Saturday, July 17, 2010

the labour theory of value

There was a nice tribute to Joan Robinson in the Guardian the other week, which might just have sold a few copies of her Economic Philosophy (3s 6d, the only Robinson book you can easily get). This is a nicely written, and appropriately sceptical, book about economics for the general reader. But for some reason Robinson has a horrible, mystical understanding of Ricardo's labour theory of value. Since the labour theory of value is the basis for the theory of free trade, I think we had better try to reconstruct Ricardo's theory, in the interests of the continued supply of consumer tat.

1. The price of any good can ultimately be decomposed into profit (Π) and labour cost (Λ) items, by adding up the labour cost and profit items of all componant items back to unaided labour. This procedure gives the totals of decomposed labour cost and profit, which I am writing as Λ* and Π*. Labour cost is taken to be a necessary cost of production, and profit represents surplus production.

I1 represents the cost of intermediate goods. This is meant to demonstrate how the price of beer can be broken down to labour costs and profit. I actually regret using the greek letters now.

2. If profit is a function of capital employed in any industry, and tends to an equal rate, across industries and transhistorically, then the sum of all decomposed profits contributing to the price of a commodity will be related to the total capital employed in its production, or decomposed capital, K*. In this case:

K* = aΠ*

where the coefficient "a" is a constant.

3. In classical economics capital is generally taken to be equivalent to annual costs. Since total necessary costs are equivalent to decomposed labour costs, Λ*, it seems reasonable to assume that capital will be a linear function of decomposed labour costs, Λ*, so that:

K* = bΛ*

if this is the case, profit can be expressed as a function of decomposed labour costs:

Π* = (b/a)Λ*

since a commodity's price is the sum of Π* and Λ*, the price, "p" is equivalent to

(1 +b/a)Λ*

price is a linear function of labour applied if the capitalisation of total decomposed labour costs is a linear function of these costs, and labour performed is proportionate to its cost.

4. However, if production is split between different capitalists, for instance if one capitalist produces malt as an input for another capitalist producing beer, then the capitalist working with the produced input, the beer producer, evidently has direct costs exceeding the decomposed labour of his input cost. His costs also include the profit of the malt producer. If the normal classical rule for capitalisation of costs is applied to each capitalist's direct costs, then total capital will cease to be a linear function of total decomposed labour costs.

5. but the classical rule for the capitalisation of costs is only really applicable to pre-industrial capital, in the mid 18th Century this rule would be about right for agricultural capital, merchant's capital and loan capital. In each of these cases a one-off payment of total costs is made in the expectation of a larger return at a specific time in the future. For industrial capital, rates of capitalisation vary.

I've tried to show that Ricardo's labour theory of value was a reasonable scientific theory, and in no way mystical, and why prices in modern industrial capitalism aren't a linear function of decomposed direct labour costs. This fact doesn't invalidate Ricardo's economics, which works just as well with varying rates of capitalisation and profit, it just complicates things. Marx uses "labour" to describe the sum of profit and labour costs, so the price of any good equals its labour value by definition.

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