This March marks the 30th anniversary of the election of Mikhail Gorbachev to the post of general secretary of the then-ruling Communist Party of the Soviet Union. At first, the election of Gorbachev seemed to involve a long overdue shift of power to a new generation of Soviet leaders. As we now know, it involved a lot more.

A process was unleashed that was soon to be called “Perestroika.” In the name of “radical economic reforms,” the Soviet planned economy was progressively dismantled. Perestroika ended not only with the restoration of capitalism but the breakup of what had been the Soviet federation.

The combined process of the restoration of capitalism and breakup of the Soviet federation was accompanied by a massive collapse of both industrial and agricultural production. The living standards and life expectancy of the working class plummeted. A generation later, the economies of not only the Russian federation but the economies of the other former republics are yet to recover.

Perestroika led to a wave of capitalist counterrevolutions that in 1989 swept through eastern Europe with the active support not only of imperialism, as would be expected, but also the Gorbachev government. As part of this process, Germany was reunited on a capitalist basis while staying in NATO. (1) The former socialist countries that had been members of the now dissolved Warsaw Pact joined NATO as did the former Soviet Baltic republics of Latvia, Lithuania and Estonia. The Georgia Republic—Stalin’s homeland—is very close to NATO and openly striving to become a formal member, while the new right-wing government in Ukraine has joined NATO in all but name.

Perestroika, therefore, resulted in a massive expansion of the U.S. world empire into the one area of the planet—the Soviet Union and its allies—that remained outside the Empire after World War II.

The destruction of the Soviet Union and the Soviet bloc and their planned economies would have been enough if that was all that was involved. But it was not. The capitalists and their spokespeople everywhere pointed to the Soviet collapse as final proof that “socialism had failed.” The result was a wave of demoralization that spread through a workers’ movement that was already in retreat before the neoliberal capitalist offensive symbolized by such political figures as Ronald Reagan and Margaret Thatcher.

National liberation movements were also pushed back, though the hopes of political figures such as Ronald Reagan and George W. Bush that the old-fashioned colonialism that had dominated the world in 1914 would return—with the difference that the United States and not Britain or France would be the chief colonizer—has not been so easy to achieve.

Between November 7, 1917, when the Bolshevik-led Congress of Soviets seized power, and the election of Gorbachev as general secretary of the CPSU Central Committee in March 1985, the peoples of the oppressed nations got accustomed to the idea that they should be independent and not colonial slaves of the West. Therefore, attempts by the U.S. world empire to push these nations and peoples back into something like pre-1914 colonial relationships have met, to the chagrin of the imperialists, unexpected and growing resistance.

However, the woeful events that began to unfold in the Soviet Union 30 years ago with Gorbachev’s election continue to cast a dark shadow over the early years of the 21st century. With both Communism as well as radical (bourgeois) democracy seemingly discredited—for example, the outcome of the “Arab Spring”—the influence of religious leaders who point to the distant past as a model for the future has increased. The slogan “Islam is the answer” has gained traction among young people in the Middle East and other countries disillusioned with both Communism and bourgeois democracy. This is reflected in the continuing influence of Al-Qaeda among some youth, and the rise of the Islamic State.

We also can’t ignore the long-term effects of Perestroika on the politics of the imperialist countries themselves. People who are 30 years of age or younger have no memory of a world that included the Soviet Union. Increasingly, this rising generation is thoroughly disgusted with the reigning monopoly capitalist order, which is denying the vast majority of them the possibility of getting meaningful jobs—beyond work in the fast-food, hotel and other “low wage” service industries.

But since the current generation of youth has been taught that the Soviet Union was a bloody failure, young people are highly skeptical of the “Marxism-Leninism,” “Maoism” and “Trotskyism” that are all associated in one way or another with the Russian Revolution. Instead, today’s radicalizing youth tend toward either anarchism, semi-anarchist ideas that were widespread in the “Occupy Movement,” or more recently, to broad left formations like Greece’s SYRIZA and Spain’s Podemos, which promise to cure the worst ills of capitalism while keeping their distance from the Russian Revolution and any notion of the dictatorship of the proletariat and centralized economic planning.

This negative attitude of today’s youth toward the “20th-century socialism” associated with the Russian Revolution is shown by the portraits that we see—and don’t see—at popular demonstrations. A generation ago, it was not that unusual to see portraits of Marx, Engels, Lenin, Mao, Trotsky and occasionally even Stalin at demonstrations. (2) Such portraits are rare today. But there is one exception—portraits and images of Che Guevara.

