[OPE-L:3402] Value of Money

Alan Freeman (A.Freeman@greenwich.ac.uk)
Mon, 14 Oct 1996 07:13:03 -0700 (PDT)

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Sorry for absence, been out of action for a week.

With regard to many fascinating contributions on the value
of money but particularly Duncan's and Fred's (I'm still
working my way through Bruce's numbers) I think this is
making real progress.

This is a response to Fred but deals with some issues
raised by Duncan. I hope to make a further response to
Duncan. I appreciated Fred's interventions and agree that
the historical movement in the monetary expression of value
over time during the 20th C is indeed a critical new
phenomenon to discuss and deal with, and has an important
modificatory effect on the observed rate of profit.

In [3223] Fred writes:

Therefore, in the case of a constant value of money,
Alan wishes to focus on the rate of profit in
historical costs, but in the case of a declining value
of money, he wishes to dismiss the historical cost
rate of profit and focus instead on the rate of profit
in current costs (the "real" rate of profit).

But, Alan, you can't have it both ways. Either
constant capital and the rate of profit in Marx's
theory are defined in terms of historical costs or
they are defined in terms of current costs. The
determination of constant capital and the rate of
profit does not change depending on one's assumption
regarding the value of money.

This is a misunderstanding. My argument was that historical
cost applies throughout but can be decomposed into two
component parts. One is the effect of changes in the
productivity of labour, the other the effect of changes in
the monetary expression of value.

My 'real' rate of profit is a historical cost rate of
profit independent of that part of the change in price
purely due to a change in the monetary expression of value.

I'll try to illustrate this. Suppose [by popular demand] a
two-sector economy that pays non-zero wages. Suppose in
1990 it produces goods C1, C2.

I write exchange values in money with a dollar sign,
exchange values in hours with the word 'hrs' after, and use-
values without a dollar sign, implying measurement in the
natural unit of the use-value concerned. As per convention
C1 is an investment good and C2 a consumption good. The
numbers are generally arbitrary and were chosen only so as
to get a few round figures for profits, values and the mev,
to make the example easier to follow. It's a bit hasty so
if some of the sums seem wrong, it may be my arithmetic.

Consume C1 Labour Time output (units)
C1 producers 27[$27] 6 66
C2 producers 29[$29] 10 39

Suppose we know from past data that at the beginning of
1990 one hour was expressed monetarily as $1. Then each $
represents 1 hour and the labour-value accounts read:

Consume C1 Labour Power Output (hrs)
C1 producers 27 hrs 6 hrs 27 + 6 = 33 hrs
C2 producers 29 hrs 10 hrs 29 + 10 = 39 hrs
Society 56 hrs 16 hrs 56 + 16 = 72 hrs

Hence new unit value of C1 = 33hrs/66units = 0.5 hrs/unit
Hence new unit value of C2 = 39hrs/39units = 1 hrs/unit


(1) The production of machinery has become more efficient
since it is now valued at 0.5 hrs/unit whereas it was 1
(2) Inputs were nevertheless valued at historical cost.
Inputs to C1 were valued at 1 hr/unit, outputs at 0.5
(3) Value is prior to and independent of the price for
which these goods actually sell (not yet known or stated)
(4) Finally I would indicate to Duncan that the new value
created in hours is by definition the total living labour
expended during 1990 so there is no violation of

My view is that the new monetary expression of value only
becomes known when the goods are sold, or to be more
precise, priced by the market.

There is thus now an infinite range of possibilities
corresponding to all possible sale prices for the
commodities. Let us consider some of these possibilities.

If there were a constant monetary expression of value, 1
hour would still be expressed in $1. In that case the goods
would sell for a total of $72. However due to the effects
of competition, supply and demand or what have you, C1
might have realised more than $33 by say Delta($C1). In
that case C2 would have sold for Delta($C1) less than $39,
the differences balancing out by Marx's first equality.
Nevertheless, their total monetary value prior to sale,
under this assumption, is a consequence of the assumption:

Now suppose that, due to monetary changes, they actually
sell for the following prices:

C1: $0.625 per unit($41.25 total)
C2: $1.25 per unit ($48.75 total)
Total price: $90

If they had sold for their value at the 1990 MEV they would
have realised

C1: $1 per unit ($33 total)
C2: $1 per unit ($39 total)
Total price: $72

Clearly, there has been inflation (decline in the value of
money or rise in the monetary expression of value). What is
the new mev? To put it another way, how do we measure this
inflation? Let us consider a number of possible answers to
this question.

