Supply and demand and anachronistic Marxology

This comes from a long post I wrote on the LBO-Talk list a few weeks ago. (See it in context here.) It came out of a discussion about the embarrassing tendency for discussion among Marxists to degenerate into biblical exegesis. I wasn’t criticising Marxology as such. It’s a legitimate part of the history of thought if nothing else, and since Marx’s work still speaks pretty directly as a critique of capitalist society, it’s more than that. I also think it’s uncontroversial that appeals to authority are not legitimate arguments in anything other than disputes about what the particular authority said. My point was rather that the form and content of Marx’s political economy were partly determined by the political economy of his time, and therefore:

“the worst thing about so much Marxology is that many people who can quote the text itself back-to-front know very little about the early-to-mid-19th-century political economy that is its context and even so much of its content. If your economic methodology is to rip selections from the text 150 years out of that context, you’re often anachronistically defending the concerns and framing of Georgian and Victorian political economy rather than any particularly radical criticism of economics past or present. The ‘labour theory of value’ is a case in point – Marx’s theory points the way out of the labour theory, but thanks to the conservatism of exegesis-based economics, which freezes analysis at an earlier stage of its development, it’s become synonymous with it! Close the hermeneutic circle, people!”

Someone asked me to elaborate on the claim that Marx pointed the way out of the labour theory, and that generated my own exercise in Marxology.

Ricardo’s labour theory of value – that the rate at which commodities exchange depends on the labour-time that goes into producing them (modified by capital intensity and skill, etc) – was set up in opposition to the idea that price is determined by adding up labour-time multiplied by the wage rate plus the necessary capital times the rate of profit. (Leaving aside the complications of rent.) Adam Smith presented eclectic theories of the determination of the wage and profit rate that were basically about supply-and-demand in the markets for labour and capital. These were each plausible in themselves, but they led to a mess together because they neglected the joint determination of wages and profit. For example, you could get the impression that if wages rose, because of a rise in demand for labour, the price of each commodity would rise to the extent of the labour used to produce it, while the rate of profit would remain the same.

Ricardo emphasised that that’s impossible because given the quantity of stuff produced in a period, if the real wage rises, so that workers are getting more of the stuff, capitalists must be getting less, and given the same value of capital, the rate of profit must fall, and there would be no general rise in prices because money, the measure of value, is a commodity too. (Relative prices would change, however, because of different capital intensities.) It was basically a long-run general equilibrium critique of partial equilibrium – that you need to follow the disturbance all the way through the whole chain of effects and not just limit yourself to supply and demand in the market of the original disturbance.

And when you do this, the system actually appears simpler rather than more complex – you can cut through all the eclectic bullshit and relate relative prices to simply the labour time and capital intensity of each commodity’s production. It can seem arbitrary as to whether you consider capital intensity to ‘warp’ the field of value determined by labour time, or labour time to ‘warp’ the field of value determined by capital intensity. But Ricardo believed differences in capital intensity (and rate of turnover) between different commodities would only have a minor impact on relative prices compared with differences in labour time – as George Stigler put it he had a “93% labour theory of value”. So it made more sense to say labour-time determines value but capital intensity modifies it.

Marx fully accepted all this as an advance on Smith and was often dismissive of mere ‘supply and demand’ analysis, which he portrayed as just determining short run fluctuations around long-run prices-of-production – again, it’s essentially a general equilibrium criticism of partial equilibrium analysis. He was much more specific than Ricardo about all the qualifications – insisting, e.g., on ‘socially necessary’ labour time – and I doubt Ricardo would have disagreed with this.

But from Ricardo’s time and Marx’s time the labour theory was pretty controversial – Ricardo dominated English political economy, but as a polariser rather than as someone everyone agreed with. And there were a lot of legitimate problems – most notably, the awkwardness in saying relative labour-time determines relative value, but then that relative capital intensity modifies the relationship. (Partial equilibrium) supply-and-demand analysis continued to be refined, and could take into account effects of one market on another and so on – it was much better at picking holes in the Ricardian theory than building a full alternative system. John Stuart Mill’s 1848 texbook presented a synthesis of Ricardo and these developments and superseded Ricardo’s Principles as the basic text of political economy until Marshall.

Marx was full of contempt for Mill and stayed old-school, which essentially meant prioritising long-run general equilibrium over short-run partial equilibria. His presentation made the ‘transformation’ from labour-time determined values to prices-of-production modified by relative capital intensities seem even more awkward – since he hardly mentions the need for this until Volume 3. Engels urged him to make it clearer from the start, and it’s debatable why he didn’t (his reply to Engels was flippant – that he deliberately wanted to piss off ‘vulgar’ economists).