Recently, I watched a PBS program on efforts to preserve and revive small languages that are in danger of dying out. One such language that is undergoing a revival is Welsh. And there was Che Guevara looking out of the screen, almost a half century after his death in Bolivia as he had done in life, defying world imperialism and reaction. Naturally, PBS ignored the portraits of Che that stared from the screen. Che, however, cannot be ignored.

Did the disasters that began to engulf first the peoples of the Soviet Union and then the rest of the world exactly 30 years ago this March stem from the fact that Gorbachev was an incompetent or even evil leader? If the plenary meeting of the CPSU Central Committee had chosen another person to be general secretary, could the disaster have been averted?

As Marx remarked in criticizing Victor Hugo’s polemics against Louis Bonaparte—Napoleon III—to credit an individual who becomes a tool and symbol of reaction and counterrevolution for singlehandedly creating the reaction and counterrevolution is to make the individual great rather than small. I certainly do not want to do that with the likes of Gorbachev.

Che Guevara warns of counterrevolution

By all accounts, Mikhail Gorbachev is a mediocre man of limited intelligence. To find the real reasons for the counterrevolutionary events that began with the election of Gorbachev, we have to examine the course of the class struggle both within the Soviet Union and the rest of the world as it unfolded between November 1917 and March 1985. In reality, the counterrevolution that began to emerge into the open in March 1985 had been gestating for decades. And though he died at the hands of CIA killers in 1967 when few people had ever heard of Mikhail Gorbachev, Che Guevara had already sounded the alarm against the approaching counterrevolution in the socialist countries.

This blog is devoted to crisis theory and not the history of the global class struggle within and without the Soviet Union as it developed between November 1917 and March 1985. Nor has or will this blog tackle the problem of how a future socialist planned economy will be run. I frankly find most writings by Western Marxists on this subject both naive and utopian.

However, Che Guevara, unlike most Western Marxists, had actual experience with a planned economy—he played a crucial role in the formulation of Cuban economic policies during the early 1960s. Che was thus in a position as a leader of the newest socialist country in the world to closely observe the actual experience—both positive and negative—of the Soviet bloc as an “insider.” And not least, he was a genuine friend of the Soviet Union, unlike many ultra-left critics in the West who often echoed capitalist attacks on the socialist camp “from the left.”

The unknown Che Guevara

The Argentine-born Che Guevara (1928-1967) was above all known as a man of action, the “heroic guerrilla,” as he is called in Cuba. He voluntarily gave up his high posts in the party and government in Cuba to return to the trenches, first in the Congo and then in Bolivia, where he met his heroic death at the hands of the class enemy. If there had been nothing more of Che Guevara, that would have been more than enough. But in fact there was more to Che Guevara, a lot more.

Che was very concerned about the problems of building a socialist economy. As is well known, he believed that it was necessary to appeal to the idealism and sense of solidarity of the mass of workers and their allies through what he called moral incentives and voluntary labor as opposed to the individual material incentives that were increasingly favored in the Soviet Union and the eastern European socialist countries—though it should be noted that Che didn’t reject individual material incentives entirely.

Less well known is Che’s fascination with emerging technologies of the 1960s, especially computer technology, as crucial to building a socialist, and ultimately a communist, society. Unlike the “reformers” in the Soviet Union, he was not only fascinated with the possibilities opened up by the invention of the computer, he even attempted to lay the foundations of a computer industry in Cuba. He thoroughly studied not only computer science but mathematics, including geometry, trigonometry, differential and integral calculus, differential equations, and set theory. Imagine doing that while running the national bank and the ministry of industries while putting in many hours of hard manual voluntary labor! In addition, Che found time to study psychology!

Not least, though he was anything but a professional economist, Che was interested in political economy. He had intended to write a critique of the “Manuel of Political Economy,” published by the Soviet Academy of Sciences, which was the official text on the subject in the Soviet Union in the 1960s. He began to write some initial notes for the project when he was in Prague between his work in the Congo and his return to Latin America that was to end in his martyrdom in Bolivia.

Exactly when Che thought he would have the time to work on this project is something of a mystery. Marx had, after all, enjoyed decades of relative peace and quiet in London where he was able to produce his massive, but far from completed, critique of bourgeois political economy. Che enjoyed nothing of the kind, and it is hard to see how he would have found time to work on his critique of Soviet political economy, even if his campaign in Latin America had been crowned by victory.

But it does show the kind of man that Che Guevara was. Che’s experiences in building socialism in Cuba during the first half of the 1960s and with the Soviet Union and the eastern European countries had convinced him that the latter countries were on a path that if not corrected would lead to the restoration of capitalism. What makes Che’s warnings about the course the Soviet Union and the other socialist countries of eastern European were on of interest to this blog is that they involve the law of the value of commodities—to give its full name—the central subject of classical bourgeois political economy and its Marxist critique. As regular readers should realize, this blog puts the law of value at the very center of its analysis of capitalist crises, the main subject of this blog.

