Sunday, 1 February 2009

Water and Diamonds

Bourgeois economists often attack the Labour Theory of Value - which they always describe as Marx's Labour Theory of Value, forgetting to mention that it was actually developed by the two greatest bourgeois economists, Adam Smith and David Ricardo - in ways that show either that they have not read and understood the theory, or else that they are dishonest.

Often, they fail to take account, of the fact, that the theory says that the Exchange Value of Commodities is determined by average, socially necessary, simple labour-time, and simply trot out, if the value of commodities is determined by the Labour-time expended on them, then producers will have an incentive to spend as much time producing them to raise their prices, and so on. They confuse Exchange-Values with prices and other such nonsense that means that often in any such discussions it is necessary to spend a long time dispelling all the fallacies before any serious discussion of the theory can be undertaken.

Another common criticism arises in reply to what has come to be known as the diamond-water paradox. The division between Marxist economics and bourgeois economics comes down essentially to this. Marxist economists basing themselves on the Labour Theory of Value argue that the Exchange Value of a commodity is an objectively determinable quantum equal to the average, socially necessary, simple labour-time required to produce it. In other words, in any economy at any specific time if we take all the producers of a commodity, all in competition with each other, this competition will force all of them to use the most efficient means of producing this commodity. Some will be more efficient, some less, and taking all together an average efficiency will be calculable. Ultimately, this efficiency can be measured by the amount of Labour-time required for this production. That labour-time is divided between the Labour-time required to produce the machines used in the production process (or at least that part of the machine, the wear and tear in the production process), that required for the production of the raw materials and ancillary materials used, and finally that living labour used in turning these materials into the finished product.

This Labour-time is not the Labour-time of the specific workers. All workers are different, have different skills etc., and so the Labour-time of a bricklayer might count as twice or three times the Labour-time of the brickies' labourer. The measure of Labour-time, simple labour, is this basic unskilled labour. If the actual Labour used is skilled then it is considered to be complex labour, and the calculation simply requires that a multiple of that simple labour-time be applied. Finally, in previous societies where commodities were made solely to be exchanged with a known buyer there was no question of commodities being produced that were not wanted. Where commodities are produced to be sold on a market this is no longer the case. Now commodities may be produced for whom there is no buyer, or at least no buyer at that Exchange Value. In other words more labour has been expended than was socially necessary. Only that which is socially necessary can count in calculating the Exchange Value.

The alternative theory of Value, that on which bourgeois economics is based, seems in many ways simpler to comprehend. It argues that Value is not objective, but subjective. Each person determines the value of any commodity based on how much they are prepared to pay for it, or how much they are prepared to sell it for. Haggling between the two settles the price, except that this haggling takes place between millions of buyers and sellers. In the end this comes down to a psychological argument. The Value any individual places on a commodity is determined by what they think it is worth to them at that particular moment in time compared to other commodities, and that comes down to what is the utility they can derive from this commodity compared to others, including the money they have to hand over to buy it.

This conflict between the two theories goes back to the first discussions on this matter both taking place at the same time in different places, in Ancient China, and in Ancient Greece at the time of Plato and Aristotle. For a long time, basically, the Labour Theory of Value won out in this battle. Smith, Ricardo and other economists of the time simply picked up the thread of a long line of Islamic and Christian scholars who over the centuries had worked their way to developing the idea of the value of commodities being determined by the Labour-time required for their production.

But, the theory was dangerous to the bourgoisie. The complete formulation of the theory by Marx showed how Capitalism was based upon the exploitation of Labour just as much as Feudalism was based on the exploitation of the serf and peasant, and slave society on the exploitation of the slave. It was the labour of the worker that created new value, and a portion of that value was simply appropriated by the Capitalist just as the Landlord appropriated part of the production of the peasant, or the slave owner appropriated the surplus product of the slave, over and above what was required for the slave's subsistence.

