[OPE-L:449] Gil's unanswered question: an interim reply

Alan Freeman (100042.617@compuserve.com)
Wed, 8 Nov 1995 01:37:57 -0800

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Re: Gil's unanswered question

This is not obviously a complete reply. It is my suggestion for
the lines along which OPE as a whole should investigate the reply.

I hope this will also clarify my concerns with the method of listing
problems in Marx's texts, by indicating possible constructive alternatives.

A Socratic Dialogue

Begin with a very simple question:

Question 1: When a price change takes place, what happens?

Suppose I have goods worth $10 and you also have goods worth $10 (in
value), and suppose my goods rise to $15 and yours fall to $5. My
purchasing power, my capacity to draw benefit from the general
productive power of society, has risen and yours has fallen.
'Something' has passed between us. There has been a transfer of
'something'. I ask Gil and other participants, as a preliminary to
all the subsequent discussion, whether you accept that this is the
case. We can discuss later what this something is and what its
magnitude is. But we can get a useful common ground if we can
establish this prior point.

If 'something' is transferred when prices change, if I lose
'something' when my commodities fall in price, then it needs a name.
I propose 'value'. That is, a measurable substance which is
independent of price but which is transferred as a result of price

I am deliberately beginning with a concept of value derived from
considerations of consumption rather than production. This is not
because I consider this to be the 'correct' standpoint but because it
is the standpoint of modern political economy, which is obsessed with
consumption. I believe it is possible to demonstrate that starting
from *any* reasonable concept of value, one is drawn back to Marx's
concepts and the recognition that labour is the origin of value. I
want to attempt a logical exposition which starts from the state of
modern thought in order to demonstrate the robustness of Marx's

This has the advantage that we can begin with a clear understanding
of where we agree, in order to assess where we disagree. On other
occasions we have to discuss where we disagree in order to establish
a clear understanding of where we agree. What is important is that
both agreement and disagreement should be explicit, not implicit.
This is part of what I take to be the critical method.

Thus this 'something' which is gained or lost as a result of price
movements is almost universally accepted to exist in political
economy, and ought therefore to be a starting point for discussion,
since we can agree on it. I think you would be very hard pressed to
deny it. All my first-year students start their essays on inflation
with the words 'inflation is a general rise in prices, that is, a
fall in the value of money'.

If you go to the 21st Century shirt shop in Lower Manhattan, you will
find their shirts which are actually labelled 'value $45, price $20'.
You can even buy them. This concerns only one use value: but the
whole store, like all 'value centers' or 'discount centers' are laid
out to convince the buyer that money will buy something better than
and different from money, some universal substance of consumption
independent of use value and also independent of its money form. The
concept that money buys 'something' which is not money, and which is
a pure magnitude rather than a collection of qualitatively different
uses, is universal in marketing jargon.

Gerard Debreu's book on general equilibrium is entitled 'the theory
of value'. Walras's work is entitled 'essays on the theory of value'.

And so on.

[Note 1: see below]

I think we need this concept of 'something' which is lost or gained
when prices rise or fall, in order to conduct a discussion on
inequality. It is the minimum necessary ground. For after all, what
does it mean to say that Bangla Desh is a poorer country than the
USA? In a certain sense it just means less physical use-values, less
'riches' in Ricardo's usage I think. But this is only the surface.
For, it is not possible for the people of Bangla Desh to put this
right by working harder. Underlying this inequality of consumption is
a deeper inequality, an inequality of *productive capacity*, and this
is the true inequality we need to explain and the true source of
poverty in a market economy. In other words, we rapidly find a useful
concept of value must allow us to discuss and evaluate differences
not just of consumption but of productive resources.

One simply cannot have discussions in economics without it.

If we can agree that there is a general category of value which is
necessary to talk about economic issues then it seems to me to be a
primal category, like distance, time, energy or force in physics.
Andrew has put this very well, I think, in a paper on Marx's polemic
with Bailey; Marx asks, not whether commodities exchange at values,
but 'as what' they enter exchange, whether this be at values or at

In that case, and if we can get agreement around this, then since we
all agree that value exists our problem is:

Question 2: Given that, when prices change there is a loss or gain of
'value', what is the origin and magnitude of this value?

This is not the next question to confront so much as a restatement of
our general problem, in the light of the answer to Question 1.

In my view this question is dealt with so differently in modern
political economy that we have to approach the issue differently if
we wish to explain what Marx's theory actually is. Not in order to
derive it, but in order to present it to a modern audience, as part
of a critical confrontation with modern perceptions of the market.
This in no way falsifies Marx's analysis and in fact leads back to
it. One can reach it by studying Marx, but unless we also study how
it appears in other currents of thought that did not exist in Marx's
day, we will live in a hermetically-sealed world which is
inaccessible to anyone who does not accept our premises.

