Labor Theory of Value Explained: Marxian Economics | Classical Political Economy

[00:00:00]hey it's dr asitar bear and this presentation is on the labor theory of value so let's start with some background okay early economic theory sought to explain both the value and the price of commodities okay so let's define these terms a price is the amount of money it takes to purchase a commodity value is the amount of money that a commodity is worth okay so we are using money terms to understand both these things okay get the the appearance of value and then we have the essence of value uh commodity that definition of that is an item that's produced for sale on a market political economy from the 17th to 19th century describes the two sources of value as number one land that is nature and number two labor okay since only labor is something we really have control over it makes sense to use labor as a theoretical basis of value so this is an early economist this is william petty and here's a quote from petty okay all things ought to be valued by two natural denominations which is land and labor right that's from his treatise on taxes and contributions from 1662.

[00:01:23]here's another influential figure history of western thought this is john locke and locke developed of course eight known for a theory of property and property rights but he used the labor theory of value to conceptualize that so here's a quote from him every man has a property in his own person this nobody has any right to but himself the labor of his body and the work of his hands we may say are properly his so in the famous quote there from locke now you might have seen uh this guy's face before if you've ever seen uh us currency hundred dollar bill this is benjamin franklin and here's a quote from franklin uh franklin is not really known as uh an economic thinker primarily i think in the united states but uh he was one very influential in fact wrote in the early 1700s so here's his quote by labor may the value of silver be measured as well as other things so in this section he's talking about what determines the value not just of commodities but also of things like gold and silver as suppose one man is employed to raise corn while another is digging and refining silver at the year's end the complete produce of corn and that of silver are the natural price of each other and if one beat 20 bushels and the other 20 ounces then an ounce of that silver is worth the labor of raising a bushel of that corn so franklin wrote before uh adam smith right adam smith again one of these foundational figures in the history of economic thought uh and had an influence on smith uh as well as many others so here's here's adam smith um look at that wig fantastic um the value of any commodity therefore to the person who possesses it and who means not to use or consume it himself but to exchange it for other commodities is equal to the quantity of labor which enables him to purchase or command labor therefore is the real measure of the exchangeable value of all commodities okay this is from smith's famous work an inquiry into the nature and causes of the wealth of nations from 1776. again one of the foundational figures uh in the history of economic thought here's david ricardo uh wrote a few decades later also in england and here's a quote from ricardo the value of a commodity or the quantity of any other commodity for which it will exchange depends on the relative quantity of labor which is necessary for its production and not on the greater or less compensation which is paid for that labor okay this is from ricardo's principles of political economy and taxation right at the beginning in chapter one right most of these thinkers discussed value theory right at the beginning okay especially uh smith and brooke so this is marx right and karl marx developed and refined labor theory of value added new aspects to it and that's mostly what we're going to focus on right so marx is not unique at all in terms of using a labor theory of value but marx used it in a very particular way okay so because marx is also a huge figure in the history of economic thought and because mark's a very controversial figure as well right being a critic of capitalism marx has sort of taken over the labor theory of value and you know 99 times out of 100 when somebody's talking about labor theory of value they're talking about marxism right or they're talking about marx's version of labor theory of value there are differences in variations and so forth within these different theories but marx of course has the advantage of being able to learn from everyone who came before right marx was very well read in the history of economic thought so he's well aware of the arguments of petty and franklin and smith and ricardo and all of these figures right so he refers to them and so forth learns from their points of view and adds to them okay so he takes the existing idea of use value that is from adam smith okay here's here's a quote from marx this is from capital volume one in chapter one commodities come into the world in the shape of use values articles or goods such as iron linen corn etc this is their plain homely bodily form they are however commodities only because they are something twofold both objects of utility and at the same time depositories of value all right so use value then marx also describes exchange value okay so here's a quote not not far from that first one let us take two commodities example corn and iron the proportions in which they are exchangeable whatever those proportions may be can always be represented by an equation in which a given quantity of corn is equated to some quantity of iron example one quarter of corn equals x 100 weight of iron so in england 100 weight is 112 pounds confusing i know but anyway what does this equation tell us it tells us that in two different things in one quarter of corn and x hundred weight of iron there exists in equal quantities something common to both the two things must therefore be equal to a third which in itself is neither the one nor the other each of them so far as it is exchange value must therefore be reducible to this third okay so use value and exchange value so use value comes from the qualities of the items okay this whatever it is right iron is useful for certain things corn useful for other things right it's about what it can be used for that's that comes from its qualities right it's a qualitative determination not a quantitative one right if we're talking about quantities then we're talking about well one pound of iron is different from four pounds of iron right so you know but but the point is right the use value of iron whether there's one or four you know is it the same they can be used for the same thing right exchange value on the other hand comes from the amount of socially necessary abstract labor that is embodied in the commodity and exchange value is quantitative okay we don't care what the particular uh qualities of something are when we're talking about its exchange value right this is why we can use the same money units to talk about a whole variety of goods and services right like what can you buy with a hundred dollars well we are talking about a certain amount of exchange value right that's what we're talking about with that with that unit okay so let's get into this term okay snault so marxists have abbreviated this this phrase from marx socially necessary abstract labor time because it's such a long phrase right marxist showing that they do indeed have a sense of humor have uh given it this weird acronym snolt okay so let's go through and explain each part of this all right so socially necessary the beginning of that right so what this means is labor only creates value at the average or socially necessary level of productivity in the society okay so example right let's say that it takes an hour to pay to offense and that represents a kind of average level of productivity right so he said everyone knows okay look it takes an hour to paint the fence of this particular size and so forth right so if it takes you two hours well you're simply below the average level of productivity right that that doesn't make the fence painting twice as valuable even though it took you twice as long it still has an hour of socially necessary labor in it not two hours right working slower doesn't make things more valuable and everyone knows this right this is just only logical right now conversely okay if you have some kind of super speed you know like the flash or superman or whatever right you can paint that fence in 10 seconds well look there's still an average level of productivity in society you're just now well below that right wow i didn't know that i didn't even know that was possible now okay that's a quite a fence-painting job right