Law of value

The law of value is a concept in Karl Marx's critique of political economy. Most generally, it refers to a regulative principle of the economic exchange of the products of human work: the relative exchange-values of those products in trade, usually expressed by money-prices, are determined (in some way) by the average amounts of human labour-time socially necessary to produce them. Thus, the exchange value of commodities is regulated by their value, where their value is a quantity of human labour (labor theory of value).

The field of application of the law of value is limited to new output by producers of traded labour-products, although it might indirectly influence trade in other goods or assets. Primary products are a special case, which Marx discusses in his theory of absolute and differential ground rent. World market prices for primary products can be strongly influenced by the yield of harvests and mines in different countries.

According to the law of value, the trading ratios of products reflect a real cost structure of production, and this cost structure ultimately reduces to the average amounts of human labour-time currently required to produce different goods and services.

This abstract idea was expressed by David Ricardo at the very beginning of his Principles of Political Economy and Taxation, as follows:

"The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour." ^*

At the most basic level, this law of value specifies "labor-content" as the substance and measure of economic value, and it suggests that trade will - other things being equal - evolve towards the exchange of equivalents. At the basis of the trading process is the economising of human time, and "normal" trading ratios become known to, or accepted, by economic actors.

However, Marx's real concern is to understand and analyse how the law of value determines or regulates exchange, i.e. how the law of value would assert itself in a society based on a universal market such as capitalism. He tries to do this by starting off with simplifying assumptions and then gradually building up a complex theoretical structure. His theory specifically aims to grasp capital in motion, i.e. how, through the circulation and dynamics of capital, changing expenditures of social labour are reconciled with (or fail to be reconciled with) changing social needs. This is obviously an enormously complex undertaking, and Marx did not get much further than to specify the main tendencies and dynamics, and "pure cases".

Economic value as such

Economic value exists necessarily, according to Marx, because human beings as social and moral beings must co-operatively produce their means of life to survive, and in so doing they are subject to relations of production. This involves three kinds of relationships which are objectively and empirically verifiable, and often formalised in law:

between people (social relations).
between people and their products (technical relations).
between products themselves (with or without trading prices; these are technical, economic or commercial relations).

The attribution of value to labor-products, and therefore the economising of their use, occurs within these three types of relationships interacting with each other. Over time, products acquire a normal exchange-value.

However, because these three types of relationships co-exist and interact objectively, as a given social fact, independently of particular individuals, it may appear that economic value is an intrinsic property of products, or alternately, that it is simply a characteristic that results from negotiations between market actors with different subjective preferences.

When more and more of human requirements are marketised, and a complex division of labor develops, the link between value and labor-time becomes obscured or opaque, and seems to exist only as an impersonal "market force" (a given structure of priced costs and sale-values) to which all people must adjust their behaviour. Human labor becomes dominated by the economic exchange of the products of that labor, and labor itself becomes a tradeable abstract value (see Abstract labour and concrete labour).

The result is that value and its source themselves becomes something of a mystery, and that how the attribution of value really occurs is no longer clear. The three relationships mentioned become mixed up, and are confused with each other, in commercial and economic discourse, and it appears that things and assets acquire an independent power to create value, even although value is a human attribution. Marx refers to this as commodity fetishism or thingification (Verdinglichung or reification) which culminates in what he calls fictitious capital.

The end result is that value theory is banished from economics as a useless metaphysics, surviving only in the form of assumptions made about price behaviour (after all, we cannot talk about price aggregates without assuming some valuation principle or criterion). Money-prices offer convenient quantifiable units of economic value, and no further inquiry into value is deemed necessary.

To solve the riddle of economic value, Marx argues, we must investigate the real historical origins of the conditions which give rise to the riddle in the first place, i.e. the real history of trade and the way that history has been reflected in human thought.

Is it an equilibrium theory?

Some authors have interpreted Marx's law of value as a theory of market equilibrium. However, Marx offered no theory of market equilibrium, only a dynamic theory of economic reproduction. In reality, markets were rarely in equilibrium anyway (that was more a hypothesis used by economists), and what explained the market behaviour of individuals and groups was precisely the imbalances between supply and demand.