Che’s warnings against the growing danger of the restoration of capitalism in the socialist camp centered on the increasingly dominant view within both the ruling parties and economics profession of the Soviet Union and eastern Europe that the law of the value either was or should be the driving force of a socialist economy. But before we examine Che’s critique, we should review exactly what the law of value is and what it is not.

The law of value is often described as if it was essentially a theory of price. For example, why does a pair of pants cost $30, an automobile $50,000, a one-ounce gold coin $1,200 and a cheeseburger $5? An even cruder error, which was, however, repeated by some learned professors of economics in the socialist bloc, imagined that “Capital” was some kind of manual on how to price products in a socialist economy.

Anybody who is at all familiar with Marx’s “Capital” knows that it is nothing of the kind. Many “pro-reform” economists who somehow pretended to or really believed that “Capital” was a manual on how to set prices in a socialist society—revealing their profound ignorance of Marx’s work—then explained that “Capital” is quite deficient in this regard and dismissed Marxism all together in favor of marginalist theories of value and price. In reality, insomuch as “Capital” deals with prices, it deals with prices only within the framework of a capitalist, not a socialist, economy.

In Volume I of “Capital,” Marx made the assumption that prices equal values—or direct prices—not because he believed that prices in a capitalist economy correspond to direct prices—he did not—but in order to strip capitalism naked. Only by making the assumption that commodity prices directly reflect values is it possible to explain the nature and origins of surplus value as labor performed free of charge by the workers for the capitalists, landowners and other non-workers.

But how can it be true that workers perform unpaid labor if commodities representing equal quantities of (abstract) human labor are exchanged with one another. The inability of Ricardo and the other classical economists to reconcile the reality of profit—surplus value (3)—with their labor-based theory of value led to the downfall the entire school of classical bourgeois political economy.

What the law of value really is

Every human society from the simplest ones of pre-history to the present-day global capitalist economy has to find a way of distributing the available supply of human labor among the various branches of production in the correct proportions. If this is not done, there can no economic reproduction and therefore no production, and no human society.

In primitive society, this distribution of labor was largely done through tradition. The division of labor in those types of society involved the sexes and various age groups. “Primitive society” emerged gradually over millions of years of both biological and social evolution as our ancestors developed from apes to the primitive societies that have been studied over the last few hundred years. It no doubt seemed to the members of these more recent “primitive societies” that the division of labor they learned from childhood on had always existed and always would exist.

Rosa Luxemburg in her pamphlet “What is Economics” gives the example of the medieval European ruler Charlemagne working out a division of labor on his vast feudal estates. While the feudal division of labor of Charlemagne’s time was far more complex than the division of labor of “primitive” pre-class societies, it was, Luxemburg explained, still a thoroughly transparent process. There was no need to develop a special science to explain it.

But things are otherwise in a market economy and especially under capitalism, where almost all major products of human labor including the ability of the workers to work—labor power—become commodities. The science of political economy as well as the Marxist critique of it is therefore a science that examines market economies in general and the capitalist economies in particular.

Proving the labor theory of value

It is often asked, how can the labor theory of value be proven? In reality, it needs no proof. It doesn’t take much thought to realize that a market economy is made up of independent producers—that is, producers who produce products privately with their own and their families’ labor, slave labor, or as is the case in a capitalist economy, with hired wage labor. The whole legal concept of private property is merely a translation of these relations of production into the language of law. Just like there was in primitive society, or in the feudal society of Charlemagne’s time, today’s global capitalist economy is characterized by a division of labor. But this division of labor is vastly more complex than it was in any earlier human society.

In addition, unlike primitive society or even the society of Charlemagne, in our modern capitalist economy the division of labor is subject to constant change as new branches of production are being created bringing with them new needs while consumer tastes and fashions are in constant flux. In the final analysis, in all human societies human labor is and must be social labor. But how is the social nature of human labor realized in a society where all the producers are producing privately for their own account and are guided only by their individual material interests? This is the question that the science of political economy set out to answer.

Commodities

In a society dominated by a market economy, the social nature of human labor can only be realized through exchange. Products of human labor whose social character is recognized only through exchange are called “commodities.” The institution through which these complex exchanges are carried out is called “the market.” Well before the time of Marx, the classical bourgeois economists already realized that products produced for sale on the market have two types of value. One is “value in use,” or use value, also called utility.

Every commodity produced must meet some basic human need. If a product does not meet any human need, nobody will buy it. Assuming the commodity is exchangeable—and it must be because otherwise it will not be a commodity—it will be exchanged for a quantity of some other commodity with a different use value. The classical bourgeois economists called this second type of value “value in exchange,” or exchange value for short.