but it still contains an hour of socially necessary labor because you know you're just one person right you happen to be faster a lot faster in this example than than the average but the average still holds right that's what we mean by socially necessary labor okay so what's up what about the next part abstract well markets have this ability of comparing many different forms of labor even though they're all different right and forming a kind of average of these okay that's what abstract labor means and it takes into account many differences between the different forms of what are called concrete labor okay so meaning labor in that sense is always concrete right you're always doing a particular form of labor you can't do labor in the abstract right now nobody ever has you have to do a certain kind of labor okay you have to dig a hole or or uh you know repair a bike or you know whatever it is right so there's in that sense there's many many different forms of labor you could do and then there's some some reckoning process where they're weighed and determined and you know what is abstract labor right how much how much abstract labor did it take okay so how is this reckon well it's reckoned two markets okay taking into account different levels of skill training risk many many other factors that go into determining right how much labor is in something okay and then labor time so obviously every form of labor that we can think of involves time takes place in time okay but time is not the only factor right like like you know the above makes clear time is modified by all these factors right so if something takes more skill well okay then even if it took less time it might actually be more socially necessary labor in there right because you know again we are taking into account all of the different kinds of forms of of labor can that labor can take okay so in order to understand these value categories we're going to do an example uh so you can see how it's used okay and it's examples of a factory it's producing chairs i use this example in a previous lecture so same kind of numbers here okay so let's say that the chairs have a value which is equal to their price and that is equal to two hundred dollars okay so just for simplicity we're assuming that value and price are the same and let's say that this shape uh this rounded rectangle here represents that two hundred dollars okay we're gonna break it down into its constituent parts in order to understand it and look at where did that come from okay so mark says part of this we're gonna call it constant capital okay we're gonna use the term little c to indicate that constant capital and what is this this is the value of the raw materials the depreciation the tools the equipment the machinery that's used in production the value of the building and so forth right this all of this marx calls embodied labor okay because all of this is the product of labor that has been done in the past sometimes mars also calls it congealed labor or even dead labor meaning labor in the past not the present the past has been embodied or has congealed into the form of wood screws leather thread you know all the things the raw materials that are going to be used to produce this chair but not only that right things that are not raw materials but are used in the production process and only a portion of them is used up okay that's called depreciation so example right if a certain tool let's say a screwdriver is used to screw the screws in and the screwdriver you know costs 20 and is able to uh you know produce in that that period uh you know a thousand chairs right well only a one thousandth of the value of that screwdriver goes into each chair right so you know this is complicated to figure out right we have to we have to do some accounting to figure out how much is the constant capital but of course this is this is part of production right part of capitalism part of part of business okay so let's say that we know that this constant capital all these things added up together is equal to 60 okay so that's part of the cost of making a chair but another cost of it is that the workers have to be paid okay now marx calls this variable capital and uses the term v to illustrate that now we'll have more to say later on about what determines the wage but for now let's just say we know what it is let's say it's 70 okay so now what is this extra that's left over right this the c and the v right that's the the cost of the raw materials and the capital right c and also the cost of wages this is the cost of production okay so in value terms c plus v we call that the cost of production now this extra that still remains and hasn't been explained is s surplus value okay very very important concept in marxism right marx is very very interested in this right what is this surplus value well this is also called the gross profit right that's that is the remainder after the direct costs of production have been paid and this surplus value is then taken appropriated by the capitalist okay and we can see exactly how much it is right if it if it cost 130 that's 60 plus 70 dollars to produce the good right and then so that's this part right uh and yet the value is 200 the surplus must then be equal to 70 okay v plus the s again very important this is called living labor what it represents is the value that's been added by workers now okay so that's the term living right it means it comes out of a live process right labor's a process and how much value does that process add to the existing value that you started with right you started with sixty dollars in raw materials and tools equipment et cetera right added workers added 140 of value to that okay so let's go on and talk about some important concepts and equations that marx develops out of this okay so the first is just the value expression okay so value or w is equal to c plus v plus s and that just you know represents value in its component uh you know constituent parts right it's components so in this example 200 right um the cost of production as i mentioned c plus v okay and in this example it's 130 right so 60 and see seventy dollars in the one hundred thirty dollars okay the next term is called the value rate of profit uh often the term r is used to uh to denote that this is equal to the s okay the surplus value divided by the total cost of production c plus v okay so in this example the surplus is 70 the cost of production 130. so 70 over 130 gives us 0.538 next term is called the organic composition of capital okay so this is equal to the constant capital c divided by the cost of production c plus v all right so what this measures is how much constant capital are we using relative to the total cost of production okay so important term right this this looks at how much of the cost of production is in constant capital relative to the total right so in this example it's 60 divided by uh 130 so this gives us 0.462 next we have the rate of exploitation which marx also calls the rate of surplus value okay this is simply s divided by v and what this measures is how much are workers producing which is then going to be appropriated by somebody else right that is the definition of exploitation marxism when someone else appropriates your surplus right um relative to what part of it you get to keep right but what part of it is the wage okay so s over v in this example s and v are the same magnitude okay they're both 70 so 70 over 70 gives us one okay now this it's not necessary that any of these figures right add up to what they add up in this example of course not right the rate of exploitation for example could be greater than one or less than one or equal to or whatever right it's just a measure like any measure within economic theory it allows us to see again the surplus relative to the the part that workers are paid okay marx also refers to surplus as unpaid labor okay so this would be the unpaid over the paid labor marx's labor theory of value argues that value is a social category okay it's not an individual category it's a social category so that's very different for us you know especially in the united states right there's a highly highly individualistic society we are used to thinking that everything is you know from us or whatever right like each individual is like an island marxism isn't really like that right marx is saying value is socially determined not individually determined okay and marx is following you know again long tradition many hundreds of years within political economy of arguing that same thing right the point of marx's labor theory of value is to reveal the existence of exploitation under capitalism even when a commodity is sold at its value and the worker is paid a fair wage there's exploitation exploitation occurs when the surplus is taken by someone other