Under capitalist conditions, balancing output and market demand depended on capital accumulation occurring. A capitalist economy was therefore in "equilibrium" so long as it could reproduce its social relations of production, permitting capital accumulation to occur, but this was compatible with all sorts of market fluctuations and disequilibria. Only when shortages or oversupply began to threaten the existence of the relations of production themselves, and block the accumulation of capital in critical areas (for example, an economic depression, a political revolt against capitalist property or against mass unemployment), a genuine "disequilibrium" occurred; all the rest was just ordinary market fluctuations.

So this kind of Marxian "equilibrium" was more a condition of social stability, not a hypothetical and unverifiable perfect match between supply and demand under idealised, static conditions. In any case, real social needs and their monetary expression through market demand might be two very different things. Economic equilibrium was not created by a perfect match of supply and demand, but by the social framework which permitted the balancing act to occur. The role of the political state was essential in this (see Kay & Mott 1982).

The difference between the equilibrium theories of neoclassical economists and Marx's theory of economic reproduction can be illustrated with a simple analogy. It is extraordinarily difficult to stay in balance while sitting on an ordinary bicycle, if the bicycle is stationary; but as soon as forward motion is achieved, balance is usually also achieved (give or take a few close shaves, perhaps). That balance therefore exists as a motion involving the rider, the bike and the ground. All of these are necessary. If we just focused on the rider and the bicycle only, and ignored the ground, we would miss an important factor, to our peril.

A physicist would no doubt explain all this in terms of momentum, mass, velocity, kinetic energy, gyroscopic forces, torque and the law of gravity. The law of value performs a similar function in economic science. It tells us that the trading pattern in a society does not behave chaotically or arbitrarily, but is regulated at the very least by the relative proportions of work effort involved. Exchange-value thus expresses a necessary relationship between the demand for a good, and the quantity of society's labour-time required to produce it.

By contrast, what economists often concern themselves with is a question of this type: suppose the purpose of the bicycle is to be perfectly stationary, and the rider to sit on it while perfectly stationary. Under what conditions would the balancing act then be successful? What kind of bike would we need? What skills does the rider need? Which is interesting to speculate about.

Obviously, while riding the bicycle, a potential risk exists that it will crash or collide with something; balance may be lost momentarily, yet also quickly restored. But the point is, we learn little about the possibilities or conditions for such an imbalance or crash from only examining the necessary conditions for a balancing act on a stationary bicycle - except trivia such as that if balance is not achieved, the rider must fall to the ground. We have to study the whole phenomenon interacting in motion.

More sophisticated econometric models in fact do this, by identifying the quantitative effects of the interaction of many different economic trends; this is sometimes referred to as "dynamic equilibrium", but it is often no longer clear what exactly is being equilibrated, or what the equilibrium would consist in. It is more a theory of how to prevent the decline or collapse of the circulation of commodities, money and capital.

Factors counteracting the law of value

The main factors counteracting the operation of the law of value, as a law of economic exchange, are:

structural unequal exchange - alternative or competing sources of supply or demand are absent or blocked, distorting trading ratios in favour of those in a stronger market (or bargaining) position. In that case, the true value or cost of products may deviate greatly from actual selling prices.

other restrictions on trade and what people may do with resources (legal, technical, protectionism etc.).

disparities in currency exchange rates.

the large-scale use of credit economy to acquire goods and services produced, without corresponding increases in production occurring.

non-market allocation of resources, including gifts, grants and subsidies, or countertrade (forms of barter).

accumulation of fictitious capital (bubble economies).

dumping of surplus goods at dumping prices.

All of these phenomena occur to some degree or other in any real economy. Hence the effect of the law of value would usually be mediated by them, and would manifest itself only as a tendency. However, there are many indications that Marx believed the future would see an increasingly "purified" capitalism. That is, obstructions to market expansion would be cleared away through privatisation and removal of legal or technical restrictions on trade, and that would in turn mean that the law of value would impose itself more, not less. Thus, the socially average real production costs would then influence the trading ratios in economic exchange more, not less; the allocation of goods would be determined more by private costs and private profits.

Law of value in capitalism

Marx argues that as economic exchange develops and markets expand, the law of value is modified in its operation.

Thus, capitalism is a type of economy in which both inputs and outputs of production have become marketed goods and services (or commodities). In such an economy, Marx argues, what regulates the economic exchange of labour-products is their prices of production, i.e. cost-price + average profit. In pre-capitalist societies, where inputs often were not priced goods, such an expression would be meaningless. The corollary is the free movement (or at least mobility) of labour and capital among branches of industry.