In Marx's day no serious current in political economy denied that
labour time was the measure of the magnitude of value. Today
political economy proposes something that did not exist in Marx's
day, namely, a subjective concept of value. Therefore, we actually
have as a central task to establish something which Marx had only to
refine. In this sense, political economy has gone backwards since
Marx's day.

The third socratic question I want to ask is therefore this:

Question 3: Can money serve as the measure of the magnitude of value?

The answers given to this by modern political economy are very
confused. For example, if a rise in prices is a fall in the value of
money, clearly, money itself cannot be an adequate measure of value.
In some sense, there has to be a measure of value independent of
price, simply in order to be able to make the statement that when
there is inflation, the value of money has changed. If money were the
*only* measure of value, such a statement would be self-

However, one possible answer would be that money at any given
*moment* in time is an adequate measure of value. In this case, a
dollar in 1993 measures a certain amount of value and a dollar in
1994 measures a different amount of value. One can find the ratio
between the two by comparing the general purchasing power of the two,
although this is to say the least fraught with both practical and
theoretical difficulties.

I think that Marx held (and in fact said) that at any given *moment*
in time value could be measured in money. He refers to it as the
'extrinsic' measure of value and distinguishes it from the
'intrinsic' or labour-time measure of value. Value has two measures.

Thus I think it possible to reach agreement that value *can* be
measured in money, provided we suspend discussion on how this measure
of value changes over time. To make myself absolutely explicit,
because there may be controversy on this, I think the so-called
dimensional contradiction between value as measured in hours, and
value as measured in time, does not exist. Marx's systematic use of
money quantities to stand for values was not a slip of the pen or an
error. I think the 'New Solution' has gone a long way towards
clarifying this important question.

Nevertheless, there are two much bigger questions to be dealt with,

Question 4: Is the quantity of value represented by a given sum of
money, at a given point in time, the same for every member of

Question 5: Is the price of a commodity a linear function of its

It seems to me that the really big innovation of modern economy is to
introduce the idea that value is *not* a linear function of value and
that it is different for each individual. The economists have, since
Marx's time, systematised a notion that was not proposed in Marx's
time in any other but a completely incoherent manner, namely the idea
that the value of a commodity depends on the individual. This is a
big change since Marx's day and therefore a different approach to
value theory is necessary in order to confront political economy in
its modern form.

Space does not permit me to explore it but the two ideas are I think
of a piece. It is impossible to maintain that price is a linear
function of value if it is subjective. This is the consequence of
utility theory that Walras was the first to perceive, which is why it
could not exist as an internally-coherent theory in Marx's time. You
simply cannot make the systems of general equilibrium work unless you
assume convex utility functions, or in simpler terms unless you
assume that the value you get from buying a commodity gets less, the
more you buy. There have been many attempts to wriggle out of this
but I don't think any of them really works.

Without going into it any further I want to explore the basis of
agreement by asking of the contenders in this discussion whether they
accept what seems to me self-evident, namely:

Axiom 1: The same quantity of money, at the same time, always
represents the same amount of value for all members of society.

If this is agreed, we can proceed. There is an obvious corollary,

Lemma 1: Price is a linear function of value. For, if two identical
sums of money represent the same amount of value, then the two sums
put together must represent twice as much value. And so on. QED.

The political economy of Marx's day held, more or less, that not only
the magnitude of value but also the magnitude of price itself was
determined by labour time, in some sense, the Physiocratic view on
this question having been largely superseded. Therefore, if prices
changed, there could only be two explanations:

(i) the value of the commodity had changed

(ii)the deviation between price and value was not significant, being
either temporary or insignificant (Ricardo) , or the result of a
'distortion' of the value system by monopolistic conditions

>From answer (i) it follows that when prices change, discounting
temporary fluctuations, this must reflect a change in the
productivity of labour (either marginal or average) and so the market
merely recognises the 'true' value created by the labour of its

This led to an enormous empirically unexplained problem: if prices
recognised the 'true' value created by the labour of its producers,
why didn't the producers receive rewards in proportion to the value
they created? Why was there inequality in the world? Why were the
poor becoming poorer, and the rich becoming richer?

The economists, as Marx calls them, could not understand why changes
in price could not be, if they directly reflected values,
*responsible* for inequality. This led Proudhon, representing the
dispossessed artisan class, to conclude that inequality must be the
product of a manipulation of prices by the intervention of capitalist
property: 'theft'. From this flowed a political programme: restore
prices to their true values. This should, according to the
Proudhonists, remove inequality.