than the direct producer as i mentioned and exploitation is the economic basis of capitalism just as it was for slavery and feudalism older modes of production which came before let's consider the issue now of price versus value okay so marx uses a simplifying assumption in volume one of capital which is assume the price p is equal to the value w this is not a necessary assumption by any means right but you know in volume two volume three marks relaxes this assumption okay the reason for this assumption is to explain that profits are made when a commodity is sold at its value not only when the price is greater than the value right obviously you're going to make additional profits if you can sell something for more than what it's worth that's fantastic from the perspective of the of the seller right that's great right but mark says look that's not possible all the time you know that's possible only some of the time you you cannot have an entire economy where every single commodity is selling at a price above its value even if you did somehow have that that wouldn't explain where profits come from right because as marx points out well you would gain any time that you're a seller but you would lose every every time that you were a buyer and in any market you have to both buy and sell so you can't possibly explain the source of profits by saying well people sell things above the value right no so marx again followed a tradition political economy is saying things are sold in general at their value let's just assume that okay marx recognizes that prices can fluctuate all right but the basic argument is that the price is over determined okay more on this in a sec and it might differ from the value for many different reasons it's it is possible right even though he makes a simplifying assumption volume one later on he then relaxes that assumption and says listen it's possible that price and value can differ okay that that does happen we know that happens value and price do not necessarily always have to be equal but for analytical purposes marx begins with that assumption in order to understand this we need to get into marx's method and philosophy a little bit more deeply okay um so marx uses the logic of contradiction okay he which he learned from hegel hegel called this dialectics or uh dialectical logic okay and it developed an entire a huge study of the differences between dialectical logic and uh formal logic which hegel critiqued marx modifies uh hegel's dialectic marx likes the term dialectical materialism okay so the whole complex history of this and whatever uh later marxists have sometimes adopted the term uh that comes from freud altuzer uses this term over determination that's a that's a nice term because it it offers a kind of update of this philosophical position it's the same position that marx used it's just a different term for it okay what does this mean look it means there is innumerable complex causes for any particular effect okay and all of these causes are inseparable from one another the and they also might contradict each other they might move in opposing directions this is what gives rise to complexity okay so we we have to appreciate that that's marx's method okay so if we didn't use that we would end up with a with a much more simple perhaps too simple right maybe simple-minded type of of explanation of price and value okay so this is called economic determinism all right so what might that look like if we took marx's argument and said made it into a kind of determinism well it might look like this okay we have socially necessary abstract labor times snault right and that determines causes the value of a commodity okay so so far right that's that's a good summary of what we've what we've said right what causes value well we're talking about the labor theory of value right but now we're talking about what comes next right what how does this relate to the price of the commodity okay so if we say well it causes it right it causes it like a causes b right um well now we have committed a certain kind of determinism that is we have reduced the complex reasons why the price might be what it is into something very simple okay now determinism is very very common right like we love determinism you know we want a simple clear explanation for whatever it is that we're talking about so because economic determinism really all forms of determinism is so very common in explanations within economics really of anything right many interpret marks to be making this argument but it's just not correct marx was deeply opposed to this kind of deterministic simplistic theorizing in economics he called that vulgar economics right it's too simple-minded okay um so marx's argument is look okay we have we have snault it's noticeably necessary abstract labor time and that leads to the value of a commodity yes okay that part we got but what is the relationship between the va the value and the price right well we use this two-headed arrow here to represent that it's complicated right it's a complex relationship it's not a simple cause-and-effect relationship this causes that right like one billiard ball strikes another billiard ball and then it goes into the pocket or something like that right that's that's a simple deterministic relationship right the relationship between value and price is not at all like that right and marx makes it very clear that it's not at all like that right that the the price of a commodity is shaped by many many many different factors right uh so we could look at for example market power uh you know if there's not very many buyers or sellers does that mean that one side has more power than the other yes absolutely it means that right might they not use that power to then charge a higher price than what the value is or or demand a lower price depending on which one has the power absolutely right of course and by the way do capitalist firms want market power of course they do right will they spend money in order to get it yes right no question okay so but again right this is one of many possibilities what about cultural factors might those play a role absolutely right our notions of of the meaning that we give to commodities and what do they say about us and so forth right is that related to the price and is affected by the price as well yes of course right uh and so on and so on right the structure of the market right and many other things okay so shifts in demand etc right the point is prices are over determined okay they are both the cause and the effect of many many forces in society okay it's just not possible to isolate this it's not and it's not wise to say that there's a simple deterministic relationship when there's clearly not right that's that would be you know like making a mistake almost on purpose right we know it's complicated why then should we argue that it's simple right and marx really does not do this right that's just a very very simplistic interpretation of marx unfortunately many marxists have been guilty of having this interpretation of marx right but it's really not in the spirit of marx's philosophy and marx's epistemology let me get this straight right what you're saying is that the value leads to the price and at the same time the price leads to the value what what the hell is going on here right so the answer is yes that is exactly what we're saying right um you know the logic of over determination suggests that cause and effect are not separable so ultimate or absolute causation the notions of that it's just simply not possible okay so i know it sounds very contrary to what we like to hear right or they cause each other what are we saying then right well we're saying in short we're saying it's complex many factors are involved and we're acknowledging that complexity right that's very important let's talk about the difference between an essence versus an essentialism okay so marx does posit labor as the essence of value okay but he does not make it an essentialism okay he does not make it a simplistic deterministic relationship there all right there's there's a difference between these things so marx does not argue right that labor snault right socially necessary abstract labor time will ultimately determine prices or allow you to predict the movement of prices right easton does not argue that okay um and that's good right um because the fact is that no theory has a good record of predicting prices and that is to be expected from the perspective of over determination right prices are complex look complex things are unpredictable you know that's their nature right so it's okay we expect that right we're not we're not making our explanation or our theory contingent on whether or not it does a good job of predicting right because no theory right the theories of simplification that