When products first began to be exchanged between what were originally independent communist communities, there was as yet no concept of money or price. The only possible standard of exchange was the quantity of labor that was on average necessary to produce the exchanged products. The amount of labor necessary to produce a given material use value was known among the exchanging communist communities through long experience.

Money obscures the nature of value

The origins of value in labor became obscured with the rise of money. Money did not begin with currency. It began instead as a universal measure of value, which is still today money’s primary function. For example, a chair might be exchanged for a quantity of grain, but both the chair and grain would be valued in terms of cattle. Here cattle served as a universal measure of value, or primitive form of money. In time, the precious metals, especially gold and silver, replaced cattle as the universal measure of value, or the universal equivalent.

Whatever commodity functioned as money, in terms of its own use value measured in terms of the appropriate unit—head of cattle or weight of silver or gold—it represented the independent existence of exchange value. Once the precious metals became money commodities, universal equivalents, it became possible to literally carry around exchange value in one’s pocket. (4)

The origins of currency

The role of precious metals as the exchange value that can be held in a hand or carried in a pocket prepared the way for the invention of currency, or coined metal, about 2,500 years ago. Coin—currency—appeared when the state began to stamp pieces of metal vouching that the given piece of metal physically contained a specified quantity of monetary metal in terms of some unit of weight. In other words, the state promised that a given stamped piece of metal physically contained a certain quantity of exchange value. The rise of money obscured the fact that what was being exchanged were products that while having different use values contained given quantities of human labor. Instead, it appeared that commodities had a mysterious quantitatively measurable relationship with the monetary metals.

The biggest problem that classical economy had to answer

The biggest problem that the classical economists had to answer was to explain how an unplanned economy consisting of independent producers working for their own account each seeking the maximum personal advantage could work at all. What prevented such an economy from disintegrating into chaos, as “common sense” would indicate it would.

The classical bourgeois economists realized that behind the money economy with its ever-fluctuating prices defined in terms of weights of gold and silver, what was really being exchanged by the private producers were products of human labor. Not money but labor measured in terms of time that was embodied in commodities, the classical economists realized, was the real essence of value.

The classical economists reasoned that market prices would fluctuate around the values of commodities but would not necessarily equal them at any point in time. The axis of prices around which market prices, reflecting ever-shifting relations of supply and demand, fluctuated was called by the classical economists the natural price, or value, of the commodity. The natural price—value—of a given commodity with a given use value was determined by the quantity of labor that on average was necessary to produce that commodity under the prevailing conditions of production.

It was therefore both possible, inevitable and indeed necessary that market prices deviate from the natural prices of commodities that the classical economists assumed were identical to values. Necessary because it was precisely in the deviation between natural prices and market prices that the classical economists found the secret that enabled an economy of producers operating independently of one another to produce commodities of different use values in the correct proportions.

If a commodity was produced in less than the quantities required or desired by society, the demand for it would exceed the supply at current (market) prices. This would cause its market price to rise above its natural price. Assuming a capitalist society, the capitalists are always on the hunt for profits above the average. Motivated only by desire for a super-profit, the capitalists would build new factories and expand existing ones that happen to produce the article in short supply in order to realize these additional profits. Though motivated only by private profit, the capitalists will be meeting the needs of society for an increase of the article that happens to be in short supply.

As a consequence, the production of the scarce articles—the commodities that were being under-produced—will rise until the scarcity disappears.

Or perhaps a given type of commodity might be overproduced relative to the needs of society. Then the market price will fall below the natural price. The capitalists in the sector that is overproducing will then realize a profit below the average or might even make losses. The capitalists will respond by moving their capital out the sectors of production that were overproducing—for example, the oil industry today—and into sectors that are under-producing. And they do this not because they want to serve the needs of society but because they must, under the pressure of their mutual competition, make the highest profits possible on their capitals or go out of business.

Therefore, the classical economists concluded, as long as the market was allowed to operate freely, the producers seeking nothing but the greatest individual gain will produce commodities in exactly the proportions desired by society. This is why the classical economists advised the government to keep its hands off the economy. Instead of trying to determine the proper proportions of production of various articles, the government should allow prices, wages, and interest rates to seek their own levels through unfettered competition among the capitalists, the workers, and between individual capitalists and workers.

Adam Smith famously called this mechanism the “invisible hand.” Marx would later call it the law of value of commodities, or the law of value for short. The law of value is the supreme law that governs a capitalist economy.

Two problems classical economy was not able to solve

This theory of the capitalist economy was powerful and elegant but left two problems unsolved. The biggest one involved the commodity that the classics called “labor.” The workers are obliged to sell their labor to a capitalist if they are to realize the “wages of labor.”

