Marxs Money Theory of Value

Something the Old Moor only dimly

perceived
by Kumar David-October 10, 2015

Underlying
this diverse range of inquiries is
the seminal role of money; that is
credit, interest, and money
creation by banks and state.
Amazingly, this was long before
central banks emerged - the Fed
was created in 1913. Marx was getting deeply into money as a universal
commodity; money was sharing with labour the position of primary
determinant of the capitalist economic order. He sees money as the
universal commodity via which all exchange is mediated and influenced
(not a convenient medium of exchange only). He realises that value is
discernible only in a market where all commodities, labour power included,
are exchanged for and via this universal commodity. Surely he is evolving
a Money Theory of Value which integrates Generalised LTV as a conceptual
building block; but he did not complete this theoretical leap explicitly. The
value of a commodity is now redefined as its exchange vale, which is its
market price, which in turn is its average cost of production plus the
prevailing equilibrium rate of profit (the average rate of surplus-value in
the economy or the average rate of social exploitation).
It is near universally thought that Marx subscribed to the Labour Theory of
Value (LTV) which originated with Scotsman Adam Smith and was
formalised by Englishman David Ricardo, scion of a Jewish family of
Portuguese origin. Marx is partly to blame for this misconception though
there are warnings enough scattered throughout his opus that he was
moving far beyond the simple but useable LTV framework. The problem is
that in Vol. I of Kapital, Marx strictly confined himself to a study of value
created in production. Only posthumous Vol. II extended the investigation
to exchange and to the circulation and reproduction of capital; that is
integration of production and exchange towards a whole-system model.

Vol. III, a mess of notes that poor Engels struggled with for the rest of his
life, is about credit, finance, banking and an unnecessary recondite issue
on which Marx wasted much time the so called Transformation Problem.
Profound thinkers, breaking new ground, do not see all implications, only
posterity digs out much of it Lord Kelvin, President of the Royal Society
said in 1883 that "X-rays will prove to be a hoax", Henry Fords banker
opined in 1903 that the automobile would never surpass the horse and
carriage, and to cap it I quote Einstein (1932) "there is not the slightest
indication that nuclear energy would ever be available". So it is no surprise
that the concepts I deal with in this essay surfaced only recently. I have
benefited from Michael Heinrichs Introduction to Capital though he does
not reach the logical conclusion of crafting the alternative for which I have
coined the term Money Theory of Value (MTV) in this essay. David Harveys
Companion to Marxs Capital Volume 2 a misnomer as it deals with Vol.
III as much as II - also helped. Though Harvey does not deal with value
theory as such he discusses Marxs approach to credit, reproduction and
finance which discourses support what I say. Of course I have simplified
this presentation considerably to make it accessible to a wide readership.
The Labour Theory of Value
Basic LTV is easy to explain; it says all value is created by labour, or to be
precise socially necessary labour engaged in production in an ideal
capitalist system. (All science postulates an ideal system perfect gas,
free space, two-body problem to create theory). Productive labour
transfers the value of raw materials, machinery and energy (m-m-e) to the
product, it also adds a value equal to its own wage and furthermore
creates an additional value called surplus or profit. LTV is about value in a
goods production economy; hence works of art, rare finds etc are
excluded. Ricardo related land value to the marginal profitability (rent) of
lands of different quality, but it would take me much too far a field to
include the Ricardo-Marx theory of land value in this piece.
OK back to basics. Lets use an illustration: Plant A uses m-m-e of Rs 80m
(m for millions) per year and pays annual wages of Rs 20m. Say the
output sells for Rs 120m (20% profit on outlay), LTV says that productive
labour transferred Rs80m of m-m-e value to the output, created a value
equal to its own wage of Rs 20m which also is crystallised in product value,
and furthermore created a surplus (profit) of Rs 20m all encapsulated in
the total output value of Rs 120m.