means we're removing factors from our understanding from our analysis which we must do because otherwise we would never finish our theory right we would never be able to say anything because new things are happening all the time right we're hardly even aware of all of them right we can't possibly explain every single factor we have to simplify well what if we missed some things we know we missed a whole bunch of things right uh how do we know that the things that we examined are the critical things we don't know that right so that is all what the logic of overdetermination okay uh and you know the uh my thinking here very much shaped by resnick and wolf for example in contending economic theories uh and also roberts from 1981 value categories and marxian method a different view of the value price transformation so why use the labor theory of value at all well if we want to understand prices or anything that's the product of complexity right anything that's over determined we have to start somewhere we have to examine some causes and that means we can't examine others right we have to make some choices and labor is a fundamental way that humans relate to the world and so it represents a kind of sensible entry point in in order to theorize value right we've all had the experience of doing various kinds of labor right so it's not something that's foreign to us right it's something that we've all experienced so let's look at some questions and some criticisms of the theory that have been asked and have been levied over the years all right so let's start with this one look at this this is a tree okay so question does this tree have value all right so to answer this let's just say look okay exchange value what we mean by that is a very particular thing okay it's only relevant to commodities items that are produced for sale okay things can be important and not have exchange value now look our language isn't the best when it comes to this because value the term value has a lot of different meanings right we're using it in a very narrow fashion here right exchange value that means in terms of the currency unit that we're familiar with it's a quantitative designation right now we don't always use value in that manner right we use value to mean all kinds of things that don't have any quantity attached to them right we use value in ways that are the opposite of exchange value right like we might say to somebody hey i really value your friendship right and that doesn't mean it's worth a hundred dollars right in fact if you said it to your friend your friend would probably be very insulted right hey i really value your friendship it's worth a hundred dollars to me you're like what that's get out of here i don't like you anymore you know so you know what we mean by value in that sense is the direct opposite of what we're talking about here right um so you know just just to drive home the kind of absurdity of this right some things are very important but have no exchange value right like what's the value of the sun obviously without the sun we all be dead right uh so but does it have an exchange value no right you can't exchange the sun with anything right as the sun is not a commodity right the sun is not something that's produced for sale so even though it's very very important right the life on earth depends on the sun but it still it has no exchange value so we have to just make that very clear right now also look value comes from nature and from labor okay that's marxism following political economy for hundreds of years right so things that contain no labor can enter a market and become commodities okay in which they will have a price which is going to depend on their scarcity and lots of other factors right but labor is probably going to be required to make use of the item okay and that would then give it some value okay so when we think about a tree right so here's a tree right is this a commodity generally speaking the answer is no right a commodity is usually something that you can take and move someplace right the tree is look it's stationary right now things that come from trees are commodities right lumber is a commodity but what lumber is not this right even though it's closely related right lumber is a product that's made from trees but you have to add some labor to get that to happen do you not i mean you have to cut it down then you have to you know make additional cuts so that it has you know a certain shape or flat sides and so forth right so that's adding labor to something that came from nature right so the thing that is in nature well that's not a human category right that's just a gift to us right again it's like the value of the sun you know so the tree itself is not necessarily a commodity right lumber is the commodity okay now i know what you're thinking okay sometimes trees are sold as trees right usually in a box or something right maybe they're a little bit smaller you know small enough to be in a pot or maybe they're in a really big pot or something and you have to transfer it on a forklift or something like this right okay well so again the the action of the tree growing out of a seed or however it grew out of a little sapling that is nature right nature did that but human labor is often involved right somebody has to care for the tree somebody has to water the tree somebody has to you know get rid of the pests and whatever right that's adding labor to nature okay so the the price of that tree right is going to have a certain value because of the labor that went into it or because it might be a price that is empty of value that's also possible okay so next example is going to make this a little bit clearer okay so let's say we have something like this okay land for sale right and it's it's unimproved okay i paid 50 000 for a piece of unimproved land but i'm concerned what's the value of it right did i get it did i pay too much or too little what's the value can we use the labor theory of value to understand as well so look not every transaction is going to involve value okay unimproved land does not have a value in terms of exchange value right so this is this is again we have to see more deeply into this right why not well look even if it has a price because society has a real estate market because society sells land right but again the land is not a commodity right a commodity is something that is produced to sell okay no one can produce land right especially when we're talking about unimproved land that's a gift from nature okay now we can capture that gift from nature and then we can say this is mine i'm going to defend it and if you want it then you either have to kill me or you have to buy it from me right i mean this is how private property and land was established right it's not because somebody made something they didn't build it themselves right they just captured it okay so that's a different thing right so that land is going to have a price but if it's unimproved it's not going to have a value now this is possible right this is totally possible explainable within the labor theory of value right of improved land has value added okay so we are we are adding value to it by using labor by using adding constant capital creating perhaps buildings or irrigation or other infrastructure roads perhaps right so then again that then it does have a value component right because those things are the product of labor but its price may exceed the value right because as we've seen right in a society where land is bought and sold then land has a price right even though it does not have a value okay so different concepts all right what about this right look at this painting and this guy holding it right here this is a a painting made by one of the most famous artists of the 20th century that is picasso pablo picasso so uh here's the question okay isn't this this is a 28 million dollar painting isn't this painting by picasso proof that value uh doesn't have to do with snolt it has to do with whatever the market will bear okay so different position here right value is whatever people willing to pay okay that's not the labor theory of value right that's a different value theory so it isn't the use value of the painting that gives it such a high price right it's not because it contains that quantity of socially necessary abstract labor time right no it's because the fame of the artist and its unique status right how many versions of that painting are there there's one okay now could somebody make a decent copy of it is are there artists who have the skills to reproduce that painting almost exactly that so that nobody could tell the difference of course there are right picasso is one of the most copied artists of all time right lots and lots of people have the skills to produce that exact same painting right will that