W.S Jevons was one of the first proponents
of the theory of utility.
So bourgeois science developed a new theory going back to the idea that the value of commodities was based not on the objective quantum of the labour-time requried for production, but on the idea that it was due to some innate quality of the commodity - its utility. But, Marxist economists were quick to point out the flaw in this argument. If we take two commodities, diamonds and water, the Value of diamonds is very high, but water has a very low Value, sometimes zero. Yet, it is clear that, in terms of utility, water is far more precious than diamonds, we can live without diamonds, but not without water. The bourgeois economists came back with the argument that it was not the total utility that counted, but the marginal utility, the utility of the last unit of a commodity to be consumed that determined its value. So, if there is plenty of water, I am able to consume lots of it, and I will get to a point where I don't want any more, so I will not be prepared to pay much, if anything, for it. But, there are very few diamonds about, I can consume few of them, so the price I am prepared to pay, for the next one I might be able to get my hands on, will be high.

In order to show the force of this argument, they often give an example similar to the following. They say, suppose someone has a diamond and has been lost in the desert for many days. They are dying of thirst, and come across another person with a glass of water. At this point they argue, the utility of the glass of water is greater to them than the diamond, and so they will be prepared to exchange the diamond for the water.

That seems a reasonable argument, but could the Labour Theory of Value also explain the basis of this exchange? It appears to contradict it, diamonds require a lot of labour to produce water very little, yet the diamond is exchanged for the water. But, in fact like many of the arguments used by bourgeois economists there is a sleight of hand here. What actually is the commodity being exchanged? Is it simply a glass of water? Or is it a specific glass of water available at a particular point in space and time?

Moroccan Water Sellers
Let's look at the facts. Someone is lost, say in the Sahara desert. In order for them to exchange their diamond, with the glass of water, there also has to be someone there, with a glass of water, at that specific place and time, for them to exchange it with! Unless we are dealing here with just isolated examples of pure fate, which can tell us nothing about Capitalist, or any other kind, of commodity production, this supplier of glasses of water, would have to have undertaken a number of decisions and actions. They would have had to, first, acquire the glass of water. At this stage, true, the glass of water has very little value; it has required very little labour-time for its production. But, if this producer of glasses of water wants to exchange this glass of water, for something else, they have to find someone with whom they can exchange it. Most frequently, such suppliers will go to where there are the most numerous potential buyers. They will quickly be able to exchange their water there, and, in consequence, because there will be other suppliers of water, the value they will get, in exchange, will be low. If our supplier wants to exchange his water for a diamond, he will have to go to where there is much less competition, but the place where there is much less competition, is also the place where there are far fewer buyers.

Our water seller decides to set up shop in the middle of the Sahara desert. Sure enough he faces no competition. But, where potential buyers, of his water, pass in hundreds through the market, in the town, few potential buyers are to be found in the middle of the Sahara. Many of those who come by, knowing that they will not easily find water have brought sufficient supplies with them and so are not customers either. Unless, our water seller is very lucky, in which case he could have simply bought a lottery ticket, he is likely to spend many unpleasant years sitting in the desert waiting to find a potential customer with a diamond to exchange for his water. During all that time, not only is he expending his labour-time, to provide this specific commodity - water at a specific time and place - but he will have to expend further labour-time, making sure that his glass of water does not evaporate, in the blazing sun. All in all, he could probably have expended less labour-time finding the diamond, and digging it out of the ground, which he hopes to exchange for his water. That is why you do not find many Capitalists engaged in such an activity. It is in fact, far better explained by the Labour Theory of Value than it is by the Marginalist Theory.

After all, the Marginalist theory is rather circular on this point. It explains the low prices of some commodities by their low price. It is not the large supply of water that allows me to buy water at a low price, but the fact that the suppliers of water have to expend little labour, in its production, that causes its price to be low, that then allows me to purchase lots of it! If a certain supplier of water had a monopoly of supply, the fact that there was lots of water would not cause its price to be low necessarily. The supplier would charge a monopoly price by restricting its supply, and I would pay a higher price. The monopolist would then make a monopoly profit, because the labour-time he expends would remain the same.