Another way of saying the same thing, is that "sale at production prices becomes the normal precondition of supply" for new output produced (although in particular cases, fluctuating market prices might be above or below the production price). This means that the exchange values realised in trade reflect not only a true production cost, but also a "mark-up" or surplus-value in excess of that cost. Usually this is in a range of perhaps 8-15% of capital invested (net) or about 10-40% of product market prices, depending on the case.

Capitalist economic exchange, Marx argues, is not a simple exchange of equivalents. It aims not to trade goods and services of equivalent value, but instead to make money from the trade (this is called capital accumulation). The aim is to "buy as cheaply as possible, and sell as dear as possible", under the constraint that everybody has the same objective. The effect is that the whole cost-structure of production permanently includes profit as an additional impost. In an overall sense, Marx argues the substance of this impost is the unpaid surplus labour performed by the working class; part of society can live off the labour of others due to their ownership of property.

In this situation, output values produced by enterprises will typically deviate from output prices realised. Market competition for a given demand will impose a ruling price-level for a type of output, but the different competing enterprises producing it will take more or less labour to produce it, depending on productivity levels and technologies they use. Consequently, output values produced by different enterprises and output prices realised by them will typically diverge (within certain limits). That divergence becomes a critical factor in capitalist competition, under conditions where the average price-levels for products are beyond anyone's control.

If capital accumulation becomes the dominant motive for production, then producers will do everything they can to cut costs, increase sales and increase profits. Since they mostly lack control over the ruling market prices for their inputs and outputs, they try to increase productivity by every means at their disposal and maximise surplus labour. Because the lower the unit-costs of goods produced by an enterprise, the greater the margin will be between its own production costs and the ruling market prices for those goods, and the larger the profits that can be realised as result when goods are sold. Producers thus become very concerned with the value added in what they produce, which depends crucially on productivity.

This leads to constant attempts to improve production techniques to cut costs, but ultimately also to a decline in the labor-content of commodities. Therefore, their values will also decline over time; more and more commodities are produced, for a larger and larger market, at an increasingly cheaper cost. Marx claims that this trend happens "with the necessity of a natural law"; producers had no choice about doing what they could in the battle for productivity, if they wanted to maintain or increase sales and profits. In business, if you don't go forward, you go backward. That was, in Marx's view, the "revolutionary" aspect of capitalism. However, competition inexorably gives rise to market monopolies, which may constrain further significant advances in productivity and innovation.

In a developed capitalism, the development or decline of the different branches of production occurs through the continual entry and exit of capital, basically guided by profitability criteria, and within the framework of competition. Thus, supply and demand are reconciled, however imperfectly, by the incessant movements of capital. Yet, Marx argues, this whole process is nevertheless regulated by the law of value; ultimately, relative price movements are determined by comparative expenditures of labour-time.

In economic crises, Marx suggests, the structure of market prices is more or less suddenly readjusted to the evolving underlying structure of production values. Another way of saying this is, that the law of value will ultimately assert itself, by forcing a change in relative prices, in conformity with real production costs. In turn, this implies that although production values and market prices can diverge significantly from each other (in particular, because there exists no "perfect competition" - competition involves also blocking competitors), there are also limits to the possible discrepancies (because ultimately competitors will bring down artificially inflated prices, and goods continually sold below value would eventually put producers out of business).

Smith's hidden hand

Neo-classical economics holds that, left to themselves, markets will balance supply and demand relatively quickly. If equilibrium does not exist, it will exist in the future, provided obstacles to market functioning are cleared away.

In his Bundesbank speech on January 13, 2004, US Federal Reserve chairman Alan Greenspan, stated:

This was a reference to Adam Smith's Wealth of Nations (1776) where Smith wrote:

Marx's theory of how the law of value operates in capitalism aims to reveal what the "hidden hand" of markets theorised by Adam Smith really consists of. It aims to explain how it comes about, that the markets get "a life of their own", by showing what drives the markets, and how the market-balancing process actually occurs.

But it can do so only by distinguishing between a domain of value-relations and a domain of price-relations, and between potential values and actual prices realised; after all, a process is involved whereby products move into markets, are sold for a price, and then move out of markets; this can be rationally understood only by assuming a temporal continuity (or conservation) of product-values through successive exchanges.