bat painting that copy be worth they could they could produce even the copy of the signature or whatever right well would that painting be worse than 28 million dollars no right even though it has exactly the same you know amount of socially necessary abstract labor in it right yeah but it's not a picasso right it doesn't have the provenance that you can't prove that it was made by picasso himself right so now we see okay look we are interested in fame right fame plays a role right that allows you to produce a absolutely unique object that even other artists who have the skills to paint like that and of course you know lots of picasso's contemporaries you know had had similar level of skill even even produced the things of a very similar style right because picasso is part of an entire movement uh in art right um so the point is right these things allow the price to exceed the value okay there is still a value per of a painting right it's just that this particular painting commands a price well above that right because of the factors that i mentioned all right so question okay who figures out how much labor goes into commodities is there some kind of central agency or someone you know who who does this averaging of all the different forms of labor to come up with abstract labor and who determines whether it's socially necessary and all that stuff right how does that happen right so the answer is well we all do this right every time we buy or sell in markets right markets are engines of comparison the value is worked out through innumerable transactions okay buying and selling is in effect comparing one thing to another and one of the basis of comparison is how much leap or socially necessary abstract labor went into producing it market prices are the outcomes of millions of comparisons between what it takes to produce one thing versus what it takes to produce another and will the market support a price that is different from the value all right next point here can value change uh yes absolutely value can change okay so a lot of marx's argument and capital is about how value changes through the dynamics of capitalist competition so one part of this marx calls the accumulation of capital okay and let's just do a brief example of the accumulation of capital kind of you see how this works okay so accumulation of capital is taking a portion of the surplus and reinvesting it right taking it and investing it in new more productive machinery and equipment now this produces a delta c okay so this little triangle right here right delta that means change in okay and then we we so we are you know hiring you're using more machinery okay maybe buying more machinery or maybe we upgrade some of our machinery okay now we might also hire workers okay so that's gonna that's gonna increase the wage bill right there's gonna be a delta v okay a change in the wage bill and we are also then going to increase the surplus okay delta s during that next period okay so let's look at how this would work okay so period one okay we have produced a certain amount of value equal to c plus v plus s okay that's our value equation period two well we have the c that we started with plus we have the change in c okay the additional amount we got the v that we started with plus the additional amount and we got the s that we had in period one plus an additional amount because we have produced our initial amount of value plus an additional amount if there's returns to scale right what this means is that the cost per unit falls and each use value contains less socially necessary abstract labor okay the the value per unit has gone down right mark says is this interesting right that capitalism can actually cause a fall in the unit not in the unit value and not only can it cause it it's a very very common i mean we can scarcely think of one commodity that capitalism hasn't done this with right it's unbelievably common what kind of effects might this have right so marx argues capitalism both very dynamic and also very contradictory okay in terms of they constantly revolutionizing the means of production of the phrase that marx uses and then connecting this to the tendency for profit rates to fall through the process of competition and that that might lead to a crisis of capitalism again we're not talking about a deterministic argument we're not talking about a simplistic oh if a happens then b happens we're not talking about one billiard ball striking another we're saying you know because it's so complex and there's so many different complex factors this might happen right these contradictions might cancel each other out or they might become more heightened over time they might get worse right that is the thing that that marx was fascinated by of course because his goal overall was to eliminate exploitation right to move beyond uh capitalism to create a system that was focused on human need and human well-being and put that first and foremost okay not the expansion of value which capitalism puts first and foremost okay the expansion of value is a very different goal it's a very different priority than making sure that all are fed and housed and you know clothed and you know educated and so forth right so that's a very different right a system where society's wealth would truly be used for the benefit of all well that would be called something else right socialism and ultimately communism right a society which is so committed to sharing and cooperation that exploitation is like a distant memory you know like a bad dream okay instead of being the absolute basis of society and all but inescapable it's like oh right yes back in the past we had that all right so let's talk about the determination of wages now marx has a lot to say about this we're just going to touch on it here in this in this lecture uh marx argues that in order to understand wages we have to distinguish between labor and labor power okay so let's define these things so labor is the process of transforming nature through human activity when a capitalist employer hires a worker they do not buy the workers labor okay labor is a process right you can't buy the process right you can buy a thing right that's not what is being purchased okay so when we i know we talk about the labor market or whatever right so morris says look we need to be careful about what we're doing here okay what is actually purchased in the labor market is not labor but rather the workers labor power okay this is an important distinction labor power is the capacity to perform labor in a given amount of time now that's a different thing right because when you've purchased a person's time you purchase their potential on labor right how much labor are they actually going to perform well guess what how much labor the capitalist gets from the labor power they purchased is the entire class struggle of capitalism in miniature okay so okay let's say the wage is ten dollars an hour and you hire three workers okay now depending on how quickly and skillfully and productively they work they will add value at different rates and let's say that each one of these three workers does that in a different fashion okay at a different rate so worker one let's say okay there they are they're adding value through the label process they're taking the you know the tools equipment raw materials and so forth the embodied labor they're adding their living labor to it and at the end of that hour they have produced ten dollars in value okay worker two is always the total value added over here work two again is doing the same thing okay adding labor uh to adding living labor to the embodied labor this worker is able to produce twenty dollars in value added okay so now we're we're abstracting from the amount of the constant capital i'm just talking about how much was added to that the value of the raw materials okay so the total is going to be greater than this but this is just the part that the worker is responsible for right the this is the living labor okay when i say value added okay worker 3 works a little bit harder a little bit faster maybe they're a little bit better at it whatever they're able to produce thirty dollars of value okay so see this right yeah how much you how much labor you get out of the labor power can really differ right worker one you get ten dollars from them worker two you get 20 worker 3 you get 30. so see how you're not buying labor right because you what you've paid for is the capacity to perform labor and you paid all three workers the same right 10 for that hour but you got very different results from it okay now of course if your workers are like worker one you have a very clear action item in front of you don't you which is terminate that worker terminate terminate terminate you must right because they're not adding anything right i mean