For example, according to the classical theory, assuming a 12-hour workday, the capitalist would pay the worker with a sum of gold or silver that can be produced on average with 12 hours of labor. The capitalists would also be expected to pay their other suppliers with money representing the value of their commodities. And on average the capitalists would sell their own commodities at their natural prices, or values.

How then does the capitalist make a profit? Profit, as the classical economists realized, is the driving force of a capitalist economy. But if we take the classical theory to its logical conclusion, it would seem that a capitalist economy would on average have a zero rate of profit. But in that case, a capitalist economy could not exist! For all its power and elegance, something was either very wrong or missing from the classical bourgeois theory of political economy.

A second problem

Though classical economy was not aware of constant capital as such, it realized that fixed capital had a much longer turnover period than circulating capital. However, as we have already seen it was well understood by the classical economists that the pressure of competition will tend to lead to a situation where capitals of equal values realize equal rates of profits in equal periods of time.

After all, the individual capitalists—most of whom probably had not read Adam Smith or David Ricardo—were interested not in values or natural prices as such but in the greatest amount of profit possible on a given quantity of capital in a given period of time. As the individual capitalists in the various branches of industry attempt to maximize their profits, capital will flow from the production of commodities that yield rates of profit that are lower than average to the production of commodities that yield profits that are higher than average.

The problem was that assuming commodities sell at their natural prices as defined by the classical economists, the capitals that produce with a larger portion of circulating capital, which has a much faster turnover time, relative to fixed capital should have a higher rate of profit than capitals consisting of a smaller proportion of circulating capital than average. Therefore, assuming an equal rate of profit between branches of industry with above and below average ratios of fixed to circulating capital, natural prices will not be proportional to the quantity of labor that is on average necessary to produce them, violating the key assumption of the classical theory of value.

Something again was amiss here. The tendency of rates of profit to equalize was in conflict with the classical theory of value and price. And thus was born the so-called “transformation problem.” These contradictions inherent in the classical theory found their highest expression in the work of David Ricardo, who developed the classical theories of value, price and profit and rents with a rigor and consistency far exceeding that of Adam Smith, thereby taking classical bourgeois economic theory to its highest point it was to reach. But in doing so, Ricardo inevitably brought out in the sharpest way the contradictions of the classical school.

The class struggle in Britain in the time of Ricardo and later

The class struggle engulfs virtually all aspects of class-divided societies. It involves not only picket lines, strikes, barricades and insurrections but a struggle between ideas that represent the interests in either open but more often in disguised forms of the interests of the contending classes. In capitalist society, this struggle of ideas involves among other things a struggle between competing economic theories.

In the days of Ricardo, British politics was dominated by the class struggle between landowners and capitalists. During his lifetime, the antagonisms between the growing working class and the rising capitalist class, though present, were still underdeveloped. Ricardo’s economic theory therefore proved a powerful weapon in the hands of the rising capitalists in their struggle against the traditional landowning British ruling class.

It would, however, do Ricardo a gross injustice to assume that his economic theory was written simply to champion the interest of the capitalists. On the contrary, Ricardo’s work shows an amazing scientific disinterest. Marx observed that Ricardo was quite willing to sacrifice the interests of the capitalists as well as the landowners and workers when their interests conflicted with the general progress of human society defined as the increase of production of wealth (5).

However, as a rising class, the capitalists found that the best scientific economic theory available at the time provided them with a powerful weapon in their struggle with the reactionary landowning class. But from 1830 onward, the struggle between the fast-growing British working class led by industrial workers who produced surplus value and the capitalists began to sharpen. From that point onward, the growing antagonism between the capitalists and wage workers began to overshadow the antagonism between the two property-owning classes—landowners and capitalists.

The changing character of the class struggle in Britain was reflected in the evolution of post-Ricardian economics. As it turned out, though Ricardo had been a staunch supporter of capitalism—he was very far from being a socialist—it was the representatives of the workers in economics that turned to Ricardian economics and began to use it as a weapon against the capitalists.

Ricardian socialism

The economic thinkers who took the side of the working class reasoned that if Ricardo’s principles were strictly applied and all commodities including the commodity labor sold at their values, the capitalists would not be able to make profits—or the landlords rents for that matter. The only reason, these early socialists argued, that the two non-working classes—capitalists and landowners—could even exist was that Ricardo’s teachings were being violated. In violation of Ricardian principles, the capitalists were paying the workers less than the value of their labor.

