The Labor Theory of Value:  A Law on the Relation between Labor and Prices

 

In evolutionary biology, the theory of evolution by the action of natural selection is a unifying framework for the description and explanation of myriad biological phenomenon.

 

The epistemological and scientific foundation of classical political economy was the “labor theory of value” (LTV). Perhaps, a more fitting description is the “labor law of value”.

 

The LTV predicts that the prices of commodities vary proportionally with their labor-content. If a commodity contains “more labor” than another, then in all probability the first will have a higher price. The LTV makes substantial law-like claims and is not a moral proposition.

 

Marx did not discover the LTV. However, he did make specific contributions to the theory, including , but not limited to, the hypothesis that labor is only represented as exchange value in societies with private ownership and atomised production, the distinction between labor and labor power, and the introduction of the concept of surplus value as something functionally prior to its division between profit, interest and rent.

 

Attack on the Labor Theory of Value :

 

Since the publication of Capital, the labor theory of value has been closely associated with socialism. For this reason, it became a major project of orthodox economists to “refute the labor theory of value.  With the rise of marginalism , and the notion that prices were grounded in the subjective appraisals of individuals , orthodox economists had a political apologia and substitute theory.

 

The first criticisms of the labor-theory of value were logical refutations of the supposed fallacies in the transformation of labor-values to prices of production. The first version of this critique, was made by the Austrian minister of finance and economist Bohm van Bawerk. In 1895 van Bawerk became minister of finance and not coincidently he published Karl Marx and the Close of his System in 1896 to challenge the rising socialist movement.

 

Essentially, the argument was that since the premise implied a contradiction, that by a reductio ad absurdum the theory was logically-contradictory. More specifically, the presupposition of exchange of commodities at equal values in Capital volume I contradicts the conclusion of the formation of prices of production and a general-rate of profit laid out in Capital volume 3.

 

Within Marxist economics, there has been the tedious accumulation of literature attempting to show that there is no logical contradiction.  This project is closely tied up to and is almost reducible to giving various interpretations of Marxist theories. One attempts to find the logically consistent interpretation in order to come up with a testable labor theory of value. We have all sorts of competing interpretations intended to solve the transformation problem; the simultaneist versus temporal , single-system versus dual, commodity-form etc.

 

How do we go about challenging this claim of self-contradiction? How can we stop the endless proliferation of interpretations in order to construct a testable and well-supported theory?

Using the Philosophy of Science to Approach the Problem:

 

The critique of the LTV took on a deeper dimension with the philosophy of science. Pre-1968, the only living philosophy of science was logical positivism. Joan Robinson , a student of John Maynard Keynes, himself a student of the great logical positivist Bertrand Russell, was one of the first to make forcible epistemological arguments against the labor theory of value.

 

According to the neo-positivists, science is in the business of coming up with theories, bodies of declarative sentences organized into a deductive-system. Some of these statements are couched in theoretical , while others are couched in observational terms. Each statement is true iff and only if it is verifiable, observable. If it is not verifiable then the statement is neither true nor false, but simply meaningless. It is a piece of metaphysics that should eliminated.

 

As the theoretical statements are not directly observable, they must be reducible to statements about direct observations. If they are not reducible to such statements, then the theoretical statements and terms are meaningless. Robinson argued that “value” was such a term. It could not be seen on an object. It was not a visible but a “metaphysical” property. Therefore, it was a meaningless term and should be eliminated from the conceptual framework of economics.

 

With time the philosophical combined with the logico-mathematical in the line of work represented by Piero Sraffa and Ian Steedman. In fact, the LTV became the prime candidate to for a discarded theory in the history of economics within the academy. The only conclusion worth making is that LTV should be discarded as a piece of anti-scientific ideology, relegated to the museum of pseudo-scientific oddities alongside “phlogiston” and “ether”.

 

Many Marxists began accepting these “arguments” around when the socialist movement was losing confidence and power. Neo-liberalism had its effect on the economic academy and even on those persons confined to a position of internal resistance. Ian Steedman was himself a member of the British Communist party. As part and parcel of the assault of capital and defeat of labor, these Marxist intellectuals and economists were unprepared to defend the most basic proposition of Marxian political economy.

 

Counter-Attack and Defense of the Labor Theory of Value :

 

The basic point, however, is that logical argumentation is not how scientific theories are ultimately accepted or rejected. A theory is accepted or rejected only if it is tested and supported by the facts. No economist tried to reject the LTV by testing and showing that it was not supported faced with the facts. Therefore, all talk of the LTV being “disproven” is moot. All these idiots have done is shown how particular mathematical formalisms are inconsistent i.e. entail contradictions. That says nothing about the real relation between prices and labor.

 

In the middle of this one-sided ideological massacre, two algorithmists named Farjoun and Machover published a book called “Laws of Chaos” (LOC).