you paid them ten dollars they added ten dollars in value that's no good where's the profit in that right you need them to produce more than you pay them right there's actually that worker has produced no surplus whatsoever fire them right i'm sorry it's not working out you are fired or you don't want to be fired well be like worker too or maybe i'll give you one more chance or maybe i have to fire you i you know i have to you know what i'm sorry i changed your mind i have to fire you because the only way i'll keep worker 2 and worker 3 working hard is out of that fear of getting fired if i don't fire you then where's the fear right so it is how much of a threat is firing somebody how easy is it to get another job what it what happens to you if you get fired right well that depends on a whole host of factors doesn't it right so but you just so this is we're not going to get into that we're just establishing the difference here between labor that is the result of that hour's work and labor power okay labor power is the commodity for sale that's in what we call the labor market really we should call the labor power market all right so let's talk now about some of the criticisms of the marxian labor theory of value that have been given over the years so because value theory is seen as the cornerstone of marxian theory marx's labor theory of value has been more heavily criticized than any other part of the theory by those who disagree with marx's indictment of capitalism right so let's let's look at some of these criticisms okay so first of all number one the idea that value doesn't exist only price exists all right so uh very old criticism uh now despite the entire tradition of classical political economy using value modern neoclassical economics has discarded the concept they call it metaphysical uh they don't see it as necessary this criticism is that the labor theory of value uh must explain prices not values since only price is observable not value and hence value represents a kind of faith-based concept right we don't want to take anything on faith we want to just have things that have an independent reality right we're not studying ghosts or spirits or whatever right we're studying things that you know have real world effects okay that's the that's the criticism so if i might offer a kind of response to this it's very clear that value exists both as a concept and in reality okay if it did not we would have there'd be no such thing as a great deal right oh yeah hey look at this i got a great deal on this what are you saying with that you're saying the price that i paid is less than the value yeah well what are you doing you're affirming that there's a value that's different from the price conceptually different that it's possible to pay less for something like this is worth 50 dollars but i only paid 10. yes this is fantastic best day ever right or i could go the other way what a rip-off oh no i paid a price much greater than the value oh i hate that right that's so bad right unless you're the seller in which case it's good right but this is a very widespread concept in our society it's so widespread that saying something is a great deal i mean we can you imagine a more cliched phrase than that in american culture right because it values a social reality we have some notion of the value of commodities okay we understand that in money units so you know if if i said hey i like those pants those are fantastic uh you know they really look good on you and you said oh yeah thank you yeah i only paid five thousand dollars for them i was like well what that's clearly that's much greater than the value right i mean i don't need to be a professional you know tailor or clothing maker or whatever right in order to know that i i know that five thousand dollars is not the value like maybe i don't know exactly what it is right but i have an idea right hey look the value of some pants ranges somewhere between thirty and a hundred dollars you know like that's but that's enough of a range for me to know that if you paid five thousand dollars look you paid a price well above the value right um and i'd say damn you really got ripped off right now people get ripped off for all sorts of reasons sometimes being ripped off is an item of pride right say hey i've got the money i can burn it you know let me show you how you know i'm going to leave the price tag on just so you can see that's how much they cost right oh what a flex right so now this is one thing that makes traveling to another country very disorienting because you know our understanding of value we have this in our minds right we have hundreds or thousands of different commodities and a rough idea of what the value of each one is right and you know we use that all the time right if we see something that is overpriced we're like well forget it right or something that's underpriced well we're very interested right as buyers if we travel to another country we're disoriented right because we go to buy something and we're like i don't understand these units right okay i gotta do the conversion right i'm in germany okay deutsch marks to two dollars or whatever it is right that's a little complicated right that's that you're having to do math in your head right why are you having to do that because you don't want to get ripped off right because value exists as a concept because it's a reality right okay so it's used in things like bargaining and negotiation right what is a fair price for something right um it enables an understanding of what forces shape prices price changes so very very useful to have some notion of value right we we don't want to just stop at the appearance right price is the appearance we want to go deeper than that and look at what causes it right what should it be that's what value does for us okay so just because you can't see something doesn't mean it's not real right i mean you can't see thoughts right we don't have we have no machine that that measures your thoughts or that tracks your thoughts right thank god um are they real though yeah they're real right just because we can't see something it doesn't mean it's not real okay so next criticism uh marxian theory is logically flawed now this aspect of the criticism of marxian theory is pretty detailed mathematically i'm gonna give a kind of overview of it okay uh non-mathematical overview of it so this criticism passes a logical contradiction between two parts of the theory okay that that is the theory of value and the formation of a general rate of profit between different industries so marx argues that different industries may have different organic compositions of capital that would produce a different value rate of profit between the industries okay however marx also argues following ricardo that competition and capital mobility that is the movement of firms from one industry to another say hey i don't like being in this industry i heard that you can make higher profits over in that industry well that should equalize the profit rate right because the movement of capital tends to level everything out okay the the competition in the in the high profit industry is going to tend to bring down value at price and that is going to equalize the profit rate across different industries assuming that they're all equal in all every other way okay and marx goes through a very detailed discussion of that in volume one of capital adds to that in volume two and three the equalization of the profit rate should occur through prices okay that causes the value to differ from what marx initially argues in volume one of capital he offers a modification of it in volume three he transforms value into price of production okay so and because he uses this term transform a lot of people who looked at this later referred to this as the transformation problem okay and some argued that marx made a mistake that he that he did this wrongly and this debate has gone on for ever since the volume three of of capital uh was published in 1894 by the way after marx died right so this is not a uh part that uh of marx's theory that marx was able to finish to his satisfaction right if he had been able to do that he would have published it while he was still alive right so angles took the notebooks and you know notes and so forth that marx left behind and edited them and and put them out as volumes two and three of capital okay so the transformation problem comes out of people studying marx later okay at the very end of the 1800s and the beginning of the 1900s which is where this literature on this transformation problem comes from okay so there's been a variety of different responses to this over the years the one that i hold myself right there's differences of points of view among marxists of course just like anywhere else my feeling is the