You can see something like the water-diamond situation above in practice. I drive quite a bit in Europe. Increasingly, you are seeing, particularly in the big countries, like France and Spain, the emergence of fully automated filling stations. This follows from the argument above. In Britain, with filling stations, largely, in, or close to, towns and cities, they get a high volume of traffic, and sell millions of gallons of fuel, plus increasingly selling other things in the shop. Over all these millions of gallons sold, the wages of the attendants form a tiny proportion of the cost. But, in a big country, where its necessary to have filling stations miles from any large connurbation, the volume of traffic, the number of gallons sold can be much smaller. If an attendant was employed, then, like our water seller, they could be sitting their for long periods without any customers. Capitalists do not pay workers to sit doing nothing. Instead, then they automate the pumps, making everyone pay for their fuel with credit cards. Food and drink dispensing machines also remove the need for someone to be in attendance in the shop.

Occasionally, problems might arise, which would, otherwise, have been dealt with by an attendant, but, with CCTV, and online error reporting, a number of such facilities can be linked together, and a technician dispatched to deal with problems when they arise.

9 comments:

CharlieMcMenamin said...

Boffy,
I missed this when you first posted it. I don't think it totally resolves my doubts about the Labour Theory of Value (I still wonder at its relation to the necessary function of distributing resources for instance) but I just wanted to say it is one of the clearest explanations of the debate on the theory I have ever read. Top blogging!

Arthur Bough said...

Charlie,

I assume you came to it from the link from my more recent post. Hope you liked that too. ON the LTV I'd be glad to try to deal with any questions you have for the reasons given in my more recent blog.

I suppose my simple answer would be that the LTV is not intended to be a theory of distribution. Its a theory of production. That is the opposite to the bouyregois theory, which almost removes production completely from the equation in order to focus solely on the question of distribution i.e. exchange.

For example, it poses the question like this. Suppose a) has 10 Mars Bars and b)has 20 fags how will they be better off by trading some of each with the other? They then answer this set up question in terms of how much each prefers fags to Mars bars? I once had a debate with an Austrian economist on this very theme, and asked the obvious question -

"Where did the fags and Mars Bars come from, how much did they cost to produce?"

only to be told,

"Imagine both find them behind the barn"!!!! Again the response was fairly obvious - "What economy is this you are describing where all commodities are simply found behind barns?"

But, bouregois economists has to make this assumption in order to limit the subjective value to just the inherent physical characteristics of the commodity for the consumer, thereby denying that most significant characteristic of the commodity, which determines its usefulness - its quality as an Exchange Value, something that can be Exchanged for other things!

The strength of Marx's Theory is that it does not deny the role of Demand and Supply in dealing with the question you raise in relation to distribution. In fact, Marx says that Interest Rates are solely determined by the interaction of Demand and Supply. To some extent, I don't think that a fully developed Marxist theory - remember Capital was only a small portion of the work Marx had set himself to do, which would have dealt with Distribution and market theory - would bother taking too much issue with Marginal Utility if taken as being simply some vague notion of how consumers make choices, provided that it was on the basis not of using that as the starting point in determining Value.

I think Marginal Utility theory is unneccesary and irrelevant personally. I think that prices are developed in the way I have outlined, and that consumer's chocies only determine what and how much is demanded at those prices. How and why consumers make this choice or that choice we probably can never know, and is likely to be different in each case - I certainly don't weigh up relative utilities and compare them against prices when I go to the supermarket, in fact, half the time I don't even know what the price was I'd paid for soemthing, I just knew I needed some.

If you start from there I think you can see the basic outlines of a Marxist theory of distribution with these changes in demand causing changes in prices and a corresponding reallocation of Capital in order to restore average rates of profit.

Arthur Bough said...

By the way feel free to point others in the direction of that post. I'll try to reciprocate when I have some time available.

Also by the way, the call about the end of the recession doesn't look so unrealistic now I think you'll agree.

CharlieMcMenamin said...

Hi Arthur,
Many thanks for this. You've given me food for thought but various work and family commitments mean I can't devote the time to give you a considered response just now. But I will, I will, I promise. Meanwhile I have put a link to this interesting article into a posting on my site - albeit a posting about something else written in a relatively light-hearted way, but the reference is genuinely positive nonetheless.

Arthur Bough said...

Charlie,

Thanks. I'll reciprocate in the next few days. I understand about commitments entirely!