Another "take" on the law of value, from an investor's perspective, is by George Soros:

In the real world, investors are constantly juggling between actual market prices and hypothetical (ideal) prices, based on assumptions about what the objective value of a good (its "real worth") is likely to be, now and in the future. A difficulty here is that the majority of objects of value in a society at any time don't have any actual market price, because they are not being traded. Thus, value relations between those objects objectively exist, but at best these can only be approximated or estimated in price terms.

Marx tries to model the market outcomes macro-economically with regard to new outputs from production, assuming that values and prices will diverge, the argument being that this divergence will create a systematic pattern of economic behaviour by producers and investors. He is not interested in the circus-act of a clown balancing on a stationary bicycle, but in the bicycle ride.

Modification of the law of value in the world market

Marx believed that the operation of the law of value was not only modified by the capitalist mode of production, but also in the world market (world trade, as contrasted with the home market or national economy). The main reason for this was the existence of different levels of the intensity and productivity of labour in different countries, creating for example a very different cost structure in different countries for all kinds of products.

Products that took 1 hour of labour to make in country A might take 10 hours to make in country B, a difference in production costs which could strongly influence the exchange values realised in the trade between A and B. More labour could, in effect, exchange for less labour (an "unequal exchange" in value terms). In addition, the normal rate of surplus value could be different in different countries. Obviously, traders would try to use this differential to their advantage, with the usual motto "buy cheap, sell dear".

Among German Marxists, Marx's fragmentary remarks on the law of value in a world market setting stimulated an important theoretical debate in the 1970s and early 1980s. One aim of this debate was to move beyond crude Ricardian interpretations of comparative advantage or comparative costs in explaining the pattern of world trade. To some extent similar debates took place in the USA (cf. Anwar Shaikh's work), France (Samir Amin) and in Japan (cf. e.g. Makoto Itoh's work available in English).

In particular, when the volume of intra-industry trade (IIT) between countries grows (i.e. the same kinds of products are both imported and exported by a country, e.g. cars, wine, beer, vegetables), and when different branches of the same multinational import and export between countries with their own internal price regime, comparative advantage theories do not apply. Nowadays, Marxian scholars argue, comparative advantage survives mainly as an ideology justifying the benefits of international trade, not as an accurate description of that trade.

The operation of the law of value in the world market might however seem rather abstract, in view of the phenomena of unequal exchange, differences in accounting norms, protectionism, debt-driven capital accumulation and gigantic differences in currency exchange rates between rich and poor countries. These phenomena can create very a significant distortion in world trade between market prices for goods, and the real production costs for those goods, resulting in superprofit for the beneficiaries of the trade.

Jayati Gosh writes:

That is, the value and physical volume of manufactured exports by developing countries increased gigantically more than the actual income obtained by the producers. Third world exporters might have got mighty rich, but the reality is that third world nations received less and less for what they produced for sale in the world market, even as they produced more and more; this is also reflected in the international terms of trade for manufactured products.

The postulate of the law of value does however lead to the Marxian historical prediction that global prices of production will be formed by world competition among producers in the long term. That is, the conditions for producing and selling products in different countries will be equalised in the long run through market integration; this will be reflected also in international accounting standards. Thus globalisation means that incipiently the "levelling out of differences in rates of profit" through competition begins to operate internationally. Trading ratios and exchange-values for products sold globally would thus become more and more similar, in the long term. This hypothesis can obviously be empirically tested by means of international price comparisons.

A comment by Marx on the law of value

In his letter to Louis Kugelmann of July 11, 1868, Karl Marx commented gruffly:

A comment by Frederick Engels on the law of value

The law of value in non-capitalist societies

There has been a long and drawn-out debate among Marxists about whether the law of value also operates in non-capitalist societies where production is directed by the state authorities.

In his famous pamphlet Economic Problems of the USSR, Joseph Stalin argued that the law of value did operate in the socialist economy of the USSR. After all, Marx had stated in Das Kapital that:

Supporters of the theory of state capitalism in the USSR and scholars such as Andre Gunder Frank likewise believed that the law of value operated in Soviet-type societies. However, it is not always clear what they mean by the law of value, beyond the vague idea that the direct producers remain dominated by their own products, or that labour costs remain important, or that Soviet-type societies remained influenced by the world market.

