Allocation, Cost Price, and the Labor Theory

B. Allocation, Cost Price, and the Labor Theory

We take as starting point Proudhon’s objection in Philosophie de la Mis`erie that contemporary economists failed to appreciate the “contradictory nature” charac- terizing “exchange value” and “use value” − the “profound mystery” that “use value and exchange value stand in inverse ratio to each other” (Proudhon 1846 1:

36, 38; cited MECW 6: 114), in effect the so-called Paradox of Value. This relation, Marx responded, was not at all mysterious, as Ricardo had made clear (Ricardo 1951–73, 1: 276). Ricardo had based himself on the principle of scarcity, and in dealing with Proudhon Marx does the same, rehearsing certain “truisms” − in the original French version, certain “v´erit´es, nous dirons presque banales” (Rubel 1963: 14) − relating precisely to the property of scarcity value: “The exchange value of a product falls as the supply increases, the demand remaining the same; in other words, the more abundant a product is relatively to the demand, the lower is its exchange value, or price. Vice versa . . . the greater the scarcity in the products supplied, relatively to the demand, the higher the prices. The exchange value of

a product depends upon its abundance or its scarcity, but always in relation to the demand” (MECW 6: 115). This principle provided the solution to Proudhon’s alleged “mystery.” Similarly: “M. Proudhon’s abundance seems to be something spontaneous. He completely forgets that there are people who produce it, and that it is to their interest never to lose sight of demand. Otherwise, how could M. Proudhon have said that things which are very useful must have a very low price, or even cost nothing?” (116; emphasis added). 3

More serious was Proudhon’s neglect of the reciprocal-demand property – that “[d]emand is at the same time a supply, supply is at the same time a demand” – a defi- ciency reflecting “futile abstraction.” The point for us now is Marx’s position that the final outcome in the market involves balancing the differing perspectives regard- ing “marketable value” (“la valeur v´enale” in the original), on the part of individuals engaged in production and consumption decision-making: “The conflict . . . takes place between the marketable value demanded by the supplier and the marketable

3 According to Rubel, Proudhon (1846) did in fact recognize the scarcity principle (Rubel 1963: 1544).

A “First Draft” of Capital 1847–1849 value supplied by the demander. The exchange value of the product is each time

the resultant of these contradictory appreciations. In the final analysis, supply and demand bring together production and consumption, but production and con- sumption based on individual exchanges” (118). And here the character of inter- dependence reflecting the reciprocal-demand perspective emerges very strongly.

Supply − which must satisfy consumers’ subjective perceptions of “utility” − itself reflects a sum of exchange values, namely those of the various inputs incorporated: “The product supplied is not useful in itself. It is the consumer who determines its utility. And even when its quality of being useful is admitted, it does not exclusively represent utility. In the course of production, it has been exchanged for all the costs of production, such as raw materials, wages of workers, etc., all of which are marketable values. The product, therefore, represents, in the eyes of the producer, a sum total of marketable values. What he supplies is not only a useful object, but also and above all a marketable value.” On the demand side too, demand only becomes “effective” when backed by purchasing power, and thus ultimately by outputs and their exchange values: “As to demand, it will only

be effective on condition that it has means of exchange at its disposal. These means are themselves products, marketable values.” In summary: “In supply and demand, then, we find, on the one hand, a product which has cost marketable values, and the need to sell; on the other, means which have cost marketable values, and the desire to buy.”

We have then not only insistence on price determination in terms of the demand- supply mechanism, but a thoroughgoing “general equilibrium” perspective − con- sistent with Say’s (and in my opinion also Ricardo’s) − involving a network of inter- dependent markets for products and factors. There was, however, a constraint − that decisions relating to both production and consumption, indeed the entire system of “needs,” turned on the state of “social organization” (118–19). Needless to say, there is nothing in a “Sayian” – or even “Walrasian” – perception of things that necessarily excludes a role for the social constraints here insisted on by Marx, and that henceforth was to characterize Marxist economics. 4