I think it’s because of his method of presentation – he needs a basic concept of value to build the concept of capital, and can’t present the effects of capital back upon value until capital is fully ‘constructed’. Also there’s an awful lot you can say about distribution and fluctuations at a macro level without worrying about relative prices – Keynes would use labour-time as his basic unit of value at a macro level too. But if that’s the case, it follows from the Volume 3 analysis of competition that as far as relative prices are concerned, the (socially necessary) labour time values of Volume 1 are epistemological devices, _not_ ontological – i.e., labour-time value – in the microeconomic sense of relative prices – doesn’t exist in real capitalist economies, ‘under the surface’ or otherwise. Wherever labour-values are used in this microeconomic sense in Volume 1, you can go back after Volume 3 and read ‘prices-of-production’ instead.

But ‘the transformation’ is basically a restatement of Ricardo. The interesting thing is where the analysis of competition and prices-of-production in Volume 3 goes way beyond the ‘transformation’. In my opinion this is where Marx really points the way out of the Ricardian labour theory of value. It becomes clear that supply and demand – as modern economics conceives them – actually do play a role in establishing long-run values and prices-of-production, not merely the fluctuations around them. Marx’s problem with supply and demand analysis _as he knew it_ was that it didn’t explain what determined supply and demand at any given price. In modern neoclassical terms, the answer is supply and demand schedules which relate demand and supply to the range of possible prices.

Marx more-or-less develops the idea of supply and demand schedules in the chapters on competition in Volume 3. It follows naturally from his emphasis that value depends on ‘socially necessary’ labour time. ‘Socially necessary’ has a dual meaning. On the one hand, for single kinds of commodities, it refers to the fact that thanks to competition between producers, those commodities produced with relatively inefficient production processes obviously don’t sell for more. On the other hand, it refers to society’s allocation via the market of labour to different kinds of commodity in proportion to society’s needs (ultimately determined by who can pay, of course – and Marx emphasises the dependence of demand on distribution in Vol. 3, Ch. 10 – p. 282 of the Penguin edition).

Now, thanks to economies of scale etc., the amount of labour necessary to produce a particular commodity depends on how much of the commodity society demands. For example, it’s way more expensive per unit of steel to produce 100 tons of steel a year than it is to produce 1,000,000 tons of steel. So ‘socially necessary’ in the first sense depends on ‘socially necessary’ in the second sense – that is, the cost of steel depends on the demand for steel. But at the same time, the amount society demands of a particular commodity depends on its price relative to substitutes – so the demand for steel depends on the cost of steel. The only way to resolve this dilemma is to think in terms of supply and demand schedules – and this is in effect what Marx does.

For example, in explaining how the rise in price of a raw material affects the profit rate of the producer, Marx explains that it depends on how much the capitalist will raise his own price, which depends on his calculations of how it will affect demand – in other words partly on the price elasticity of demand for his product:

It is evident… that the expansion or contraction of the market depends on the price of the individual commodity and stands in an inverse relationship to the rise or fall in this price. It happens in fact, therefore, that a rise in the price of raw material does not lead the price of the manufactured product to rise in the same proportion, or to fall in the same proportion when the price of the raw material falls.” [vol. 3, ch. 6, p. 203 in the Penguin edition]

Another example from vol 3 ch 10 (p. 279 of the Penguin) where Marx basically edges towards the concept of demand (in)elasticity:

At a given price, a species of commodity can only take up a certain area of the market; this area remains the same through changes in price only if the higher price coincides with a smaller quantity of commodities and a lower price with a greater quantity. If the demand is so strong, however, that it does not contract when price is determined by the value of commodities produced in the worst conditions, then it is these that determine the market value.

The point of these quotations is not to say, ‘aha, Marx anticipated Marshall’. These are fragments that are not developed into a coherent statement, and the section is unfinished. It is, rather, to say

(1) that Marx himself recognised, at least implicitly, that determination of relative price by labour-time cannot be causally prior to demand in the market, because the size of the market for a commodity enters into the determination of the labour time necessary to produce it (due to economies of scale, etc); and

(2) that Marshallian (neoclassical) concepts can be a useful tool for dealing with this kind of question more systematically than Marx did.

