The
Labor Theory of Value approaches the question of Value from the standpoint of
the reproductive needs of a society, and then regards the total value produced
by a society as the sum of the incomes of its various social classes dependent
on their “ownership” of the various factors of production. The theory therefore
starts with the notion of “social labor” required for the reproduction of the
entire society, and not with the atomistic relationship between individual and
“good” – which is what marginal utility does. The exchange value of a good is
determined by the amount of labor it contains mediated by the labor contained
in the means utilized for its production. But the “price” is conditioned by the
fact that the distribution of the aggregate surplus value across different
sectors of industry with varying rates of exploitation must be distributed
according to an equalized rate of profit across all branches of capitalist
industry. Market prices differ therefore from exchange values because it is the
market that determines finally what labor time was socially necessary for the
production of each good sold on the market. The market provides “the social
osmosis of capital” in that it determines the distribution of the aggregate
surplus value according to a rate of profit that is equal the total amount of
capital invested.
The
“circuitousness” of this theory of value is quite apparent because it describes
labor time as “socially necessary” when in fact its “social necessity” is still
determined ultimately by market forces – by supply and demand. As Bohm-Bawerk
properly objected to Marx’s version of the theory – by far the most refined -,
it is sheer “metaphysics” to insist that market prices can merely regulate the
“equalization” of the “different surplus values” extracted in different sectors
of production as an aliquot return or profit for the aggregate amount of
capital invested, but cannot determine what is the “socially necessary labor
time” on which surplus value is calculated! In other words, even in Marx’s version
of the labor theory of value, it is still the market that determines ultimately
what production is “socially necessary” and what is not, and therefore also
what is the profit for each individual investment. It is this contra-diction in Marx about the possibility of an "equilibrium" whereby total market clearing prices and total "embodied value" of goods can be homologated and therefore "labor values" be transformed into monetary prices that Bohm-Bawerk attacks successfully.
The
difference with marginal utility theory rests on the fact that marginal utility
starts with the assumption that individuals already
own the “goods” whose marginal utility will determine market prices and
that these market prices are merely a reflection of the marginal utilities
relative to the goods made available for exchange on the market! Put
differently, the LTV starts with social necessity to determine distribution and
ownership whereas marginal utility starts with ownership and “individual choice
or preferences” to account for market prices. It then proceeds to explain the
empirical behaviour of markets through their prices by describing the
psychological motivations or justifications for that behaviour. It follows from this that whereas LTV looks at "input costs" to calculate the value or price of the "output", marginal utility operates in reverse, giving priority to the marginal utility of the finished product to calculate the marginal utilities of its "inputs".
Consequently,
the LTV is more concerned with the pro-duction of goods whose value depends on
the “labor power” or “effort” that goes into their production with distribution
and ownership a “consequence” of this process, whereas marginal utility is
concerned with goods already in existence and owned whose “exchange” is
dependent on their “scarcity”. The LTV is a theory of pro-duction whilst
marginal utility is one of “exchange” of existing
resources that are legally owned by individuals (“endowments”).
From
the foregoing it can be seen that both the LTV and MUT are “metaphysical”
accounts or explanations of “value” because both treat “value” as some “entity”
or “substance” that is “reflected” in market prices. The “metaphysics” consists
in the fact that both Classical Political Economy and Neoclassical Theory
ultimately agree that it is “the market” that decides what gets produced and
how social resources are allocated. Both theories believe in the existence of a
“market equilibrium” at which the “value” of goods exchanged in that market and
their component factors or costs of production can be determined either
objectively in terms of “socially necessary labor time” (in Marx’s version of
the LTV) or else subjectively in terms of individual marginal utilities.
Just briefly, the demonstration of the "metaphysical" and therefore self-referential or tautologous definition of value and price in marginal utility is illustrated clearly and inconfutably in this passage from Bohm-Bawerk's Positive Theory of Capital:
In what follows I mean to inquire how prices are determined under the assumption that all who take part in the exchange act exclusively from the motive of pursuing their immediate economical advantage in it. The law which we shall arrive at in this way I have already,*2 for very good reasons, called the fundamental law of the formation of price. I am perfectly aware that, in practical life, this law does not exactly obtain. For, although the motive of self-advantage is almost never absent, and is almost always the most prominent motive, still, in price transactions, other motives do very often get mixed up; such motives as humanity, custom, friendship, vanity, or the influence of outside institutions, such as government taxation, union regulations, boards for fixing wages, and the like, give them another direction than that they would have taken if exclusively dominated by self-advantage. Such motives, indeed, scarcely ever get the upper hand of the other to the extent of making us conclude an exchange which would cause us positive economic loss; but they often make us decide to be content with a less amount of advantage than we should have got in steadily pursuing our interests. (IV.1.2)
Just briefly, the demonstration of the "metaphysical" and therefore self-referential or tautologous definition of value and price in marginal utility is illustrated clearly and inconfutably in this passage from Bohm-Bawerk's Positive Theory of Capital:
In what follows I mean to inquire how prices are determined under the assumption that all who take part in the exchange act exclusively from the motive of pursuing their immediate economical advantage in it. The law which we shall arrive at in this way I have already,*2 for very good reasons, called the fundamental law of the formation of price. I am perfectly aware that, in practical life, this law does not exactly obtain. For, although the motive of self-advantage is almost never absent, and is almost always the most prominent motive, still, in price transactions, other motives do very often get mixed up; such motives as humanity, custom, friendship, vanity, or the influence of outside institutions, such as government taxation, union regulations, boards for fixing wages, and the like, give them another direction than that they would have taken if exclusively dominated by self-advantage. Such motives, indeed, scarcely ever get the upper hand of the other to the extent of making us conclude an exchange which would cause us positive economic loss; but they often make us decide to be content with a less amount of advantage than we should have got in steadily pursuing our interests. (IV.1.2)
It is entirely obvious that Bohm-Bawerk defines the purpose of exchange in determining prices as "the obtaining of immediate economical advantage". But that begs the question of "what" precisely determines "economic advantage" or "self-advantage" or, conversely, "positive economic loss"!! The tautology consists in defining prices (the definiendum) in terms of "advantage or loss" (the definiens) which is then defined again in terms of prices!
The
important difference for us here is that the Labor Theory of Value interprets
value in terms of “effort of production” whereas marginal utility looks at
value in terms of “want of provision”. By taking “effort of production” as its
starting point, the LTV assumes that “ownership” of the “pro-duct” is socially
and politically determined and that “labor” provides the social synthesis that
needs to be “validated” by the market in capitalist society and by “planning”
under Socialism. By contrast, in starting from “want of provision”, marginal
utility assumes that “goods” are already in existence and are “already endowed” to individuals, so that “society”
– by which they mean, “the market mechanism as social synthesis or osmosis” –
only decides the “exchange” of the existing value between individuals.
Under
the LTV, “labor” is the active part
of Value (effort, labor power); under marginal utility it is the passive part of value – labor as “want in search of
provision”, labor as “dis-utility”.
We
can see therefore how wrong Max Weber was to believe that “the Protestant work
ethic” could ever provide “a specifically economic ethic” or explanation for “the
spirit of capitalism”. Instead. We will have to return to Bohm-Bawerk to be
able to add “time” to the Neoclassical theory of value and only then we shall
be able to return to Schumpeter and Keynes.
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