Neoclassical price index theory can only answer this in
relation to some ideal basket of consumption. Suppose this
basket is, for the sake of argument, the gross output of
the economy. In 1990 this would have cost $66+$39 = $105.
Now it costs $90. So the Paasche price index (price of
now's basket now divided by the price of now's basket then)


- a *fall* in the 'price level' - or a rise in the 'value
of money'. Perhaps this was a bad choice of basket. So take
the Laspeyres index (then's basket now divided by then's
basket then) based on the productive inputs of 1990. This


- still a rise in the 'value of money'. Neoclassical index
theory yields a *deflation* and money seems more valuable.
This is because the fall in the value of C1, in this basket
of commodities, outweighs the actual rise in prices. The
neoclassical confusion between exchange and use value leads
it to mix up productivity changes and nominal price changes
to such an extent that it converts an inflation into a

But let's try some other baskets.

Let's use an index based on the wage-basket (C2). A unit of
wage goods has, it is true, risen in price by 33% and so
according to neoclassical index theory, there has been an
inflation of 330r a fall in the 'value of money' in the
neoclassical sense, of 25%. But unfortunately we would get
the same answer *whatever* the price of C1! Clearly, this
is not a general measure of the change in the purchasing
power of money because it does not take into account
changes in the price of those goods that are used to
produce other goods.

So how about an index based on the price of C1? In that
case, since 1 unit of C1 used to cost $1 and now costs
$2/3, there has again been a 'deflation' of 33%. Moreover
this index is independent of the price of C2, so that bread
could rise in price by a factor of 10 without registering
any change in the value of money.

We need a theory of value because such measures hopelessly
confuse two entirely separate causes for the change in the
price of C1. One is the introduction of more productive
techniques. The other is the monetary effects of changes in
the price level.

Moreover non-Marxist theory bandies around terms such as
'real wage' and 'price level' but neither conceptualises
nor quantifies them. The term 'value of money' appears in
every first-year macro textbook, so this is hardly some
obscure doctrinal obsession. Without a theory of value, we
cannot distinguish these two sources of a change in price.

Moreover this really matters. No society can prosper merely
by raising prices. Otherwise capital need never manufacture
anything, but should just inflate its currency as fast as
possible. Anyone owning an asset would make a monetary
profit simply by doing nothing. We genuinely require a
measure of profit that isolates the *pure* effects of
production from monetary effects or we cannot avoid this

I ask Steve Keen and Mike Williams the simple question: how
do they distinguish between production and inflation? The
need for a proper theory of value does not arise from
paying Marx his due but from paying bills with money.

How do I think we should we measure the monetary expression
of value? I agree with Paul C's answer [in 3198]:

"value is a measure of the cost to society of
producing something"

We require a measure which relates the purchasing power of
money to its command over the productive capacity of the
economy. But the most universal productive resource of
society is labour power. We have to ask this question: What
relation is there between the value of the results of
production in terms of this universal productive resource,
and the monetary measure of these same results once this
value is realised, that is, given a new monetary

Complications and differences arise from different
interpretations of the last phrase. What exactly represents
the 'value of the results of production'? I know of at
least five views and I think the next thing is to get clear
the different consequences of each one.

The traditional view says the monetary expression of labour
is given by the value of the money commodity, regardless of

A more subtle view is Mandel's who argued that the monetary
expression of labour in gold terms is given by the price of
production of 1 oz of gold. I think of this as transitional
to the idea that I believe was first proposed as the New
Solution, that the value of money should really be
conceived of as a measure of the labour commanded by the
money commodity in exchange, rather than the labour
'embodied' in some sense in the money commodity.

The New Solution as such argues, as I understand it, that
the value of money is the ratio between the net value added
in money, and living labour. It is possible, but it seems
to me not necessary, to interpret this as the ratio between
the money price of the 'net product' of society and living

A fourth view - I think is implicitly your own and Bruce's
- is that the new monetary expression of value is given by
the ratio between the value and the price of the gross
product of society, that is, the number of hours of
society's total production of value which $1 will buy. Thus
a gross output of 72 hours is now expressed in a total sale
price of $90, so that now $1 represents 0.8 hours. I hope I
can convince you that all we do is apply this concept

I personally would modify this for fixed capital, to
calculate the MEV as the ratio between the value and the
price of the total stock of society including its fixed and
monetary assets. Here I differ from Andrew as can be seen
from his Okishio example. But if fixed capital is
neglected, we all ought to be able to agree.

