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April 05, 2005

Lire le Capital: Mail Call

From: "XXXX" XXXX@berkeley.edu
To: delong@econ.Berkeley.EDU
Subject: Communism
Date: Mon, 4 Apr 2005 14:22:30 -0700
Thread-Index: AcU5XGg0e/rUmG6pRfqAi7kFYayhrA==

I was wondering if I could borrow some of your insights on Economics.... I have taken Transitional Economics and have a healthy background (for an undergrad) of the “Economics of Shortage” and decision making under socialist constraints.

However, reading Das Kapital and other things, I am seeing a different interpretation of how an item is valued, and the value of labor verses what I have been taught in traditional classes and I need more understanding. What is the “value” of a product, or of labor? Marx argues that exploitation in capitalism is structural, because the basis of making a “good deal” is paying someone four dollars for something worth five. To be a capitalist means you have to exploit the true value of their labor for what you’re willing to pay them for it.

I was hoping to get your insights into how products and labor are valued, and what you think of exploitation in capitalism. Any help you can provide would be greatly appreciated, even if it is a referral to other books or anything. Thank you in advance.


Let's run through Marx's labor-theory-of-value argument in a simple finger-exercise model:

Start with 100 identical farm families on 100 identical farms, each of which produces 3000 pounds of wheat (and other crops, but let's assimilate them all into wheat) each year.

Now suppose that ten of these families starve themselves for a decade--living on little more than half-rations--to raise the cash to buy farm machinery, irrigation systems, fruit trees, et cetera from the cities. As a result of their sacrifice, saving, and investment, thereafter their farms require four times as much labor each year to operate, but also produce crops worth eight times as much because of the capital investment. They then hire thirty additional families' worth of workers, leaving the remaining ninety original farmsteads to be worked by sixty families.

If diminishing returns do not set in and if the sixty families that remain in the family-farm sector expand their crops to take over the now-idle land, each of them can now produce 4500 wheat-pound equivalents of product each year: their standard of living has gone up by 50%. The owners of the capital-intensive farms have to pay each of the 30 families they hire 4500 wheat-pound equivalents to get them to work in the capital-intensive farm sector. Each of the proprietor families is then left with 24000 - 13500 = 10500 wheat-pound equivalents in income--4500 wheat-pound equivalents of which is the "wages" of the proprietor family, and 6000 wheat-pound equivalents is profit.

Now in Marx's schema, the first situation--where average labor productivity is 3000 pounds of wheat per family, and each family receives 3000 pounds of wheat in income--is one of no exploitation: labor is paid its average product:

Average Labor Product: 3000
Real Wage: 3000
_____ _____
Surplus Value per Worker: 0
Total Exploitation: 0

And in Marx's schema, the second situation--where average labor productivity is 5100 wheat-pound equivalents, and each non-proprietor family earns or is paid 4500 wheat-pound equivalents--is a situation of exploitation in which the proprietor class extracts surplus value from the workers by using their market position to pay those that they hire less than the true value of their labor.

Average Labor Product: 5100
Real Wage: 4500
_____ _____
Surplus Value per Worker: 600
Total Exploitation: 60000

Now it should be clear that this labor-theory-of-value-based analysis makes no sense at all. The proprietor families starve themselves for a decade, and yet Marx views them as exploiters? The heavy investments of the proprietor class and their resulting demand for labor raises the real wage by 50%, and yet the working class is oppressed? Something is very wrong here.

Now at this point the standard response is that the example is rigged: that in the real world those who own property and hire labor and live richly gained their wealth not through sacrifice but through a combination of luck and theft and having chosen the right parents. Thus it is unfair to set forth an example in which the proprietors' moral claim to their higher income is so clear and strong.

And the rebuttal is that, yes, this example is rigged: that's the point. The aim is to construct useful analytical categories that will help one identify and assess injustice. The aim is not to construct analytical categories--like the labor theory of value--that claim to find injustice whether there is in fact injustice or not. The fact that the labor theory of value finds injustice whether it is there or not is a sign that it is not the brightest light on the tree of good ideas.

Marx's labor-theory-of-value-schema makes no distinctions between profits on capital that have their origins in luck, theft, and choosing the right parents on the one hand; and profits on capital that have their origins in sacrifice, industriousness, or flashes of genius on the other. They are all, to Marx, "exploitation," "unjust enrichment," "extraction of surplus value." They are all, to Marx, signs of evil. But in this particular example the proprietors are, in reality, not evil. The proprietors are, in reality, public benefactors. The effect of their savings and investment is to raise not just their own incomes (after an extended period of sacrifice) but everyone else's incomes as well.

Thus the labor theory of value category of "exploitation" does not map onto what either ordinary language or our moral intuitions call "exploitation." There are social and economic changes that are good that are, in Marx's schema, increases in the rate of exploitation. There are social and economic changes that are bad that are, in Marx's schema, increases in the rate of exploitation. It's simply not a useful tool for either moral philosophy or political action.

Moreover, the labor theory of value is of little help in predicting what average market prices will be. It's not a useful tool for economic analysis either. In my view, the labor theory of value is pretty much useless.

If you want to make a compelling criticism of economic and social relationships, you cannot do so by saying that there is Marxian "exploitation"--which exists wherever workers are paid less than the average product of labor. You have to, instead, inquire into the origins of the wealth and property rights on which the proprietor class's income is based. The labor theory of value is simply a red herring.

Posted by DeLong at April 5, 2005 01:00 PM