According to Ernest Mandel, the law of value, as a law of exchange, did influence non-capitalist societies to some extent, inasmuch as exchange and trade persisted, but because the state directed the bulk of economic resources, the law of value no longer ruled or dominated resource allocation. The best proof of that was, that there was mostly no clear relationship at all anymore between the exchange-value of goods traded, and what it really cost to produce them; accounting information, insofar as it was valid, might in fact be unable to show anything about the real nature of resource allocation. Insofar as social priorities ensured that people got what they needed, that was a good thing; but insofar as resources were wasted because of a lack of sensible cost-economies, it was a bad thing. Cost-accounting is, of course, no more "neutral" than profit-accounting; a lot depends on what costs are included and excluded in the calculation.

Che Guevara adopted a similar view in socialist Cuba; if more resources were directly allocated to satisfy human needs, instead of commercially supplied, a better life for people would result. Guevara organised an interesting conference at which the theoretical issues were debated (see Silverman 1971).

Some Marxist authors, such as John Weeks, have argued that the law of value is unique to an economy based on the capitalist mode of production. They reject the claim by Engels that the law of value is associated with the entire history of economic exchange (trade), and modified when all inputs and outputs of production have become marketed commodities.

Other Marxists (including Ernest Mandel and the Japanese scholar Kozo Uno) followed Engels in believing that the law of value emerges and develops from simple exchange. Here, it is argued that, if the law of value was unique to capitalism, it becomes impossible to explain the development of precapitalist commodity exchange or the evolution of trading processes in a way consistent with historical materialism and Marx's theory of value. So a better approach, it is argued, is to regard the application of the law of value as being modified in the course of the expansion of trade and markets, including more and more of production in the circuit of capital. In that case, a specific society must be investigated to discover the role that the law of value plays in economic exchange.

(Post-)modern thinking about the topic

It has become increasingly clear to intellligent economists that there is not one principle that can explain resource allocation in any real society, nor that economies allocate resources only according to one principle.

It is virtually meaningless to elevate one principle, such as markets or planning, to be the only one explaining resource allocation. So-called "free" markets cannot exist without substantial social and economic regulation, enforced by the political state, and all sorts of non-market activity. Economic "planning" cannot occur without accounting for inputs and outputs in price terms. And so on.

Different methods for resource allocation are only a means or technique to achieve social goals. A society might wish to apply different criteria, such as justice, fairness, efficiency, equality, ecological sustainability, and so on. But this does not mean that any technique used is intrinsically good or bad, independently of the effect it has when it is applied, within a given social framework. This gives rise to new moral debates, because a shared morality is often lacking.

Marxists have often been hostile to markets, while Liberals have been hostile to state planning or dirigisme. Behind these hostilities are social and moral philosophies about what is best for people. However, often the technique of resource allocation used has the opposite effect of what is intended. The reason is that people ignore the real power and property relationships involved. It would be wrong to think, for example, that there is only one kind of exploitation possible.

The challenge for the future is then to devise methods for allocating resources which combine democracy, planning and markets in such a way, that social inequality does not become extreme (causing immorality and crime), that economic growth occurs efficiently, and that production is ecologically sustainable. This is primarily a political question; the economic techniques are known, but that does not mean necessarily that they will be applied.

In postmodern thought, the idea of a "ledger" as the arbiter of truth is questioned. In other words, who is to say what are the real "costs" of an activity? Who is to say what are the real "benefits" of an activity? In that case, there are no longer any agreed objective criteria with which to judge the gains and losses from economic activities. For business people, however, net profit and sales figures remain the "bottom line" of what they do, and the objective criterion of economic success.

Criticism

Traditionally, criticism of Marx's law of value has been of three kinds:

conceptual
logical
empirical

The conceptual criticism concerns the concept of value itself. For Marx, value was an objective social characteristic of labour-products, exchanged in an economic community, given the physical reality that products took a definite amount of society's labour-time to produce. Critics however argue that economic value is something purely subjective, determined by personal preferences and marginal utility; only prices are objective.

However, many prices are not objective either - they are only ideal prices used for the purpose of calculation, accounting and estimation, not actually charged or applying to anything real. Yet, these notional prices can nevertheless influence economic behaviour. Economists then debate about when a price can be said to be "objective". Objectivity of prices, could be taken to mean e.g. only that the prices are empirically observable, not that they are independent from subjective values. But many prices are not empirically observable either.

In almost all cases, cars will sell for more than carrots, but why? If value is subjective, all we can say is that people value cars more than carrots, or that cars are more in demand than carrots. Marx argues by contrast that cars and carrots have different objective costs of production, reducible to different amounts of labour-time. So cars will always cost more than carrots; one car will trade for, or be worth, quite a few tonnes of carrots, at least in the normal situation.