To be universal we must of course advance our concepts from concrete

labour [plant by plant, or activity (tailoring) by activity (welding)] to
abstract social labour, which is labour as a universal or general category.
Political economists of Marxs genre need these abstracted (generalised)
categories.
This is rudimentary LTV shorn of complications such as Is this plant of
above or below average productivity? etc. Note that m, m and e are
themselves generated, in like fashion, by the exercise of labour. Hence
working back all the way to origins, all value is created by labour. Ricardo,
well aware of the implications, preferred not to make a fuss about the
source of surplus (he was a stockbroker), while Marx shouted it out from
the roof tops calling it surplus-value created by the worker, exploitation,
and so on. Morally and qualitatively LTV is fine, but dont ask too much of
it quantitatively. The problem is that if you isolate analysis plant by plant
you run into contradictions. Consider another plant B turning out the same
goods as A, but technically less sophisticated (labour intensive). Say the
m-m-e of B is Rs 60m but wages are Rs 40m less technology, more
labour. Assume a uniform labour market where workers are paid the same
wage everywhere and create surplus value similarly. Then the ratio of
wages to surplus is assumed to be 1:1 in both A and B. Then the surplus
(profit) created in B should be Rs 40m. In which case the profitability of
the Rs 100m outlay in plant B is 40%.
This is a contradiction not that the low tech plant is more profitable,
which is inconsistent but a different matter. The incongruity I refer to is
that the rate of profit across the system is different depending on the mm-e to wages (capital to labour) ratio in production. Capital will migrate,
industry to industry, technology to technology, seeking the most profitable
locale; a new equilibrium will be established. An underlying average rate of
profit prevails across the whole system; fluctuations like waves on the sea
only seek to restore a system wide average or equilibrium. The equilibrium
profit rate depends on history and on the play of the class struggles, but
that too is another long narrative. For similar reasons LTV rejects supplydemand interplay as the determinant of prices. Supply and demand explain
price fluctuations (like waves on the sea) but the underlying determinant
(the depth to the sea bed) of value (price) is cost, that is the socially
necessary labour congealed in a commodity.
In our example economy, if the natural rate of profit is say 20%, then the

selling price of plant B output will have to be Rs 120m and the surplus
added by the labour-power on which Rs 40m was expended is only Rs
20m. Observe that in (modern) plant A however, labour-power costing Rs
20m continues to add Rs 20m of surplus. The hard link between labour
time and value, when interpreted as prices, is broken. Value measured in a
labour time paradigm must give way to a money and price paradigm. The
former is only a stepping stone to a more complex conceptual framework.
But bear with me for a moment; another moral of the story is that LTV
should not be used plant by plant, but over the whole economy. To put it
simply, it is legitimate to replace plant A by $80b (b for billion) m-m-e,
$20b wages and $20b surplus, and to postulate a model a little larger than
Lanka but all capitalist, that is the rural and informal sectors are
insignificant. Then mutatis mutandis the previous example is meaningful
with the whole economy replacing plant A.
A Money Theory of Value
What linkages consolidate plant-by-plant activity into a whole-system? This
is where Vol. II which deals with exchange, and with the circulation and
reproduction of capital, has impact. There is no such thing as an isolated
unit of production; materials, machinery, energy and labour come from
elsewhere in the economy; commodities sell into a market. Isolated
production is an oxymoronic absurdity existing only on Robinson Crusoes
island. Vol. I & II together form an integrated system. Vol. I deals with
value in production, II adds exchange and the circuits of capital. Vol. III
injects average profit, interest rates and finance capital in a massive
unfinished conceptual extension.
We are now close to but have still not come to a Money Theory of Value
(MTV). Previously we extended LTV to a generalised economy-wide version
call it Generalised LTV. But we still need to shift paradigm from a labour
and time value framework, to a money-price framework. As we follow Marx
into wide-ranging discourses, notes, comments and thoughts scattered
throughout his political economy opus (three volumes of Kapital, three
volumes of Theories of Surplus Value, a few shorter but seminal works,
and a mass of notes published under the name Grundrisse about 50 years
after his death) something very striking takes shape - especially in Vols. II
and III of Kapital. Marx increasingly focuses on capital per se; (i) credit as
a key to expansion - the reproduction problem; (ii) interest rates (How are
they set? Here alone he concedes determination by supply-demand); (iii)

division of the social surplus between landlords (rent), finance capitalists

(interest seekers and bankers) and profit of productive capitalists. He
becomes preoccupied with finance capital and with "fictitious capital" the
grandfather of todays loony derivatives and hedges.
Underlying this diverse range of inquiries is the seminal role of money;
that is credit, interest, and money creation by banks and state. Amazingly,
this was long before central banks emerged - the Fed was created in 1913.
Marx was getting deeply into money as a universal commodity; money was
sharing with labour the position of primary determinant of the capitalist
economic order. He sees money as the universal commodity via which all
exchange is mediated and influenced (not a convenient medium of
exchange only). He realizes that value is discernible only in a market
where all commodities, labour power included, are exchanged for and via
this universal commodity. Surely he is evolving a Money Theory of Value
which integrates Generalised LTV as a conceptual building block; but he did
not complete this theoretical leap explicitly. The value of a commodity is
now redefined as its exchange value, which is its market price, which in
turn is its average cost of production plus the prevailing equilibrium rate of
profit (the average rate of surplus-value in the economy or the average
rate of social exploitation).
Today global finance, in its worst crisis in 85 years (testified to by the
sleepless nights of quantitative-easers Janet Yellan, Mario Dragi, Haruhiko
Kuroda and Mark Carney) headlines the central role of money-per-se in
keeping capitalism afloat. Linking money-per-se in finance capital, with
labour as value creator in production, underpins a nexus between MTV and
globally Generalised LTV. Marx was probing this 150 years ago, but through
distant epistemological horizons he but dimly perceived.
Posted by Thavam