There remains to note an objection to Proudhon of a methodological order. 5

Marx alludes to the extreme “abstraction” entailed by Proudhon’s reduction of producers and consumers to trading bodies − I use Jevons’s term − which excluded the role played “in the real world” by competition among buyers and among sellers: “He carries abstraction to the extreme limits when he fuses all producers into one single producer, all consumers into one single consumer, and sets up a struggle between these two chimerical personages. But in the real world, things happen otherwise. The competition among the suppliers and the competition among the demanders form a necessary part of the struggle between buyers and sellers, of which marketable value is the result” (119). All this is consistent with the Smithian

4 On this matter, see Schumpeter on “Methodological Individualism” (1954: 888–9). 5 It resembles a complaint addressed in 1844 at Ricardo and the Ricardians (Chapter 6,

B. Allocation, Cost Price, and the Labor Theory 197 notion of “competition” as involving a race to acquire goods in excess demand or

to get rid of goods in excess supply (Smith 1937 [1776]: 55–7). And this approach is confirmed by the analysis of commodity pricing provided in “Wage Labour and Capital” of 1849 (MECW 9: 205). First, there is competition amongst buyers in the case of excess demand such that “one buyer will seek to drive the other from the field by offering a relatively higher price per bale of cotton. . . . The result is a more or less considerable rise in commodity prices” (206). Marx − unlike Smith (see Hollander 1992: 64–9) − says little regarding the extent of the price rise except that “even the most persistent and eager buyers have very definite limits,” presumably alluding to the effect of price on quantity demanded. Even less is said of the reverse case of excess supply, when “competition takes place among the sellers, which depresses the price of the commodities offered by them” (205). 6

We return to the Poverty of Philosophy where Marx refers to Ricardo’s objection to the Smithian limitation of the labor theory to the “primitive state” (MECW 6: 122). He goes on to represent the labor theory as “the scientific interpretation of actual economic life,” the truth of which Ricardo had established “by deriving it from all economic relations, and by explaining in this way all phenomena, even those like rent, accumulation of capital and the relation of wages to profits which at first sight seem to contradict it; it is precisely that which makes his doctrine a scientific system” (124). Marx appreciated that Ricardo’s cost price – including within cost the profit rate – implies exchange according to labor ratios: “ . . . according to the Ricardian doctrine [1951–73 1: 46–7], the price of all objects is determined ultimately by the cost of production, including the industrial profit; in other words, by the labour time employed” (199).

As for Proudhon, Marx focused on his so-called “synthetic” or “constituted value” − or labor time – as determinant of relative values (given utility): “Once utility is admitted, labour is the source of value. The measure of labour is time. The relative value of products is determined by the labour time required for their production. Price is the monetary expression of the relative value of a product. Finally, the constituted value of a product is purely and simply the value which is

constituted by the labour time incorporated in it” (MECW 6: 120). 7 But Proudhon

6 Cases of excess supply are said in practice to occur “more frequently. Considerable surplus of supply over demand; desperate competition among the sellers; lack of buyers; disposal of goods

at ridiculously low prices” (MECW 9: 206). A third category of competition is that “between buyers and sellers,” where “the former desire to buy as cheaply as possible, the latter to sell as dearly as possible,” the outcome depending upon “whether the competition is stronger in the army of buyers or in the army of sellers” (205). It is not clear how Marx intended to be understood since the cases of excess demand and excess supply had been covered, and these seem to be inclusive of all situations, apart of course from that where markets clear. 7 The Hegelian term “antimonie” was used by Proudhon to refer to a sort of dialectical conflict between use value or utility and exchange value. The “synthesis” resolved the conflict by proposing that relative labor time expresses the relative degrees of utility by bringing demand

A “First Draft” of Capital 1847–1849 had not been generous in his attributions; he certainly referred to Ricardo, but as

“trash” (“du fratas”), though he had in fact plagiarized Ricardian labor doctrine: “posterity . . . will say perhaps that M. Proudhon, afraid of offending his readers’ Anglophobia, preferred to make himself the responsible editor of Ricardo’s ideas” (121).