The emerging British workers’ movement therefore demanded that Ricardo’s principles be put into effect and that labor be paid at its value just like all other commodities. Once the workers were paid the full value of their labor, the exploitation of workers by the capitalists and landlords and with it the very existence of the capitalist and landlord classes would end.

As economists, the Ricardian socialists were far inferior to Ricardo. As Marx pointed out, Ricardo was not interested in establishing what the prices of commodities should be but rather explaining what determines prices in a capitalist society. However, though the Ricardian socialists used Ricardian economics in a theoretically inadequate way, they did represent an advance over Ricardo in one crucial sense. They emphasized the exploitative character of capitalism that enables classes of non-workers—capitalists and landowners—to live on the unpaid labor of the workers, and they did so on the basis of the Ricardian theory itself.

The classical school, after serving as a powerful weapon in the hands of the capitalists in their struggle against the landowners, was now being turned against the capitalists. Suddenly, the (bourgeois) economists that had more or less overlooked “the loose threads” of Ricardian economics became very interested in exposing the contradictions of Ricardo, not in order to solve the contradictions of Ricardian economics but rather to overthrow it altogether.

The obvious class interests of the post-Ricardian bourgeois economists did not change the fact that the contradictions in Ricardian economics and the classical school in general were very real. Economic science could not be left where Ricardo had left it. During the remainder of the 19th century, two major new schools of economics were to develop. One school represented the interests of the working class. But unlike the Ricardian socialists, it had thoroughly mastered Ricardian economics. This school, the school of Marx, succeeded in overcoming the contradictions of Ricardian economics in a positive way.

The other school, representing the interest of the capitalists, rejected the whole notion that labor embodied in commodities lay behind “value.” The concept of labor value had to go, because retaining it would inevitably expose that capitalism was based on unpaid labor just as slavery and serfdom were.

After stumbling around for awhile, the bourgeois economists came over to the view that “economic value” represented the scarcity of various useful objects relative to subjective human needs for these objects. This school eventually evolved into the economics that is taught in university economics departments today. It is called the “neoclassical school,” or the “marginalist school.”

This month, I will review how Marx solved the contradictions of Ricardian economics and answer some claims by certain 20th-century economists that Marx hadn’t really solved the contradictions of Ricardian economics like he thought he had. Next month, I will examine the evolution of post-Ricardian bourgeois economics into neoclassical marginalism. I will show how neoclassical marginalism has served as a weapon in the hands of the capitalists and their supporters not only in the capitalist countries but, as Che Guevara realized, in the socialist countries as well.

Labor versus labor power and the secret of surplus value

The biggest problem left over from Ricardo that Marx had to solve was to show how profit can arise when commodities representing equal quantities of labor—equivalent exchange—are exchanged in strict proportion to the quantity of labor it takes on average to produce them. In Volume I of “Capital,” Marx assumed a pure capitalism. Everybody in this pure capitalist society are either industrial capitalists or workers who sell their labor power to the industrial capitalists at its value. No cheating is allowed. In this abstract, pure capitalist society, there are no landowners, simple commodity producers or other “third persons.” Marx put the entire question of “equalization of the rate of profit” aside to examine the far more important question of how profits arise in a pure capitalist society where nobody is cheated.

In order to do this successfully, Marx had to considerably deepen Ricardian value theory. And Marx didn’t do this overnight either. He learned Ricardian economics in the mid-1840s, but it wasn’t until the late 1850s that he hit upon the solution.

How Marx deepened Ricardian value theory

Marx came to realize that (abstract) human labor is the social substance of value but that labor itself does not have value. Labor as the social substance of value cannot itself have a value any more than heat, to give an example used by Engels, can have a temperature. Therefore, the expression the value of labor is as meaningless as the temperature of heat. Just as temperature is the measure of the quantity of heat, value is the measure of the quantity of (abstract) labor. The workers do not sell their “labor” to the capitalist but rather their ability to work, or labor power.

For a certain period of time—not for life as is the case with the slave—the workers agree to do whatever the capitalists—or their representatives—ask them to do. In exchange, the workers receive a sum of money they use to purchase the commodities necessary to reproduce their labor power and raise the next generation of workers.

Unlike other commodities, labor power is not produced capitalistically. No industrial capitalist produces the commodity labor power. How then is labor power produced and reproduced?

The workers having sold their labor power for a sum of money, which Marx assumes has the same value as their labor power, purchase the commodities—food, clothing, shelter and so on—necessary to reproduce their ability to work as well as raise their children—future workers. The quantity of (abstract) labor socially necessary to produce the commodities that reproduce their ability to work therefore determines the value of labor power.

