Groucho Marxism

Labour plays a central role in Marxian economics. In this context, ‘labour’ refers specifically to the physical act of working by human beings – but, crucially, not by animals or machines. Almost all other concepts in Marxian economics are derived from this basic concept. For example, ‘labour time’ is defined as the period of time that a person spends doing labour; and a ‘commodity’ is defined as a good or service produced by (human) labour and offered as a product for general sale. We can also define the ‘socially necessary labour time’ (SNLT) associated with a commodity as the average labour time required under current prevailing conditions to produce it. This is also referred to as the labour value, or simply the value, of a commodity.

Labour value is just one attribute of a commodity, the other four being use value, exchange value, production price, and market price. ‘Use value’ refers to the tangible features of a commodity which can satisfy some human requirement; ‘exchange value’ refers to the proportion at which a commodity can be exchanged for other commodities; ‘production price’ refers to the cost of producing a commodity multiplied by a factor of 1 + the average profit rate under current prevailing conditions; and market price refers to the actual prices paid for a commodity on the market. The ‘labour theory of value’ (LTV), also known as the law of value, posits that the exchange value of a commodity is proportional to its labour value (or equivalently, to its SNLT).

Production prices can be thought of as exchange vales expressed in monetary terms. Marxian economists argue two things about such prices. The first is that they act as ‘centres of gravity’ for market prices; and the second is that they are proportional to labour Values (i.e. the LTV holds). To make rigorous the second of these propositions, consider an economy with n sectors that specialize in the production of one commodity type. The economy is determined by an n × n input-output matrix of inter-sector coefficients A = [a_ij], where a_ij ≥ 0 is the quantity of commodity i directly required to produce one unit of commodity j; and a 1 × n vector of direct labour coefficients L = [L_i], where L_i > 0 is the quantity of labour directly required to output 1 unit of commodity i.

For such an economy, labour values v are usually defined by the equation v = vA + L, and prices of production p by the equation p = (pA + Lw)(1 + r), where w,r ≥ 0 are the average wage and average profit rate respectively. Rearranging these equations gives v = (I – A)^-1L and p = (I – A(1 + r))^-1Lw(1 + r). If the average profit rate r = 0 then p = vw and the LTV holds; but in general, r > 0, and the LTV doesn’t hold. However if instead we define Labour Values by the equation v = (vA + L)(1 + r), we have v = (I – A(1 + r))^-1L(1 + r) and therefore p = vw for all values of r. Therefore we can easily define labour Values such that they are proportional to Production Prices and the LTV holds. Moreover, defining Labour Values in this way is arguably closer in spirit to the socially necessary labour time concept first introduced by Marx.

Thus, it is possible to define labour values and production prices in such a way that the LTV holds trivially by definition. What about the claim that production prices act as a centre of gravity for Market Prices? This proposition must be tested empirically. Many studies have attempted to do this and have claimed to demonstrate a correlation between production prices and market prices. However, these studies have been rightly criticized on the grounds that they use aggregate prices of entire sectors of the economy rather than using prices of individual commodities. A correlation at sector level does not imply a correlation at commodity level, as it could be caused by the number of commodities in each sector correlating with itself.

The problem is that testing directly for a correlation at commodity level is almost impossible as it requires estimating an input-output matrix A at commodity level (i.e. one row and column for each commodity type in the economy), and the data required to estimate such a matrix just doesn’t exist. However, there is an alternative: we can look at how firms set prices. Do firms set prices based on supply and demand, or do they set prices by applying a fixed mark-up to their costs? If it’s the former, there is no reason that there should be a correlation between production prices and market prices; if it’s the latter, the two must be correlated. This empirical work has in fact already been done, and the results are clear: firms almost exclusively apply a fixed mark-up to their costs when setting prices.

Therefore, we have clear evidence that production prices will act as a centre of gravity for market prices. Furthermore, we can define Labour Values in a sensible way such that the LTV holds, from which it follows that Labour Values will also act as a centre of gravity for market prices. It seems odd therefore that this idea is often considered controversial. The only step in the chain that can really be argued with is the definition of labour values; but any other measure of ‘value’ will not, in general, correlate with Market Prices. As Marx realized over 150 years ago, the only measure of value that can explain Market Prices is one based on accumulated labour time. It is for this reason that the LTV is and will always remain cornerstone of Marxian economics.