Ricardo's scientific achievement was to lay the basis for
understanding why inequality could result, even if prices did not
differ from values. The first economists to exploit this antedated
Marx and Marx fully acknowledged this. They consisted of the English
'socialist' economists who drew socialist conclusions from Ricardo's
economics, showing that if labour time were indeed the determinant of
price, then workers would necessarily be exploited even if the
'natural' price were restored.

But this argument could not deal with what happened when prices
differed from value. Marx recognised that this was a scientifically
inadequate for talking about distribution in any more general terms
than the distribution between capitalists and workers, and a very
shaky foundation for talking about capitalism and markets in general.
In my view, therefore, the subject of his enquiry was not, as is
often considered, a theory of deviations between values and any
particular set of prices (such as prices of production) but of
deviations between values and any *arbitrary* set of prices.

That is, Marx's is first and foremost a theory of *market* price, and
hence of money. This is contained in Volume I in which value-price
differences are introduced as a necessary consequence of the
existence of money, itself a necessary consequence of the production
of commodities as the general form of social production. Value-price
deviations do not start with Volume III, as Suzanne de Brounhoff has
pointed out very vigorously.

Now, we are in a position to study the question as it is posed today.
What is the origin of inequality?

If it is accepted that price systematically diverges from value, and
if at the same time it is accepted that money is a measure of value,
then it follows that price-value deviations emerge *over time*. I
cannot see any other explanation that makes sense. I think it is the
systematic attempt to understand price value deviations as synchronic
which leads to all the difficulties.

The matter appears like this: suppose I take various commodities,
worth $100 separately, and engage in production.

As a result, I am able to sell the *result* (not the original) for
more than $100. But this means that the price of a *transformed* or
*produced* use value is *not* linear function of the value of its

Therefore, there must be something distinctive which happens in
production, which does not happen in any other aspect of social
activity, which leads to a deviation of the price of a product from
the sum of the prices of the component parts of a commodity. By the
same token, this must lead to a deviation of the *value* of a product
from the sum of the *values* of the component parts of a commodity
(since price is a measure of value).

>From where does this difference arise?

If this can arise from any aspect of exchange, that is in the
broadest sense from any activity which leaves use values
untransformed, there is an insurmountable problem: it then becomes
possible for the value of the total produce of society to change,
without any change whatsoever in the composition or magnitude of its
use values. For, in pure exchange considered in isolation from
production, there is no change in use values. Nothing is consumed,
and nothing is produced. [incidentally insofar as Marx considers
'pure exchange' this is what it means; not, as Sweezy et al have
interpreted it, a petty commodity society which both produces and

[Note 2: see end]

That means that there must be *something* in society which, in the
act of production, is responsible for a rise in the amount of value
which is not in proportion to its cost. It does not seem to me
unreasonable to suppose that the value it creates is in proportion to
its magnitude. And in fact I think this is the second axiom of Marx's
construction, which if for no other reason than Occam's razor should
be thought worthy of consideration:

Axiom 2: in production, every commodity adds value in proportion to
its magnitude.

[note that this does not assume that the proportion is the same
everywhere. That is the question under discussion. We have framed
this axiom so as *not* to make the assumption that different labours
necessarily add the *same* amount of value. All that is implied is
that the value each labour adds is proportional to its duration]

Now, on this basis it is of course possible to argue that value could
be created by some particular commodity other than labour. The
Physiocratic theory, for example, could be interpreted as the
assertion that corn adds more value to the product than it takes into
production. This is a serious topic for further discussion. The
substantive issue is that, since both Humans and Nature transform use
values, why isn't Nature a source of value? Since however the issue
under discussion is average and marginal labour time, I will just
make a proposition for later proof:

Proposition 1: labour is the only commodity whose contribution to the
product is greater than its value. [for which the proportion
identified in axiom 2 is not unity]

I will make one point however: The peculiar thing about this
proposition is that one comes back to it no matter what one does.
Suppose one goes all the way round the houses, as Roemer has done,
and establishes exploitation on the basis of fair exchange without
it. Suppose this venture is successful. What is then the conclusion?
If exchange is 'fair' then surely labour is rewarded fairly. That is,
there is no systematic divergence of the price paid to labour and its
value, no more than for any other commodity. Otherwise, it is being
paid systematically less than its value, which is hardly fair.

But in this case labour is clearly rewarded a sum of money much
smaller than what it adds to the product. That is, there *is* a value
contribution from labour greater than its value. Or, value is created
outside of production, which I hope we agreed could not happen. So
why not just start from proposition 1 without all the intermediate
hoohah? In any case, the important thing is whether proposition is
assumed or proven, and howsoever it is proven, can we reach agreement
that it is the basis of further discussion?

This now leads to the final question, which is the one we began with.
Why is the value contribution of labour average and not marginal?
Because value contribution of all labour is *equal*. By this we mean
something very precise: that the observed differences between the
value productivity of labour arise not from the intrinsic capacities
of the workers concerned but from the mode of their utilisation by
capital. It is *capitalism* which is responsible for inequality, not
the *workers*.

