The value of 1 metre of linen is not measured by gold, but by abstract labour, whose proxy is now gold producing labour. The value of linen is measured by whether the quantity of this abstract labour increases or decreases, which is a function of productivity in linen production. Only the exchange value of linen is measured by gold, i.e. the relation between the value of linen as against the value of gold.
As Marx puts it slightly later, talking about Smith,
“Moreover here he confuses—as Ricardo also often does—labour, the intrinsic measure of value, with money, the external measure, which presupposes that value is already determined;” (p 403)
Suppose that the 20 hours of gold producing, (abstract) labour now produces 20 grams of gold. The value of gold thereby falls. But, this fall in the value of gold does not at all affect the value of linen, which continues to require 20 hours of abstract labour for the production of 1 metre of linen. Now, 1 metre of linen exchanges for 20 grams of gold, the linen producing labour continues to produce twice as much value per hour as gold producing (abstract) labour. Ten hours of linen producing labour creates as much value as 20 hours of gold producing (abstract) labour, but now this means that 1 metre of linen exchanges for 20 grams of gold, rather than 10 grams of gold, because the value of 1 metre of linen still has a value of 20 hours of abstract labour, whereas the value of gold has fallen, because 20 hours of abstract labour now produces 20 grams, whereas previously it only produced 10 grams.
But, this determination of the value of the linen has thereby nothing to do with the value of the linen producing labour (power) itself, i.e. what portion of it is paid labour as opposed to unpaid labour, as Smith contends, but only by the total labour, paid and unpaid, required for production. If the paid labour declines, because changes in social productivity reduce the value of wage goods, and thereby the value of labour-power, this in no way changes the value created by the linen producing labour; it simply changes the proportion in which that value is then distributed, in providing for the reproduction of the labour-power, and that going to surplus value.
“Ricardo’s reply to Adam Smith is correct—that the relative quantity of labour which is contained in two commodities is in no way affected by how much of this quantity of labour falls to the workers themselves and by the way this labour is remunerated; if the relative quantity of labour was the measure of value of commodities before the supervention of wages (wages that differ from the value of the products themselves), there is therefore no reason at all, why it should not continue to be so after wages have come into being. He argues correctly, that Adam Smith could use both expressions so long as they were equivalent, but that this is no reason for using the wrong expression instead of the right one when they have ceased to be equivalent.” (p 396)
Both expressions were equivalent when it was only a question of materialised labour exchanging for materialised labour.
“They cease to be equivalents as soon as materialised labour is exchanged for living labour.” (p 397)
In other words, there is a change not just in the exchange relations here, but in the social relations that underpin those exchange relations. In a society of petty commodity producers, each producer creates a commodity, and they exchange this commodity for some other commodity, or set of commodities that have the same value, i.e. represent the same quantity of abstract labour.
“Two commodities exchange in proportion to the labour materialised in them. Equal quantities of materialised labour are exchanged for one another. Labour-time is their standard measure, but precisely for this reason they are “more or less valuable, in proportion as they will exchange for more or less of this standard measure” [l.c., p. 5].” (p 397)
In other words, if commodity A represents 10 hours of abstract labour, and commodity B represents 5 hours of abstract labour, A is relatively more valuable than B. 1A will exchange for 2B, “since this exchange relationship expresses, is identical with, the relative quantity of labour which it itself contains.” (p 397)
But, herein lies the contradiction, and the problem facing Smith, which Ricardo, by his approach, has failed to resolve. Wage labour is itself a commodity, and the basis upon which capitalist production is founded. But, on the basis of the argument that Smith has put forward, the law of value, by which the value of commodities is determined by the labour-time required for their production, cannot apply to this commodity, labour (power). If it did, then the value of this wage labour would be equal to the value it created, and so no surplus value could exist, and thereby capitalism itself could not exist.
Nor can the value of this wage labour be defined in terms of Smith's second definition, derived from the value of labour, rather than the quantity, because that would lead to a tautological statement that the value of labour is equal to the value of labour. Smith is then led to a conclusion that capitalist production is not governed by the law of value.
“This is the first of Adam Smith’s problems. The second—which we shall find further amplified by Malthus—lies in the fact that the utilisation of a commodity (as capital) is proportional not to the amount of labour it contains, but to the ‘extent to which it commands the labour of others, gives power over more labour of others than it itself contains. This is in fact a second latent reason for asserting that since the beginning of capitalist production, the value of commodities is determined not by the labour they contain but by the living labour which they command, in other words, by the value of labour.” (p 397)
In other words, if we take a commodity, such as corn, as a proxy for wages, a worker requires a certain quantity of this corn for the reproduction of their labour-power. But, in the hands of the capitalist, the value of this corn resides in how much living labour it will buy, and consequently, how much surplus value they can extract. If a worker requires 1 kilo of corn per day, as wages, they exchange say 10 hours of their labour for this kilo of corn. Say a kilo of corn sells for £2, and the capitalist buys this corn, and pays it as wages to the worker. The worker then undertakes 10 hours of labour, and creates £3 of new value. Now, the capitalist takes this £3 of new value and can again buy a kilo of grain, so as to pay the wages to the worker again the following day, whilst keeping £1 of surplus value for themselves. But, if the price of a kilo of corn falls to £1, the capitalist can now buy 2 kilos, and thereby employ 2 workers, who now produce £6 of new value, so that the capitalist can extract £4 of surplus value.
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