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Marx’s General Formula for Capital

February 2nd, 2009

In Chapter 4 of Capital, Marx begins to discuss the transformation of money into capital.

Marx imagines two sorts of abstract circuits of exchange: C-M-C’ and M-C-M’. In the former, Peter brings to market a commodity, C, and sells it in exchange for money, which he then uses to purchase another commodity, C’. In the latter, Paul brings to market money, M, and sells it in exchange for a commodity, C, which he then sells in order to obtain M’.

From the former Marx concludes that, “The circuit C-M-C comes completely to an end, so soon as the money brought in by the sale of one commodity is abstracted again by the purchase of another,” which is to say that Peter has exchanged one commodity for another commodity of equal value. In the latter circuit Marx objects to the “surplus value” created by capitalist Paul, who merely exchanged £100 for £110, the difference of £10 being “surplus value”.

Now let us examine the circuit M-C-M a little closer. It consists, like the other, of two antithetical phases. In the first phase, M-C, or the purchase, the money is changed into a commodity. In the second phase, C-M, or the sale, the commodity is changed back again into money. The combination of these two phases constitutes the single movement whereby … a commodity is bought with money, and then money is bought with a commodity. The result, in which the phases of the process vanish, is the exchange of money for money, M-M. If I purchase 2,000 lbs. of cotton for £100, and resell the 2,000 lbs. of cotton for £110, I have, in fact, exchanged £100 for £110, money for money

At least two objections come immediately to mind:

  1. The M in C-M-C may at any time be either M or M’ in the circuit M-C-M, and that as such, these are not independent circuits but rather interlocking parts of a greater whole.
  2. What Marx is really describing is an arbitrageur, although painted as a thief and usurer.

In the first instance, Peter does not keep the money he receives any longer than is needed for his own security. He may of course immediately effect the C-M-C by exchanging the money he receives for another commodity item. Or, he may enter into an M-C-M circuit, exchanging the money for a commodity, to which he adds his labor over a period of time, the completed product which he expects to exchanges for M’ in the future. The farmer, for instance, spends money M on the purchase of new seeds, stock and tools with which to work the soil, in hopes of selling them in the future for M’.

Is the lack of transformation (as in the example of the farmer) what riles Marx? If so, this is barely worthy of scorn: where the farmer creates value, the arbitrageur has at the very least prevented the destruction of value, thus allowing its creator to realize value in exchange far greater than he could’ve on his own accord. The “capitalist” function in this instance is, if nothing else, Pareto efficient. One must not lose sight of the fact that the arbitrageur performs a valuable service of allocating scarce resources across an economy. Without the “capitalist” in Marx’s M-C-M circuit, the commodity is sold at a steep discount (if it is in-fact sold at all) and the most urgent need as measured by opportunity cost remains entirely unsatisfied. The problem of “surplus value”, posed by the M-C-M appears only as a result of Marx’s imaginary demarcation.

In the real world, C-M-C and M-C-M, are indistinguishable parts of a complex economy, in which economizing individuals are to some extent, constantly in the midst of performing both roles.  Even Marx’s vulgar capitalist holds and acquires money in order to satisfy some future need to consume.

Or, to put it another way, even the vulgar capitalist, at some time in the past had to provide valuable goods; he had to contribute materially to the economy in order to earn that first chunk of money, which Marx scorns.  What he does with it after that is of no man’s concern but his own.

On The Labor Theory of Value

December 2nd, 2008

A while back I read parts of Kevin Caron’s Studies in Mutualist Political Economy. A while back. I was particularly interested in his commentary on the labor theory of value.

[T]he labor theory of value is based, not on an inductive generalization from the observed movement of prices, but on an a priori assumption about why price approximates cost, except to the extent to which some natural or artificial scarcity causes deviations from this relationship.

Like Carson, I believe there is a case to be made for an a priori assumption about why price approximates cost, but the conclusion I reach is quite different. The “natural” scarcity is embodied in the supply/demand diagram. Prices will approximate costs (in a free market), all else being equal, because competition makes it so. FSK explains this pretty clearly in The Free Market Labor Arbitrage Process

If labor is underpaid (relative to its fair value), then workers will form competing businesses, arbitraging away the difference.

If labor is overpaid (relative to its fair value), then new workers will enter the industry, again arbitraging away the difference.

In a free market, the costs do not determine the prices, but rather the expectations of prices determine which costs will (or will not) be incurred. To the extent that the entrepreneur is in error, costs will exceed prices. Of course, the costs of production in a free market approach or equal the opportunity cost for the respective productive resources, which are also intimately and inextricably linked to the perceived value to be thereby provided.

Is it true that price (i.e., value of the final good) approximates cost of production? In the long run, yes this is true. But a theory of value needs to speak to more than just long-run trends, does it not? Ultimately, value is determined subjectively and with some uncertainty; it is not determined by the costs of production. Rather, the costs of production are determined by the anticipated value of the output.

I cannot resist the temptation to bring up the ditch-diggers or make-work programs. These things are costly; expensive. But as Bastiat noted over a century ago, they are not valuable. Lest I be accused of setting up straw men, these examples are only fallacious in the sense that such unproductive dispositions of labor and resources are unlikely to occur, and even less likely to persist, in a truly free market. But the fact remains: it doesn’t matter how hard or how long a man works towards a project which others do not value.

One objection might be that the labor costs are determined by labor’s opportunity costs, and so in a free market the labor-theory still holds. But the opportunity costs are also appraisals of the potential future values of whatever else may be produced by labor, and these values are no more certain than the anticipated value of what labor in-fact chooses to produce. No matter which course of action taken by labor, unless the final product is subjectively deemed “valuable” on the market, it’s price will not be sufficient to cover the perceived disutility or discomfort of labor “costs” incurred during its production.

We know or assume to know what value will be produced by a certain amount of labor, and this knowledge guides economic actors in their determination of the prices to be paid for such productive resources. So what we can conclude is that value is the independent variable in the equation, by which final prices are ultimately determined.

Carson continues,

Or to approach it from the opposite direction, we can start with the law of cost as the basis of price, and from there systematically eliminate all the subordinate factors that only have a price because of artificial scarcity, leaving only labor as a creator of exchange-value in its own right (at least for the equilibrium prices of goods in elastic supply).

Although price and cost should tend towards convergence in a truly free market, the important distinction, though, is that labor simply doesn’t “create” or imbue a product with “value”.

Demand, utility, desire, the ability to fulfill needs or satisfy discomfort, these abstract notions are what acting man finds valuable. However true it is that labor is the ultimate “creator of exchange-value in its own right,” but although labor certainly assists in the creation of all things valuable, value (at the terminus) is not determined by the past labor embodied during the production process.


For further reading on the topic, I suggest Bob Murphy’s The Labor Theory of Value: A Critique of Carson’s Studies in Mutualist Political Economy. Murphy restates “the case for the superiority of the marginal, subjective theory versus the labor (or more generally, cost) theory of value” Murphy concludes that “everything true of the cost (labor) theory can be incorporated in the subjective theory of value”.

no third solution

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