To make this point we have to establish how it is that the operation
of the market can transform actually equal labours into apparently
unequal labours. For this purpose we, like Marx, assume that the
reduction of complex to simple labour has already been achieved. That
is, on the assumption that all labour is equal, can we show how the
market brings about apparent inequality? If we settle this prior
question we can then revisit the secondary or derived question of the
actual differences between workers, after having removed all those
differences brought about by the market.

[Note 3]

Suppose we have two producers, one making 100 articles for $100
constant capital and $100 labour, and the other also turning over
$100 constant capital and $100 labour. Suppose, also, that these
wages secure the *same* labourers, that is labourers of identical
skill and energy; let us say, 100 hours in each case. But suppose,
due to the superior productive capacity of the machines, the second
produces in the same time 200 articles.

In society as a whole, there are 300 articles. Suppose these sell for
a total of $900, and to avoid unnecessary complications suppose this
is the same as their value. In that case the workers have created a
total of $800 in new value.

But the operation of the market means that all these commodities sell
at the *same* price. Therefore, (axiom 1) they must have the *same*
value. They must be worth $3 each.

Now look at capital 1. The workers are paid $100, the raw materials
cost $100, and there are 100 units sold. They fetch $3 each and so
the sales revenue is $300. Profit $100, margin on turnover $200 or $2
per worker

Look at capital 2. The workers are paid $100, the raw materials cost
$100, and there are 300 units sold. They fetch $3 each and so the
sales revenue is $900. Profit $700, margin on turnover $800 or $8 per

One can then arrive at only two conclusions. One can either say that
the workers in capital 1 actually *create* $6 more per hour than
those of capital 2. Or one can say that they create the *same* value,
but the operation of the market *transfers* this value from capital 1
to capital 2.

Marx adopts the second view throughout, and it is very hard to see
how economic analysis can go if you accept any other. For, what is
the real origin of the different profits made by the two producers?
If you try to maintain that it is the intrinsic differences between
the two workforces, then the logical conclusion is that capitalist 1
needs only swap workers with capitalist 2 to reverse their fortunes!

It makes the pursuit of technical improvement a nonsense. Why waste
time investing in more advanced techniques if lazy workers are going
to wreck the whole thing?

On the contrary for Marx, the 'superprofit' resulting from the above
process (the formation of social from individual values) *is* the
driving force of capitalism. It is the starting point for his
explanation of capital movement, technical change, crisis,
inequality, everything. And the decisive test of its adequacy is that
it allows him to explain these things, that the explanation remains
valid today, and that no other explanation has come forward.

However, this will obviously be hotly disputed and so I do not offer
it at this point as 'proof'. What I would say is that these are the
lines along which the proof or disproof of Marx's proposition should

Alan Freeman 8/11/95



1: [Three schools of thought either do not seem to refer to value, or
try to remove it from the scene. These are the PostKeynesians, the
Analytical Marxists, and the Surplus Approach School. This is not
made as a polemical point but to try and establish what common ground
actually exists.

If I understand Roemer's project properly (and I have read far too
little of it, so Gil has carte blanche to put me right) a major part
of it is to explain how inequality can arise from fair exchange; but
when I read the construction of the argument, it seems to be saying
that there is 'no need of the hypothesis' of value, in order to arise
at this result.

If I understand the PostKeynesian project properly (and I have read
far too little of it, so Steve has carte blanche to put me right), a
major part seems to be to explain macroeconomic phenomena and in
particular crisis on the basis of a distinctive theory of money,
investment, pricing and the behaviour of the firm, without reference
to an intrinsic concept of value. It would be useful to know, simply
whether everyone on OPE agrees that the category of value is

Note 2

[This, it seems to me, is the central point in Marx's 'Queen Anne's
farthing' discussion where he asks what happens if owners A,B and C
can change the amount of value they hold in common by exchanging
products amongst themselves. This is commonly mistaken to be a
discussion about what happens when goods are exchanged at values. But
if one reads the argument carefully, it is a discussion about why
exchange at *any* prices cannot change the total value in society,
and *therefore* in order to understand where value comes from we have
to look only at those things which are unaffected by changes in
price. In other words, this argument is an argument which says we
have to abstract from diachronic changes in price because otherwise
these diachronic changes will change the scale of measurement and we
will no longer be comparing like with like.]

Note 3

[Just as, for example, in comparing educational attainments between
children from deprived backgrounds and endowed backgrounds, we
systematically reject attempts to 'prove' that deprived kids are
worse attainers because they are more stupid. We *first* remove all
disturbances to the observed data which result from the effects of
Nurture, before we start considering Nature]