Against this view, one could also argue that objective amounts of comparable resources (such as energy, land, water, etc), necessary to manufacture a car, are much larger than resources necessary for growing a carrot, explaining why the cost (and, hence, minimal price) of a car is larger than the cost of a carrot. In other words, it is the total input costs (including costs of labour), not the amount of labour per se, which create the difference in costs (and, therefore minimal equilibrium prices) of the goods. Marx however argues that most of such costs are again reducible to direct and indirect costs in human labour time.

Austrian economics explicitly rejects the objectivity of the values of goods as logically and conceptually unsound. On this view, we cannot validly say that products took a certain amount of labour, energy and materials to make, and compare them on that basis. It follows that the Austrian school thinks most contemporary economic theory is invalid, as it relies in one way or another on the aggregation and comparison of actual and ideal prices. The problem with Austrian economics however is that it has no explanatory power at all; all we can say about a realised price is that it reflects a subjective preference. And there are billions of subjective preferences, all different. Of course, the Austrian economist is not "subjective" at all about his own bank account, he wants his money to be there, regardless of any subjective preference by anybody else.

The logical criticism revolves around the idea that Marx is unable to reconcile the domain of value relations and the domain of price relations, showing exactly how value magnitudes correspond to price magnitudes. Various arguments are made to show that Marx's theory of value is logically incoherent. The most famous of these is the controversy about Marx's prices of production, sometimes called the transformation problem in which it is argued that total output value must equal total output prices, and total profits must equal total surplus value, so that the distribution of particular output values and output prices can then be inferred from each other, via mathematical functions.

However, product-values in Marx's sense themselves can only be expressed as trading ratios, prices, or quantities of labour-time, and therefore this exercise is fruitless. As soon as we admit that prices may fluctuate above or below values for all kinds of reasons, the relation between values and prices is at best probabilistic, not a fixed function of some type. Value theory offers an interpretation, generalisation or explanation concerning relative price movements, and of economic behaviour in capitalism as a social system, but it is not possible to deduce specific real prices from values according to some mathematical function. What we can verify is, to what extent production-costs and the ruling profit rates actually determine market prices.

The empirical criticism is simply that there is no observable quantitative correspondence at all between changes in relative expenditures of labour-time and changes in relative market prices, however measured. This is undoubtedly the strongest criticism, but there exists very little research to back it up. Most critics have tried to refute Marx's theory with a mathematical model, rather than actually looking at real data to see if the capitalist economy behaves in the way Marx claims it does. Of course, Marx is not talking about all prices, only about a theory of what regulates production prices of new output (which may deviate themselves from actual market prices, and may be observable only by comparing price aggregates during an interval of time).

These three lines of criticism lead the critics to the conclusion that Marx's law of value is metaphysical and theoretically useless. Everything he says can be restated in terms of prices, real or ideal, so what is the point then of any theory of "value"?

Austrian economics goes a step further by attributing no special objective meaning to price levels at all, which it considers a mere "statistical outcome" of comparisons between each party's ratios between the value of money (taken to be just another kind of a good) to values of goods being sold or purchased. The prices, therefore, are knowledge, which may (or may not) influence behaviour of economic agents differently in each particular case. However, this approach is inconsistent, insofar as nothing in their theory entitles the Austrians to aggregate prices at all; because each price expresses a unique subjective preference, adding up prices is like adding up apples and pears. The Austrian theory says only that "markets are good" but cannot consistently specify why.

Clearly Marx himself thought that the concept of value was necessary to explain the historical origins, the development and mode of functioning of capitalism as a social system, under conditions where traded, priced assets were only a subset of total assets possessing a potential exchange-value. If the economy just consisted of prices, Marx's theory would be unnecessary, but it doesn't just consist of prices.

Marx asked questions like: if supply and demand are equal, what then explains the price-level? If goods trade at their real value, what explains the increase of value occurring in production? If competition settled a particular average profit rate, why that average level, and not any other? Price theory ended up in an infinite regress here, of explaining prices by other prices by other prices, and so on. But as soon as it was admitted that prices were the monetary expression of exchange-value in the trading process, one had to explain where that exchange-value came from, and how it was established. And that required a theory of economic value and trade.