In order to “confront M. Proudhon with his predecessor Ricardo,” Marx quotes Ricardo to the effect that labor-input conditions alone determine relative prices independently of demand − though utility is a necessary condition – in the constant-cost case: “By far the greatest part of those goods which are the objects of desire, are procured by labour; and they may be multiplied . . . almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them” (Ricardo 1951–73, 1: 12). Lauderdale’s position was correct only in the case of “monopoly” – commodities in limited supply: “their price has no necessary con- nexion with their natural value: but the prices of commodities, which are subject to competition, and whose quantity may be increased in any moderate degree, will ultimately depend, not on the state of demand and supply, but on the increased or diminished cost of their production” (385).

Marx left it to his readers to compare the “simple, clear, precise language of Ricardo’s and M. Proudhon’s rhetorical attempts to arrive at the determination of relative value by labour time” (MECW 6: 123). But he goes on to do the exercise for them, emphasizing two specific differences. Firstly, Proudhon’s so-called “revolu- tionary theory of the future,” was in fact “what Ricardo expounded scientifically as the theory of present-day . . . bourgeois society”; and secondly, Proudhon took “for the solution of the antinomy between utility and exchange value what Ricardo and his school presented long before him as the scientific formula of one single side of this antimony, that of exchange value” (121). This latter formulation – and the direct citations from the Principles – might suggest that Marx read Ricardo as expounding a cost theory that allowed no place for demand. But this is not the case. The labor theory turns, Marx explained, on factor mobility, and “it is the variations in demand and supply that show the producer what amount of a given commodity he must produce in order to receive at least the cost of production in exchange. And as these variations are continually occurring, there is also a continual movement of withdrawal and application of capital in the different branches of industry” (134). And Ricardo is cited for this very principle: “It is only in consequence of such variations, that capital is apportioned precisely, in the requisite abundance and no more, to the production of the different commodities which happen to be in demand. With the rise or fall of price, profits are elevated above, or depressed below their general level, and capital is either encouraged to enter into, or is warned to depart from the particular employment in which the variation has taken place” (Ricardo 1951–73, 1: 88; Marx’s italics). Again: “the principle which apportions capital to each trade in the precise amount that is required, is more active than is generally supposed” (Ricardo: 89–90; Marx’s italics).

B. Allocation, Cost Price, and the Labor Theory 199 In what then consists Marx’s rejection of Proudhon in favor of Ricardo? I suggest

that it reflects a distinction between the labor theory of value attributed to Proudhon as a static theory of general equilibrium and that version attributed to Ricardo which emphasizes the process of adjustment to equilibrium: “If M. Proudhon admits that the value of products is determined by labor time, he should equally admit that it is the fluctuating movement alone that makes labor time the measure of value. There is no ready constituted ‘proportional relation,’ but only a constituting movement” (MECW 6: 135; emphasis added). But after all is said and done, the perceived difference between Proudhon and Ricardo is rather less than Marx some- times makes it appear; thus elsewhere Marx complains only that the sequential order relating demand-supply and costs was inverted by Proudhon: “Everyone knows that when supply and demand are evenly balanced, the relative value of any product is accurately determined by the quantity of labour embodied in it. . . . M. Proudhon inverts the order of things. Begin, he says, by measuring the relative value of a product by the quantity of labour embodied in it, and supply and demand will infallibly balance one another. Production will correspond to consumption, the product will always be exchangeable. Its current price will express exactly its true value” (131). One has the impression that Marx had been deliberately overdoing the difference, possibly in order to undermine Proudhon’s reputation and divorce his stance from that of Ricardo.

There is, however, another matter – to be explored further in Chapter 13 – relating to “the ‘equalitarian’ consequences which M. Proudhon deduces from Ricardo’s doctrine . . . based,” Marx complained, “on a fundamental error. He confounds the value of commodities measured by the quantity of labour embodied in them with the value of commodities measured by ‘the value of labour,’ ” whereas “[t]he value of labour can no more serve as a measure of value than the value of any other commodity” (127–8). Proudhon had erred despite Ricardo’s correction of Smith in this regard (128). Moreover, “[i]t is in order to find the proper proportion in which workers should share in the products, or, in other words, to determine the relative value of labour, that M. Proudhon seeks a measure for the relative values of commodities. To find out the measure for the relative value of commodities he can think of nothing better than to give as the equivalent of a certain quantity of labour the sum total of the products it has created, which is as good as supposing that the whole of society consists merely of immediate workers who receive their own produce as wages” (128–9).