Like all values, the value of labor power represents a definite quantity of (abstract) human labor measured in terms of some unit of time. The quantity of labor represented by the value of labor power is by no means the same as the quantity of labor that the workers must perform once they have sold their labor power to the capitalists. (6) If the industrial capitalists are to make a profit, the labor performed by the workers whose labor power they have purchased for a given period of time must be greater than the quantity of labor represented by the labor power they have purchased. The specific use value of labor power for its purchaser—the industrial capitalists—is that it is the only commodity that can be found on the market that not only produces value but a value greater than its own value. Of all of Marx’s many discoveries in economics, this is by far the most important one.

Chattel slavery versus wage slavery

It is a common misconception that the difference between slavery and “free wage labor” is that slaves aren’t paid for any of their labor, while free wage laborers are paid for all of it. Marx’s theory of surplus value shows that this is thoroughly false. If the slave was not paid at all, the slave would soon die and the modes of production based on slave labor—such as in ancient Greece and Rome, or the pre-Civil War U.S. South—would never have existed.

Therefore, Marx demonstrated that assuming all commodities including the commodity labor power are sold at their values, the workers will perform unpaid labor for the capitalists. True, unlike the case with slave workers, wage workers are in Milton Friedman’s phrase “free to choose” and can reject these terms. But if they demand wages that represent not the value of their labor power but the entire value that their labor produces, their labor power will have no use value to the industrial capitalists—because it will not produce any surplus value. In this case, the labor power of the workers, like all products lacking a use value, will prove unsaleable. Milton Friedman’s “freedom to choose” becomes simply the “freedom to starve.” The slave owners whip is replaced under the capitalist mode of production by the whip of hunger.

Indeed, because of the tremendous growth in the productivity of labor that is characteristic of capitalism, it is possible for workers to spend an increasing percentage of the working day working for the capitalists, landowners and their hangers-on because workers can reproduce the value of their labor power in an ever smaller period of time. This will be true even if their real wages rise in absolute terms. Therefore, contrary to what the Ricardian socialists believed, even if all commodities including labor power sell at their values, capitalist exploitation—and with it the existence of the exploiting classes of capitalists and landowners—can very much continue.

The transformation problem

Marx dealt with the other great contradiction of Ricardian economics—known as the transformation problem—in Volume III of “Capital.” In Volume I, Marx distinguished between the value of commodities, measured in terms of abstract human labor, from the form of value, which must be measured in terms of the use value of a second commodity that measures the value of the first commodity. The classical economists, in contrast, had spoken of use value and exchange value. They had no notion that exchange value is the necessary form of something else—namely, value.

Therefore, unlike classical political economy and Marx’s own early work, the mature Marx distinguished between value—always measured in terms of a definite quantity of abstract labor measured in some unit of time—and exchange value—always measured in terms of a definite quantity of the use value of a second or equivalent commodity measured in some appropriate unit.

Except in the earliest stages of exchange, a special commodity—or a few such as gold and silver—emerged that served as a universal equivalent, or money commodity. Therefore, what the classical economists called the natural price of commodities is not the actual value of commodities but merely the form of value of commodities.

On the basis of his concept of value developed in Volume I, Marx demonstrated in Volume III that the law of value does not require that the “natural prices” of classical political economy coincide with prices that directly express labor values.

The law of value does, however, require that production prices of commodities express themselves as definite quantities of the money commodity. The value of the production price of a commodity of a given use value and quality (7), however, is not arbitrarily set by supply and demand. Instead, the production price of a commodity is the direct price of the commodity modified by the equalization of the rate of profit.

Marx made a start—but only a start—in analyzing mathematically the transformation of direct prices into production prices. He provided a calculation in Volume III that modified the direct prices into production prices that equalize the rate of profit between branches of production with different organic compositions of capital. The sum of the prices of production equaled the sum of direct prices. The mass and average rate of profit were also equal both before and after the transformation of direct prices into production prices. After the transformation, the rates of profit were equal in all branches of industry. The average rate of profit was identical whether measured in terms of quantities of abstract labor, direct prices or production prices.

Numerous critics of Marx pointed out that Marx didn’t transform the input prices, which is necessary for a complete mathematical solution. However, this problem can be solved mathematically. Assuming that all commodities are either consumed by the productive (of surplus value) workers or reenter production as part of the constant capital, the sum of the prices of production will equal the sum of direct prices and the mass and rate of profit will be unaffected by the transformation from direct prices to prices of production.

But this is also only a partial solution, because it ignores the consumer luxuries consumed only by the capitalists as well as the means of destruction that are sold by the capitalists to the capitalist state(s). Once these commodities are taken into account, it is quite possible to equalize the rate of profit among all branches of industry without the sum of all production prices being exactly equal to the sum of all direct prices. In addition, the rate of profit, unless you make extremely restrictive assumptions, will be somewhat different—or transformed—once the transformation from direct to production prices has occurred. The rate of profit in terms of values—quantities of labor—and in terms of production prices will no longer be exactly equal.