Now, there’s also a debate in the literature about the extent to which John Stuart Mill anticipated Marshallian demand and supply curves. It certainly wasn’t only Marx that was groping in this direction. It’s generally accepted that Marshall got the idea from Cournot rather than Mill – but the point is it was in the air of Victorian political economy. Many of the early neoclassicals defined themselves as anti-Ricardians, arguing especially that he neglected the influence of demand. But Marshall argued in an appendix to his Principles that Ricardo did in fact implicitly incorporate it and even anticipated the distinction between marginal and total utility. He understood that the purpose of Ricardo’s labour-time theory was to go beyond the immediate supply-and-demand in the market – because if high demand raised a price and thereby profits, capital would move into that line and bring labour with it – so that ultimately labour-time, as a cost that enters into every commodity, regulates relative prices in the long run. Marshall believed this still to hold, although because of economies of scale etc, labour-time would be affected by the demand schedules for each product, just as Marx recognised.

In other words, the labour theory of value was thus a step towards equilibrium theory and a real advance over vulgar supply-and-demand theory. But conceptualising demand and supply as schedules opened the way to superseding vulgar labour-value theory in turn. When Marxists stick to the letter of Capital and quote Marx’s dismissals of supply and demand as determining nothing, and think this holds against neoclassical conceptions of supply and demand, they are falling into anachronism. Even if the neoclassical vision is problematic, the fact remains that it’s not what Marx was dismissing, and they therefore miss the opportunity to engage productively.

Published in: on 7 September, 2010 at 11:08 am  Comments (5)  

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  1. This is a quite excellent brief review.

    There is another point to consider which I would say is on a supra-economic level (or ontological if you will).

    The reality of a labor based concept of value is reinforced historically by the development of modern science and the atomization of the atom which occurs in quantum theory. Once you have E=MC2, the equivalence of energy and matter, and sub-atomic engineering then the value of various forms of matter becomes an effective constant to production cost.

    In the present epoch among the most revolutionary products of human labor are made from sand, i.e. silicon and glass. Much of the most valuable social services which exist to our society relate materially only to the travel of electrons.

    This is to say that the only essential element in determining the value of a commodity is human labor in the context that diamond can be fabricated out of wood and that the only decision as regards whether or not to make diamonds out of fir trees or coal or to mine them from the earth has to do with production costs and that the production costs themselves become reduced to socially-necessary labor time in both of the senses that you aptly describe above.

    From the point of view of economics as an isolated discipline your points are very well taken In the context of Marx’ critique of the “Fetishism of Commodities” a different point is being made than how the determination of value may be developed to have the most scientifically accurate predictive power.

    I am not being dismissive of the importance of scientific accuracy, but simply raising the political issue as it relates to Marx writings. Marx was calling upon the worker to understand her or his relationship to the creation of value in capitalist society and to understand his or herself as the source of value. It may be this political fact which leads certain writers to cling to the antiquated form of the labor theory.

    The development of economic science since Marx, including the development of neoclassical economics and even management theory a la Peter Drucker are as with all advancement of pure scientific knowlege an element of social progress.

    Modern society has at its disposal much more powerful tools to implement economic planning, management and control than did society at in the Victorian Era or even in the first half of the 20th Century.

    It is a bizarre aspect of sectarian socialist dialogue that all subsequent scientific development in economics is treated as heretic.

  2. Thanks Rawlin – and good point. I completely agree that there are more important things to Marx’s theory of value than the determination of relative price. I don’t think it’s very important to the broader theory whether or not there is a one-way causal relationship from socially necessary labour time to value or price, and in any case I don’t think Marx thought this, although it’s certainly implicit in Vol I. Re: ‘fetishism of commodities’ – I also think this is one of the most important points. I like Diane Elson’s line that Marx had a ‘value theory of labour’ more than a ‘labour theory of value’.

  3. I haven’t studied economics, nor really debated this stuff with economists. However the foreignness of Marx’s thought to many people who assert that they are giving a Marxist account of x, y, and z is outrageous; particularly with what Marx says in Capital. I think this foreignness is widespread and that a return to Marx is now beginning. But we need to remember Althusser’s injunction that our readings aren’t innocent.

    I think even from Capital I, a close reading indicates that Marx doesn’t have a labour theory of value; this is in essence what the notion of socially necessary labour-time destroys. It is the assumption that Marx has a labour theory of value that stops people reading this.

  4. sir, im a student at hsol and i have a reasearch about E=mc2, can you tell me what is the connection or what does that formula inflences the law of demand and supply in economics… e-mail me if you know please.. asap ,tnx

  5. sir may i ask?what is the connection of the formula E=mc2 to the law of demand and supply? need answer asap! pls… rasearch project…

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