We return to the proposition that the labor theory presupposes the free oper- ation of “competition.” It emerges conspicuously in a discussion of cost-cutting technology: “Competition forces the producer to sell the product of two hours as cheaply as the product of one hour. Competition implements the law according to which the relative value of a product is determined by the labour time needed to produce it” (135). Ricardo is cited to the effect that “[b]y constantly increasing the facility of production, we constantly diminish the value of some of the commodities

A “First Draft” of Capital 1847–1849 before produced” (Ricardo 1951–73, 1: 274). 8 Marx asserts that Proudhon was

unaware of the least-cost principle (or the “socially necessary” labor of Capital): “It is important to emphasise the point that what determines value is not the time taken to produce a thing, but the minimum time it could possibly be produced in, and this minimum is ascertained by competition. . . . It will suffice to spend six hours’ work on the production of an object, in order to have the right, according to M. Proudhon, to demand in exchange six times as much as he who has taken only one hour to produce the same object” (MECW 6: 136).

Comments on the value of money are relevant to the relation Marx himself envis- aged between production costs and demand-supply. Marx points out that Ricardo “after basing his whole system on value determined by labour time, and after saying: ‘Gold and silver, like all other commodities, are valuable only in proportion to the quantity of labour necessary to produce them, and bring them to market,’ . . . adds, nevertheless, that the value of money is not determined by the labour time its sub- stance embodies, but by the law of supply and demand only” (150; citing Ricardo 1951–73, 1: 353). This case had led Say to suggest that Ricardo should have drawn

a general lesson: “This example should suffice, I think, to convince the author that the basis of all value is not the amount of labor needed to make a commodity, but the need felt for that commodity, balanced by its scarcity” (Say 1819, 2: 234). Marx’s own position is that the value of money specifically is to be accounted for – as Ricardo insisted – in terms of demand-supply not cost analysis; it was the excep- tion that proved the rule. All the more important is it to reiterate that for Marx, as for Ricardo, the demand-supply mechanism is essential for the achievement of cost pricing in the standard case.

We turn now to the complexity that Marx himself designated the “least cost” prin- ciple as a “disproportional relation” – a play on Proudhon’s terminology, intending prices diverging from labor ratios – having in mind the tendency to “monopoly” engendered by rapid technical progress, a tendency undermining the entire con- cept of proportionately between products, or Proudhon’s “proportional relation”: “It is only in a few branches of industry, like the cotton industry, that very rapid progress can be made. The natural consequence of this progress is that the products of cotton manufacture, for instance, fall rapidly in price: but as the price of cotton goes down, the price of flax must go up in comparison. What will be the outcome? Flax will be replaced by cotton. In this way, flax has been driven out of almost the whole of North America. And we have obtained, instead of the proportional variety of products, the dominance of cotton” (MECW 6: 136). Nothing remained of the “proportional relation” than “the pious wish of an honest man who would

8 Sismondi was yet more sophisticated by his focus on expected costs. “ ‘Mercantile value,’ he says, ‘is always determined in the long run by the quantity of labour needed to obtain the

thing evaluated: it is not what it has actually cost, but what it would cost in future with, perhaps, perfected means; and this quantity, although difficult to evaluate, is always faithfully

B. Allocation, Cost Price, and the Labor Theory 201 like commodities to be produced in proportions which would permit of their being

sold at an honest price” − the long-standing desire of good-hearted bourgeois and philanthropic economists.