 

LOC is one of the most important and overlooked works of Marxism ever written. The philosophical, epistemological, and scientific implications of this book are revolutionary.

 

Farjoun and Machover transform the whole of the Marxist research program in political economy. The authors believe that all economics, including Marxian, flounders on a false assumption i.e. that the economy tends towards a stationary state of equilibrium. In this deterministic picture of the capitalist economy, economic categories such as price and profit gravitate around this one point of equilibrium, so e.g. there is an economy-wide rate of profit.

 

Farjoun and Machover begin by rejecting the deterministic picture of capitalism that is tacitly assumed in such a theory. Logic and evidence exclude the possibility of such a system. In rejecting such a picture, they adopt a more realistic understanding of capitalism, but also of scientific practice and theory.

 

In a brilliant instance of scientific modelling, Farjoun and Machover recognize that physics has already produced successful theories about anarchic and disorganized systems and they use such theories to analyze the capitalist economy. They argue the capitalist economy is extremely anarchic and disorganized. In a capitalist economy, millions of buyers and sellers interact such that at the macro-level it is entirely uncoordinated, just like in a container of millions of gas-particles, colliding against one another and the walls in a frenetic and unpredictable way.

Statistical mechanics is precisely the science that studies such anarchic and disorganized physical systems and it does so in irreducibly non-deterministic and probabilistic terms.

 

Physics says that such systems have “many degrees of freedom” and that the movement of each individual particle is “random”. We cannot predict with certainty the micro-properties of a specific molecule. However, and this is extremely important, we can make statistical statements about aggregates of molecules. In like manner, we can make statistical statements about the aggregate economy, distributions of prices and profit-rates, but not about one profit rate. There is no “economy-wide profit rate” but a dynamic distribution of profit rates in which , at the granular-level, individuals profit-rates (firms) constantly change and switch positions.

 

Now whatever science is, it is certainly in the business of describing and explaining causal mechanisms. In the process of understanding, prediction is used as a means of testing, keeping, or discarding a theory.

 

However, when we use a theory to make a prediction we should always specify before the set of all possible competitors. If the theories make the same predictions it is difficult to determine which to choose. If two competing theories make different predictions, then by observation or experiment we can eliminate one. This scientific method allows us to discard those theories that we know to be false, while keeping those theories that do best faced with the evidence.

 

Neo-classical economics predictions concerning prices and labor-content are falsified. Orthodox economics predicts that there will be no connection between labor-to-capital ratios and profit. Farjoun and Machover’s probalistic theory of labor-content, continuing the classical programme of Smith, Ricardo, and Marx, predicts that industries with a high labor-to-capital ratio will be more profitable than those with a lower. The prediction checks out as a statistical generalization. The statistical generalization falsifies the orthodox claim and provides support for the claim that the source of profit is surplus-value, labor i.e. the labor theory of value.

 

Since the publication of Farjoun and Machover’s work there has been a proliferation of literature that supports the LTV (Shaikh, Cockshott and Cottrell, Zachariah). Time and again prices of commodities varied proportionally with labor content. As with any statistical law, an individual price might not be exactly proportional with its labor-content , but in the aggregate commodity prices would cluster very tightly around labor-values. For instance, a paper by Cotrrell and Cockshott finds that labor-content is an extremely efficient (but biased) predictor.

It would seem Marxist political economy is the victor unless there is another more likely and better supported theory on price.

 

Probabilistic Political Economy and Its Philosophical Meaning :

 

Yet there is a deeper point to take out of all this, a deeper point about science and the world we live in. Quantum physics was a revolution that unsettled previous conceptions on the universe. Some of these doubts were insane. Some philosophers went to the extreme of claiming that quantum physics “eliminated matter”, made reality a function of “subjective perception”. Those who took a more cautious stance towards the quantum revolution drew better lessons.

 

Quantum physics weakened the Enlightenment perspective of the world as a well-oiled machine, and with it the belief of science as the production of a universal explanation that is a total prediction of every event in time.

 

Likewise, Farjoun and Machover build a theory that does not presuppose capitalism to be a machine. Instead, capitalism is quasi-determined (in production) and chancy (in exchange). Science is a project of understanding, describing, explaining, questioning the determined and chancy process of nature, and prediction enters in as one kind of epistemic act of many.

 

Take the typical critiques of Marxism as a failed scientific research programme that rested on a prediction that did not check out. There were perhaps some Marxists who had an extremely deterministic picture of history. Whether it was the productive forces or the working-class, some irreversible process in capitalism would necessarily lead to socialism. But to be a Marxist is to understand that our material , like our social world , is no machine with a central brain, it is both determined and chancy , and like anything, there is no guarantee of socialism. Marxists must always live with this chanciness, uncertainty. Awful though it is, this is the way Marx saw history, no guaranteed finalities. Just the fight.