The economists assumed all sorts of things about an economy and economic actors, in order to build models of price behaviour; Marx thought those assumptions themselves needed to be looked at and theorised consistently. However, his critics claim that his own approach has hidden assumptions as well, and that these assumptions obviously contradict the empirically observable reality of human action. In the letter by Marx cited above, Marx anticipated this criticism, which he regarded as very shallow. For thousands of years, people believed that the sun revolved around the earth (after all, we can observe how the sun rises in the East and sets in the West) until science revealed that just the opposite was the case. It is perfectly possible not only to participate in market trade without much knowledge of markets and their overall effects, but also to participate in markets with a false or one-sided interpretation of what is really going on in the exchanges. In this sense, Marx warns that market trade can stimulate all sorts of delusions about what relationships are really involved.

A Californian perspective: Jim Devine on the Law of Value

In an essay available on-line (see below), Prof. James Devine provides an interesting argument which suggests that critics of Marx's law of value are really barking up the wrong tree. Their arguments are based on an interpretation of Marx as a "minor post-Ricardian" who tried to deduce a "labour theory of price". But, he argues, Marx's intent was something else. Devine cites Charles Andrews's book From Capitalism to Equality as an example of a modern US analysis using the concept of the law of value (see http://www.laborrepublic.org/).

Steve Keen and the machine

In an important new book, Debunking Economics, Steve Keen tries to pull the rug from under Marx's theory with a stunningly simple argument: machines can add more product-value over their operational lifetime than the total value of depreciation charged during those asset lives. Depreciation, he implies, was really the weak point in Marx's social accounting system all along, and Keen's case will hold irrespective of whatever definition of economic, real, or tax-assessed depreciation is used.

Marx wrestled with the problem of depreciation a lot, discussing it with Frederick Engels and so on. But he remained insistent that only human labour could create net new value; machines did not create any new value by themselves; instead human beings conserved the value of machines, and transferred their value to the new products. Therefore, logically, machines could add no more value than was implied by the labour it took to make them, or perhaps more precisely, their current value in society.

This raises the problem of whether Marx or Keen is correct, and how we know that. In the machine age, it certainly seems that the argument favours Keen. Marx would no doubt come back though with the argument that Keen had devalued the work effort of the man behind the machine, an instance of reification or techno-fetishism. The worker was, in truth, not an appendage of the machine, but the machine was an appendage of the worker. Thus, before saying "all power to the machine", one ought to say "all power to the working class". But Keen would think this is an instance of religion; for him, value denotes essentially a difficulty.

References

Karl Marx, Das Kapital.
Thomas T. Sekine, The Necessity of the Law of Value, its Demonstration and Significance. ^*
Geoff Kay and James Mott, Public Order and the Law of Labour (MacMillan, 1982).
Anwar Shaikh papers ^*
Ed Chilcote, "Classical Theories of Reproduction and Accounting" ^*
W. Paul Cockshott and Allin F. Cottrell, "Value's Law, Value's Metric", September, 1994 ^*
Bertram Silverman, Man and Socialism in Cuba; The Great Debate. New York: Atheneum, 1971.
Tilla Siegel, Kapitalismus als Weltsystem.
Tilla Siegel, "Politics and Economics in the Capitalist World Market: Methodological Problems of Marxist Analysis", in: International Journal of Sociology, Vol. XIV, no. 1., Spring 1984.
Klaus Busch, Die Multinationalen Konzerne.
Klaus Busch, Gunther Grunert, and Walter Tobergte, Strukturen der Kapitalistischen Weltoekonomie.
Oliver Nachtwey, Weltmarkt und Imperialismus - Zur Entstehungsgeschichte der klassischen marxistischen Imperialismustheorie. Neuer ISP-Verlag Köln 2005, 116 S. ISBN 3-89900-021-8
Guglielmo Carchedi, For Another Europe: A Marxist Analysis of the EU
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James Heartfield, The Economy of time ^*
Jim Devine, "Is Marx's "Labor Theory of Value" True? What's LoV Got to Do with It?" ^*
Steve Keen, Debunking Economics; The Naked Emperor of the Social Sciences. London: Zed Press, 2005. ^*
Ian Wright, "The Emergence of the law of value in a dynamic simple commodity economy" ^*
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Andrew J. Kliman, "The law of value and laws of statistics: sectoral values and prices in the US economy, 1977--97". Cambridge Journal of Economics, 2002, vol. 26, issue 3, pages 299-311.
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Samir Amin, The Law of Value and Historical Materialism. New York: Monthly Review Press, 1978

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