Marie A.C. said...

One of Marx famous quote is: I am not a Marxist...
Now why would he say that...clearly he should have be proud a generation upon generation of student, followers of his teaching to behold his name...
Cause he didn't start a new school...cause he was honest enough to acknowledge that he already belong to a school of economic though.
Marx was political economist and the economic foundation he believe in also known as Labor theory of value...
I grow up in Yugoslavia and I graduated at the University of Macedonia, Skopje...my major was economic policies and development of the country ... macroeconomics in one word...
We as socialist country have Marxism as philosophy since high school, but in economic study Das Capital was elaborated as well as Adam Smiths Wealth and Ricardo's Principle in the class Political Economy...literally...
I never ever considered myself to be Marxist...
I am political economist...
Marxism was worldview, dialectic approach to materialistic reality: things always change, even when we don't like the change cause it's not in our favor, the wheel of history always move forward...stall, derailed maybe, but never the less, it will not be stop...progress will happen, capitalism will flip into Socialism, no matter who scream otherwise ( conservatives )!
Of course we study critics of LTV so called market economist who one after another mud the water that Capitalism is a system that only benefit few on account of impoverishing many, most famous being Keynes, Mises & Friedman...
All of those apologetics schools of economics failed to find answer to Marx main observation about Capitalism, nor they could have despite his economic genome of Capitalistic DNA: the crises...all they could have come out is superstitious excuses: someone fall asleep at the switch, some animal spirit took ahold of our noble business enterprenors who become obsess with greed and spin the whole economy out of proportion...the boom and bust of business cycle...
Silly rabbits...tricks are for kids...
Marx and those of us who understand his economics we see the crises happening a mile before it hit our shore...
That's Marx legacy...the crises, the contradiction of capitalistic mode of production that accumulate in a hand of few the vast wealth and inability to materialize profit on the market...crises of overproduction, one and the same today as they were during Marx time...crises due to growth as we call them today...bubbles...
As for water and diamond paradox...
Adam Smith did not explain labor theory of value with his example...he point the absurdity of the marginalist utility creed...
Marx never waste time with thing he agree with Adam Smith...nor any of his predecessor as Ricardo...nor he waste time on any marginalist claims...
I love your blog...hope I will have you on mine too...
Marie...

Marie A.C. said...

Adam Smith did not mention water and diamond to explain labor theory of value...he pinpoint the absurdity of marginalist utility with only two words...
To dwell in any explanation of utility as value is waste of brain cell right there...
What you doing on your blog is courageous attempt to educate people who are not under Mises umbrella...
Good lunch with that...
I wanna say something else...
One of Marx famous quote is " I am not a Marxist"
Why would he say that...
Don't he should have be proud that generations upon generations economic pupils will bare his name?
No...not really...
Why...
Cause he was political economist, same as Adam Smith and David Ricardo...cause he didn't invent new theory of value, but pick up the scientific torch where his predecessor left: DNA of Capitalistic crises...
That was Marx contribution...the genome, the system DNA will unavoidable lead capitalism from one to another crises and nothing, no man, no govt can stop it...
He discover that genome called contradiction of capitalistic accumulation, production for the sake of production...and inability to realize the profit on the saturated market...and no economist after Marx was able to disprove that fact, no matter how successful they deny it...
Crises are plaguing Capitalism just as Marx mathematics show they will, and all those queasy economist can hang to animal spirits or neglect, or greed, or lack of regulation, or to much regulation...never the less what excuse they use in their woodoo economics books, all they do is blame game, and due lack of logic are unable to offer exit of the predicament...
Marx didn't have that problem...going in crises and getting out of it was clear logical outcome of the systemic flaw...
Love your blog...
Hope you will love mine too...
Marie...

Marie A.C. said...

Love your blog...
Marie
Ps Adam Smith didn't mention water and diamond to explain labor theory of value...he pinpoint the absurdity of marginalist utility theory with two words...

Boffy said...

Actually, Marx didn't say he wasn't a Marxist. What he said was in the context of his differences with Guesde and the French socialists over "revolutionary phrasemongering". Marx said caustically "If this is Marxism then I am no Marxist".