I think the differences which Duncan detects arise in part
from differences between our (common) measure of the
monetary expression of value and the New Solution measure.
Duncan would, if I understand correctly, calculate the
value of money here like this: monetary value added is $90
- $64 = $26. Living labour hours = 16. Therefore

Value of money = 16/$26 = 8/13 hours per dollar, or
Monetary expression of value = $26/16 = $13/8 per hour.

My problem is this: the total product sold for $90. It is
then surely equivalent to $90*8/13 = 55.35 hours. Yet the
inputs were valued at the time of purchase at 56 hours. So
the total new value is negative. This is a bit odd since
living labour is positive. Moreover if we construct an
example in which the productivity of labour falls, rather
than rising, value added so calculated *exceeds* living
labour, so that value is apparently created out of nothing.

Nor is this better with current cost valuation. If the
inputs to production were revalued to 1991 levels they
would have cost 13.5 + 29 = 42.5 hours instead of 56, and
value added would be 55.35 - 42.5 = 12.85 hours, still not
equal to living labour. At least that's the way it seems to

These discrepancies, and the discrepancies which Duncan
observes, arise because once technology is changing, it
makes a real difference what measure of the value of
money/MEV is adopted. If technology is unchanging, only a
factor of proportionality distinguishes the different

Therefore in a dynamic context if one measure of the MEV is
used as a conversion factor to turn dollars into hours, and
the results are compared with the same value calculations
using another MEV, then in a sort of relativistic fashion,
each theory will observe a discrepancy in the other.

It seems to me that the conclusion that follows is that we
should have a proper debate about the most appropriate
measure of the MEV and of the value of money. But I don't
think it invalidates the sequential approach. The reason
has been given by Andrew. It is because we can always
conduct the entire calculation in hours up to the point of
sale in hours, as follows:

(1)represent the inputs in hours using the MEV extant at
that time.
(2)add living (abstract) labour in hours to get value
(3)calculate the real rate of profit as the ratio between
surplus value in hours, and advanced capital in hours
(4)observe the sales price to get price
(5)calculate the new MEV/value of money using (1) and/or
(2) to supply measures of value and (4) to supply measures
of price
(6)calculate money profits from (4) and the actual money
paid for inputs.

Incidentally this strictly follows Marx's reproduction
schema sequence


I think this will allow us properly to compare the results
of different mev/value of money measures in a single
systematic framework, though I am open to alternative

Now, to return to Fred's point. To establish the profit
rate we have to establish the wage. To pacify various
objections, I shall not take it to be zero. Instead I shall
arbitrarily assume it to be 0.5 units of C2 per hour
purchased out of money paid at the beginning of the year.
At this time C2 costs $1 per unit, representing 1 hour, and
so variable capital (V) is 6*0.5 = 3 hours for C1 and
10*0.5= 5 hours for C2, or 8 hours in all. S can easily be
seen to be 8 hours in all likewise.

In that case the accounts of the capitalists can be
presented in two different ways:

HOURS Output (Constant + Variable)= Advanced Surplus Value
C1 33 hrs ( 27 hrs + 3 hrs )= 30hrs 3 hrs
C2 39 hrs ( 29 hrs + 5 hrs )= 34hrs 5 hrs
Total 72 hrs ( 56 hrs + 8 hrs )= 64hrs 8 hrs

'Real' rate of profit = 8/64 = 0.125

MONEY Output (Constant Variable)= Advanced Profit
C1 $41.25 ( $27 + $3 )= $30 $11.25
C2 $48.75 ( $29 + $5 )= $34 $14.75
Total $90 ( $54 $8 )= $64 $26

'Money' rate of profit = 26/64 = 0.40625

Clearly the money rate of profit is higher than the rate of
profit calculated using hours. But nevertheless the 'hours'
profit rate used the historic cost of constant capital, not
the current cost.

In terms of my original equation the 'real' profit rate is
0.125 and the difference due to inflation is 0.40625-0.125
= 0.28125 We can even quantify this absolutely since, if
the monetary expression of value had remained constant,
money sales would have totalled $72 and money profits would
have been $8, (and the money and 'hours' profit rate would
have been the same). The capitalists have received $18 more
than if the mev had stayed constant, as a result of
inflation. Profits thus amount to

$ 8 real underlying profits
$18 inflationary addition to profits

My suggested partitioning of profits separates out the
actual monetary profits into two parts. One is the
sequentially-calculated profit which presents the pure
effects of technical change. The other is an (also
sequentially-calculated) monetary adjustment derived from
the principle that only living labour can create new value.