (for example, Böhm-Bawerk rejects the assumption of the ultimate fungibility of social labor, and J. B. Clark implicitly adds a full-employment assumption to support the marginalist theory of distribution) or on a misunderstanding of the questions that Marx thought the theory of value could address (for example, Samuelson misses the point that the question is the origin of surplus value at the level of the system as a whole, and sees it as a fallacious theory of equilibrium pricing of commodities). On the other hand, various defenders of Marx’s position have differed sharply and even violently among themselves. Some, like Rosa Luxemburg, want to demonstrate the logical inconsistency of capitalist exploitation, which is not Marx’s point. Isaac Ilyich Rubin ultimately paid with his life for his fidelity to Marx’s theory of commodity production and the concept of abstract labor fungible among branches of production. The heat arises because Marx’s theory does hold together and constitutes a troubling and devastating criticism of capitalist social relations without putting forward a framework for supplanting it. There is real political power in Marx’s discourse, as the ability of the Soviets to deploy Marxist language in Orwellian fashion as one of the main props of their power demonstrated.
[1] The independent producer counts the acquisition or production of means of production as part of the labor effort: as a result, although means of production are present in the commodity law of exchange system, the producers do not compute their costs using the principle of compounding profit rates of return.
Author: David Calnitsky
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