The problem is that by going so far Marx seems to turn away entirely from the Ricardo vision of cost pricing – with its demand-supply based allocative under- pinning – which he had apparently favored so wholeheartedly. He is explicit enough. That vision was irrelevant in the real world of “large-scale industry” characterized by cyclical instability: “This correct proportion between supply and demand . . . ceased long ago to exist. It has passed into the stage of senility. . . . With the birth of large-scale industry this correct proportion had to come to an end, and production is inevitably compelled to pass in continuous succession through vicissitudes of prosperity, depression, crisis, stagnation, renewed prosperity, and so on” (137). He adds that Sismondi and others who wished to reestablish the “cor- rect proportion of production, while preserving the present basis of society,” were reactionaries, since to do so entails reestablishing out-dated industrial conditions. Interestingly, Marx does not bring himself to mention Ricardo!

In a further exploration of the theme, Marx pointed to the implicit assumption behind the principle of “correct proportion,” that the pattern of final demand gov- erned allocation − demand “preceding” supply − as in the almost defunct exchange system entailing small-scale activity: “What kept production in correct, or more or less correct, proportions? It was demand that dominated supply, that preceded it. Production followed close on the heels of consumption. Large-scale industry, forced by the very instruments at its disposal to produce on an ever-increasing scale, can no longer wait for demand. Production precedes consumption, supply compels demand.” In large-scale industry based on individual exchange, “anar- chy of production” was the rule, which though “the source of so much misery, is at the same time the source of all progress.” There follows a statement with profound implication for social arrangement: “Either you want the correct pro- portions of past centuries with present-day means of production, in which case you are both reactionary and utopian. Or you want progress without anarchy: in which case, in order to preserve the productive forces, you must abandon individual exchange” (138). At this point Marx repeats his charge (above, p. 198) that Proud- hon’s “determination of value by labour time − the formula M. Proudhon gives us as the regenerating formula of the future” – is “the scientific expression of the eco- nomic relations of present-day society, as was clearly and precisely demonstrated by Ricardo long before M. Proudhon” (138; emphasis added). But this contrast is very difficult to appreciate so far as it relates to Ricardo, since Marx had just ascribed to “present-day society” those features of large-scale industry that rendered irrelevant the entire allocative base implicit in the labor theory. Conceivably the solution lies in a vision of the present as one in which small-scale activity still existed though on the path to extinction.

“Wage Labour and Capital” (1849) is silent on the complexities created by mono-

A “First Draft” of Capital 1847–1849 bourgeois as his measure of profit? The cost of production of his commodity. . . . And

he calculates the fall or rise of the profit according to the degree in which the exchange value of his commodity stands below or above zero − the cost of produc- tion” (MECW 9: 206–7). Marx notes that “[i]f the price of a commodity rises con- siderably [above costs] because of inadequate supply or disproportionate increase of the demand, the price of some other commodity must necessarily have fallen proportionately . . . ” (207). And the actual adjustment of market to cost price follows orthodox lines involving output flows between industries to eliminate excess demands and supplies and establish uniformity of return on capital, though with one important difference − that for Marx over-reaction precludes smooth adjustment: “What will be the consequence of the rising price of a commodity?

A mass of capital will be thrown into that flourishing branch of industry and this influx of capital into the domain of the favoured industry will continue until it yields the ordinary profits or, rather, until the price of its products, through over- production, sinks below the cost of production. . . . [C]apital continually migrates in and out, out of the domain of one industry into that of another. High prices bring

too great an immigration and low prices too great an emigration.” 9 Nonetheless, taking an appropriate time interval, deviations between market and cost prices cancel out: “We have just seen how the fluctuations of supply and demand con- tinually bring the price of a commodity back to the cost of production. The real price of a commodity, it is true, is always above or below its cost of production; but rise and fall reciprocally balance each other, so that within a certain period of time, taking the ebb and flow of the industry together, commodities are exchanged for one another in accordance with their cost of production . . . ” (208). In brief, “the periods in which the price of [a] commodity rises above its cost of production are compensated by the periods in which it sinks below the cost of production, and vice versa.” 10

This conclusion does not appear to justify a contrast perceived by Marx between his own and the orthodox “average”: “The economists say that the average price of commodities is equal to the cost of production; that this is a law. The anarchical movement, in which rise is compensated by fall and fall by rise, is regarded by them as chance. With just as much right one could regard the fluctuations as the law and the determination by the cost of production as chance, as has actually been done by other economists.” In fact, he insists, “these fluctuations . . . bring with them the

