The purpose of this piece is to summarise some of the points made in Capitalist Metaphysics before we embark on Part Two of our very popular essay on "Keynes and Einstein":
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.
Weber’s
notion of the Problematik der Sozialismus
consists precisely in this: - that the “riddle” or paradox of the
rationalization of the economy and society and the preservation of “freedom” –
that is to say, the coincidence of use value and exchange value - is one that
belongs properly to socialism and not to market capitalism (though perhaps
Schumpeter may add “monopoly capitalism”). Socialist planning is not a
“problem” for “market” capitalism; rather, it is the other way around!
Capitalism is “the” problem for Socialism because it shows that the only way to
act “rationally” is by allowing the “free-dom” of social conflict over
need-necessities through the “market”, which is what Socialism wishes to
eliminate! For Weber, the “problematic
of socialism” is the impossibility of reconciling choice (Wert-rationalitat)
and rationality (Zweck-rationalitat), freedom and science, except from the
choices and free-dom of in-dividuals! This
is so because “free choice” applies only to ultimate substantive goals (which are irrational precisely because they are
a matter of “in-dividual choice”) whereas rationality or “science” applies only
to the instrumental choice of means
to achieve chosen goals (which is “logico-mathematical and scientific” and
therefore inter-subjective). The Sozialismus
instead insists on finding an ultimate goal or “choice” within rationality
itself or “science” – and this for Weber is the equivalent of seeking to square
the circle. This is the “truth” of Weber’s
methodological individualism. Paradoxically, it is Weber and Hayek (and
Mises) who end up on the side of “individual freedom of choice” by denying that
there is any “scientific” roadmap to market equilibrium for the precise reason
that such a “roadmap” would depend on the information supplied by
freely-choosing individuals – in complete antithesis with the “planned-society”
tenets of the Sozialismus based on the Law of Value. Hayek of course applies
the same critique to “totalitarian” Walrasian equilibrium.
If
the Law of Value is given an objective
quantitative form, as every “socialist” wishes ardently to do, then there will
be no space for that “subjective Law
of Value” that is the common basis of both the negatives Denken and neoclassical economics! Without the social
conflict of the latter springing from individual need-necessities and related
“choices”, no proper “science” is possible without the last vestige of
“free-dom” (market freedom)
evaporating. For Weber, market free-dom begins precisely with the expropriation
of workers from the means of production, with the Trennung intended as a pro-duct of the stahlhartes Gebaude. Then it continues with the discipline of the
factory, on which “the exact calculation” of profit is based.
Lowith
seems to argue that Weber is either seeking to reconcile these opposites or
else that he harbors “illusions” about being able to do so! But we know that
neither is the case because in this exact respect market capitalism represents for Weber the apex of both human free-dom and
scientific rationality. Lowith here misses the point entirely!