transformation problem comes out of a very deterministic reading of marx right that claims that since labor is seen as the essence of value it should then be possible to explain prices solely in terms of labor hours that you know price that that labor hours should map exactly to to um to price right that's what we mean by the transformation of value into price okay again that is really not consistent with marx's epistemology okay marx does not argue that right marx does not argue that prices ought to be solely determined by labor or anything else okay um marx is well aware that prices fluctuate and are the are the result of many many different forces right that doesn't change the theory of value it just acknowledges that what we're doing is very complex right so the logic of over determination makes solving the transformation problem totally unnecessary right the goal is not to argue that snaul to socially necessary abstract labor time determines prices what would be the point of that right what would be the point of producing such a simplistic argument when no economic theory has a good record of predicting prices right i mean it would be one thing if okay well hey despite its logical problems we've got to use this theory because it's so good at predicting prices well no it's not right that's not its function which is good because no other theory is good at predicting prices either and if it was good at predicting prices there's no way on earth i would share it with you guys right i would just use it to get rich myself right why would i give away the secret to the goose that laid the golden eggs right no way i would use keep it a secret economic theories do not do a good job of predicting prices next criticism labor is not the essence of value okay so now some of these criticisms can flip with one another and it just shows that you know there's many people who are you know intervening here right marx is an absolutely huge figure not just in economics but in many many different fields right so whenever you're influential then a lot of people criticize you right and they criticize you on a host of different bases okay so this is a different kind of criticism okay labor is not the essence of value this is saying look uh it's labor is not the only unique factor right that every commodity has in common mark sets up his argument like this in a volume one he says there's something that every commodity has in common okay and that's labor critics pointed out well you know it just depends on how you look at it right i mean you could you could use almost any commodity as you know that everything contains some of this right or is derived from some of this right why do you why do you use like you know some critics said why should you use human labor why don't you use sewing machine labor you know why why not use sheep labor why use human labor okay or so here's a fanciful example right the peanut theory of value right every commodity either some peanuts were either used as an input or they were used as an input for something that was used as an input right so we could use the peanut as the essence of value and then we would have a peanut theory of value for example right why don't we do that right so here's a reference to that right uh some of my old professors actually at umass amherst okay so response look while this is technically true it's not very useful right unless you're a peanut if you're a peanut then yeah it makes sense to use that as the basis right but since we're human beings it makes sense to use labor right labor is the most relevant input to understand production and value for humans if we were sheep then yeah maybe we want to use a sheep theory of value right but we're not we're humans right that's a very sensible entry point to use right mr peanut might feel differently right mr peanut says i like the labor theory of value yes we should use that all right the marginalist critique number four um over time this has become kind of a dominant uh critique uh so it's a little more detailed uh the transformation problem was very influential in the early to mid 1900s but it's kind of faded over time right so a marginalist critique because of the dominance of this new form of economics that this comes out of that is neoclassical theory so neoclassical economics arises in the latter half of the 1800s so like broadly speaking from about 1860 to 1900 or so is when this kind of economics is created and formalized okay and it brings with it a new theory of value okay it has much older roots but it has something new to it as well okay so neo means new classical means old or classic right so what is this new thing that was added to the classics well it's utility theory right and this was initially called the subjective theory of value because of its emphasis on subjective factors right basically arguing that whatever gives a person utility that is whatever makes a person happy well that is value to that person right that's it so value is totally subjective right it just depends on oh i like this you like that right everybody has their own version of value okay so again from an individualistic perspective it's like this makes a lot of sense to us right so let's examine this okay later of course it was called marginalist that's due to its focus on the margin okay the margin is uh comes from a mathematical concept of the derivative uh it represents an infinitesimally small change in something okay so the the marginalists the early neoclassical theorists used a lot of calculus and they felt like that made a stronger theory created certain problems for them as well but this is why they were called the marginalists so neoclassical value theory posits that price is always equal to value right they do not believe in the concept of value at all right so that makes it kind of similar to the first criticism okay that that value doesn't exist as a separate category it's always equal to price and price is determined by three factors okay number one is people's preferences okay this is that subjective element okay i like a certain thing you don't like that thing right i like peanuts you're allergic to them you know we're not gonna buy them right they're bad for you okay that's preferences number two is technology okay we'll get get more into that that's the ability the knowledge that we have to produce things with certain inputs and three is the inputs themselves this is called the resource endowments now the entire marginalist or neoclassical theory is outside our area for here right uh i'm just gonna kind of give you an overview it it's it's uh you know there's whole courses in microeconomics that go into this in far more detail but here's an overview okay so again three determinants of value or price okay preferences and these preferences are embodied in something called the utility function okay the utility function is a mathematical formula okay it says the amount of utility u is a mathematical function of okay f parentheses good one good two good three etc right sometimes we could add to this the amount of leisure and so forth we could we could add additional arguments to it but basically the utility function says look the quantity of goods and services that you take in that's what makes you happy okay your preferences shape this utility function okay so even though we might all have exactly the same general format of a utility function my unique preferences mean that my coefficient for this term is different from yours for example okay so everyone might have a different utility function based on our different preferences okay that's neoclassical theory that causes along with other stuff right this causes the demand curve okay what causes the supply curve well that is technology okay technology is understood in neoclassical theory to be the production function okay the production function is the relationship between output that's q the quantity of finished goods and eat the inputs okay the labor and capital that go into production okay and the final thing the resource endowments that's the amount of labor and capital that there are in society and that each uh you know group of individual owns okay so from the utility function we get marginal utility from technology we get marginal productivity and from the resource endowments we get the incomes which go to workers and capitalists and the input prices which firms use to determine how much they're going to buy labor and capital and so forth right these things together then determine here's the supply and demand graph perhaps the most famous graph in all of economic theory right comes out of neoclassical theory famous neoclassical economist alfred marshall okay writing in the in the 1890s so what the what this is saying is look the equilibrium price okay what is called in theory p star okay equilibrium