9 Marx adds the mouth-watering assertion: “We could show from another point of view how not only supply but also demand is determined by the cost of production. But this would take

us too far away from our subject” (MECW 9: 207). Marx may have intended the notion that depending on the pattern of income distribution implied by “cost” so the pattern of demand will vary. 10 Marx proceeds to qualify his analysis. Such adjustment he affirmed “does not hold good, of course, for separate, particular industrial products but only for the whole branch of industry. Consequently, it also does not hold good for the individual industrialist but only for the whole class of industrialists” (MECW 9: 208).

B. Allocation, Cost Price, and the Labor Theory 203 most fearful devastations and, like earthquakes, cause bourgeois society to tremble

to its foundations − it is solely in the course of these fluctuations that prices are determined by the cost of production.” For all that, the so-called “anarchy” characterizing markets is under strict constraint: “The total movement of this disorder is its order. In the course of this industrial anarchy, in this movement in a circle, competition compensates, so to speak, for one excess by means of another.” Indeed, “in spite of the fluctuations in prices of commodities, the average price of every commodity, the ratio in which it is exchanged for other commodities, is determined by its cost of production” (219). Marx reverts to orthodoxy after all.

What though of the relation between cost-price and the labor theory? Marx throughout takes for granted a 1:1 relation: “The determination of price by the cost of production is equivalent to the determination of price by the labour time necessary for the manufacture of a commodity, for the cost of production consists of 1) raw materials and instruments of labour [1891: depreciation of instruments], that is, of industrial products the production of which has cost a certain amount of labour days and which, therefore, represent a certain amount of labour time, and

2) of direct labour, the measure of which is, precisely, time” (208).

We return to the Poverty of Philosophy and a discussion of various derivations by Proudhon from his version of the labor theory, including the dismissal of qualitative distinctions between types of labor (MECW 6: 124). Proudhon was unjustified in supposing that the labor theory demonstrated the qualitative identity of all types of work: “Does labour time, as the measure of value, suppose at least that the days are equivalent, and that one man’s day is worth as much as another’s? No” (126). In another version of the complaint: “ . . . he takes for granted the equivalence of the working days of different workers. In short, he seeks the measure of the relative value of commodities in order to arrive at equal payment for the workers, and he takes the equality of wages as an already established fact, in order to go off on the search for the relative value of commodities. What admirable dialectic!” (129).

It was, Marx maintained, perfectly reasonable to apply the labor theory tak- ing account of differentials reflecting quality, by use of the scale provided by competition: “values can be measured by labour time, in spite of the inequality of value of different working days; but to apply such a measure we must have

a comparative scale of the different working days: it is competition that sets up this scale. . . . Competition, according to an American economist, determines how many days of simple labour are contained in one day’s compound labour” (126–

7). 11 But Marx may have realized that his wage-scale did pose a threat to the labor theory, for he immediately sought to explain that a reduction to simple labor in fact “presupposes” such labor to be the standard, which in turn “presupposes that simple

11 Possibly Thomas Cooper 1826. The principle, of course, was formulated earlier by Smith (1937 [1776]: 100–18) and by Ricardo (1951–73, 1: 20–1).

A “First Draft” of Capital 1847–1849 labor has become the pivot of industry” characterized by “the subordination

of man to the machine or by the extreme division of labour” where “[t]ime is everything, man is nothing. . . . Quality no longer matters. Quantity alone decides everything; hour for hour, day by day” (127). Such “equalizing of labour” was not, Marx proceeds, “the work of Proudhon’s eternal justice; it is purely and simply a fact of modern industry.” Indeed, in the modern automatic factory “one worker’s labour is scarcely distinguishable in any way from another worker’s labour. . . . It is upon this equality, already realised in automatic labour, that M. Proudhon wields his smoothing-plane of ‘equalisation,’ which he means to establish universally in ‘time to come’!” While Marx admitted the wage-scale principle, in practice the entire matter was fortunately becoming academic.