price the price at which the quantity supplied and the quantity demanded are identical they are the same equal to q star okay the equilibrium quantity that the the this is what determines the price okay and it's seen as again it's a very deterministic relationship okay these three forces see how the arrows only go going one way right there's no arrow going back right there's no understanding of like well can prices also shape people's preferences no that's not part of it right do do prices affect technology in any way no okay do prices uh or quantities affect the amount of resource endowments no right this is a one way street okay a causes b right one billiard ball strikes another billiard ball right it's a good example of economic determinism okay they use three causes not one right but those three causes are seen as the ultimate final determinants of the price slash value okay that is neoclassical value theory okay it's called marginalism because so much attention is placed on the margin right marginal utility that is what forms the demand curve okay marginal productivity that is what leads to the supply curve through marginal cost and so on okay so you know we get into the details and so on but this would be a different course a little bit of an awkward issue for neoclassical theory is that the theory looks to smith and ricardo as intellectual forebears all right it argues that free market capitalism maximizes the wealth of a nation but on the other hand the theory rejects the labor theory of value which both smith and ricardo use that's awkward right that means you have to kind of do a tortuous interpretation of smith and ricardo if people are going to actually read it they're going to find that what smith and ricardo argue is very different from the neoclassical theory of value so here's smith okay smith is saying the things which have the greatest value in use okay meaning he's talking about the subjective use value right have frequently little or no value in exchange and on the contrary those which have the greatest value in exchange have frequently little or no value in use can you give us an example adam smith certainly my friend nothing is more useful than water but it will purchase scarce anything scarce anything can be had in exchange for it right of course if you don't have it you die right so it's pretty damn useful right i mean it's pretty important a diamond on the contrary has scarce any value in use right you could live your whole life without a diamond but a very great quantity of other goods may frequently be had in exchange for it okay that is adam smith the wealth of nations book one chapter four so very early on in the wealth of nations you don't have to read far into this big book in order to get this perspective from adam smith right now here's what i mean by tortuous interpretation okay new classicals are forced to give this quote an absolutely bizarre interpretation they call it the water diamond paradox arguing that smith oh he's scratching his head and puzzling over this problem and oh my what determines the value out of water and diamonds what a contradiction to my theory now this is absurd you know like i mean read the quote it's not a long quote smith is not puzzling over it he's not he's not flummoxed by it it's not a paradox it's an example he's just using it to illustrate the labor theory of value he's turning over in his grave right now saying do you guys think this is a paradox it's not a paradox at all right it's just a little piece of my argument right it's not you know so what's the argument well water doesn't have much exchange value because it doesn't take much labor to obtain it right if it did take a lot of labor to obtain it let's say we were in a very arid climate or something right there's not much water around you have to dig you know 50 foot well or something to get to get water well then water's gonna have a high exchange value in that setting right because it takes a lot of labor i mean you ever ever dig a 50-foot deep hole that's hard to do right so in england where smith is writing right water is pretty plentiful you know it streams and it rains and you know rains all the time right um diamonds on the other hand have a high exchange value because it takes a lot of labor to obtain a diamond i mean you have to you got to do a lot of digging before you find a diamond right they're rare first of all and they're found deep underground once you even have a raw diamond then you still have labor to do right you have to cut it and polish it and all this stuff right so diamonds have a lot of labor embodied in them right that is what gives them value that's smith's argument okay so you know let's give a response to the marginalist critique in general okay the marginalist theory or neoclassical theory offers a different explanation for price and value than does marxism and this different explanation is neither better or worse okay it has a different area of emphasis it has different effects upon the practitioners of the theory and upon society as a whole right neoclassical economics focuses on the fairness of markets on the choices offered in markets on the benefits of markets to society on the efficiency of markets all these things right it does not focus on the exploitation of capitalism in fact that's not even a category right exploitation doesn't exist in a competitive market right that's that is basically neoclassical economics argument so what's the effect on the practitioners well the practitioners have a hard time seeing how capitalism could be unfair right because to them they're focused on the fairest aspects of it right or that they are looking at it in a certain way which emphasizes that every exchange is an even exchange right so okay that's that's interesting but it's very different than marxism right now neoclassical theory has some problems of its own though right it's it's not like it's free of problems so since we've given the neoclassicals they're due and offered their you know given their theory and you know given them a lot of space in a presentation on marx's labor theory of value right well let's offer a counter critique then of the marginalist theory okay because like i said it has plenty of its own problems so uh what are these well number one it's a very ironic that the neoclassicals are going to say well you can't use value because the value is not observable you know it's not observable utility is not observable utility is not measurable right there's no evidence that a utility function exists you know let me talk about faith based my god right you cannot have a mathematical equation that contains non-observable non-measurable variables so you know marxists can look at neoclassical theory and be like this is pure fantasy you know don't talk to me about value being unobservable when you're going to use utility theory that's also not observable okay now number two the production function contains its own kind of logical problem right a logical circularity okay the quantity of capital that is one of the causes okay resource endowments depends upon the price of capital which is the effect okay so it's a little bit like saying i need the answer to explain to you the answer right it's like no that's not how you get someplace right that's not how you have a theory right the theory is supposed to say okay here's what causes stuff to happen right however right i mean you could have a complexly determined right over determined thing right that's okay marx uses that kind of logic but that's not what neoclassical theory does right it's a problem because neoclassical theory uses a very deterministic logic right it's a very positivistic uh kind of theory that says look there's facts and opinions and you know we're only concerned with facts that's all right and the problem is then well then there shouldn't be any logical contradiction in your theory right but the production function is extremely illogical right it basically we cannot really say that if there's different kinds of capital that lasts different amounts of time that there could be such a thing as the production function okay this is a very well established criticism made by joan robinson and others sometimes known as the cambridge capital controversy so a big problem for neoclassical theory all right number three look if we're dealing with a fact-based positivist theory of price well you know what they say the proof is in the pudding okay so prove to me that it works by predicting prices oh you're going to tell me you actually can't predict prices better than anybody else well okay and so you're using things that are unobservable and illogical and they can't even predict better i don't see the value in it right no pun intended okay so that's my coverage of the labor theory of value thank you very much