The money commodity has no price

By pointing this out, a whole slew of 20th-century writers, dubbed “neo-Ricardians,” imagined that they had finally overthrown Marx’s law of value and surplus value. What they overlooked—though Marx himself was aware of it (8)—is that not all commodities have a price. One special commodity does not by definition have a price—the money commodity.

For example, the capitalists will realize in terms of money a higher rate of profit in terms of production prices than they will in terms of value if the luxury and arms-producing industries have a higher than average organic composition of capital. Our neo-Ricardians jump to the conclusion that something other than the unpaid labor of the workers must be producing profit, just like the post-Ricardian bourgeois economists claim!

But the extra profit that the capitalists realize in terms of money when they sell their luxury commodities above their direct prices they lose as consumers when they purchase the same commodities above their direct prices (values). Our 20th-century neo-Ricardian Marx critics assume that Marx’s law of labor-based value is essentially the same as Ricardo’s and have fallen victim to a simple money illusion!

This money illusion in no way changes the fact that producers exchange the products of their own private labor—or under capitalism of their hired wage labors. It is also true that production prices will approximately equal direct prices and that the sum total of production prices will even more closely approximate the sum total of direct prices. And the mass and rate of profit will when calculated in production prices—measured in terms of money and not the actual (non)money commodities that the capitalists and workers consume—approximate the rates calculated in direct prices or in terms of (abstract) labor.

However, the existence of money means that the mass and rate of profit will differ slightly in terms of money from the mass and rate of profit when it calculated in terms of hours of human labor—or value—much like a fun house mirror distorts the reflections of objects. This distortion occurs because of the very nature of

exchange value as the necessary form of value and the generalization of exchange values in the form of money.

Many of our present-day Marxists who have attempted to defend Marx against the “neo-Ricardian” onslaught have remained at a “quasi-Ricardian” stage of value theory as opposed to a fully Marxist understanding of value. The widespread acceptance by present-day Marxists—not all, of course—of marginalist claims that under today’s paper money systems there is no such thing as a money commodity and that gold is simply “another commodity” are actually closer to Ricardo than to the mature Marx when it comes to value theory.

This widespread failure of contemporary Marxists to really transcend the Ricardian

theory of value has had two general consequences. One, it has kept the neo-Ricardian critique of Marx alive when in fact it should have been declared dead and buried long ago.

Second, it has barred the way to developing an adequate theory of capitalist crises of generalized overproduction. This is reflected in the fact that so many modern Marxists—generally the same ones who deny that there is a money commodity in present-day capitalism—describe the downturns of the industrial cycle as something other than what Marx and Engels and other classical Marxists described them as: crises of the generalized overproduction of commodities.

As I have shown throughout this blog, the claims that today’s paper money is no longer based on gold and the avoidance of describing capitalist cyclical crises as crises of overproduction go hand and hand. Both errors are themselves rooted in the failure to fully grasp Marxist value theory.

One of the consequences of inadequate and often flatly contradictory crisis theories—the falling rate of profit theory versus the underconsumption theory—mean

that these Marxists have not been able to fully refute either the “orthodox” marginalist claim that capitalism “naturally tends to full employment” or the assertion of more “progressive” bourgeois economists—the followers of Keynes—that the problem of unemployment is merely a technical problem that can easily be solved without abolishing capitalism.

Within the socialist countries, these kinds of weaknesses in Marxist theory helped the marginalists—the supporters of so-called market socialism or Perestroika-like “economic reforms”—gain a foothold. (9) Next month, we will take a look at the marginalist theory that grew out of the disintegration of Ricardian economics.

To be continued.

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1 After World War II, the Soviet government had hoped that a unified German democratic—but not a German socialist—republic could act has a buffer between the the vastly expanded U.S. empire and the Soviet Union. Therefore, the Stalin leadership initially showed no interest in conducting a socialist experiment in the Soviet sector of occupied Germany, which represented only 25 percent of the reduced territory of defeated Germany.

Before and during World War II, Soviet foreign policy had relied on the skillful exploitation of the contradictions between the imperialist countries to prevent them from uniting against the Soviet Union. However, after World War II the unification of the imperialist countries under U.S. domination completely undermined this traditional pillar of Soviet foreign policy. Stalin was counting on Germany and Japan reasserting their independence and coming once again into conflict with the United States. Therefore, the Stalin government was opposed to the division of Germany after World War II. (See Stalin’s “Economic Problems of Socialism in the USSR“.)

However, the U.S. along with Britain and France forced the issue of Germany’s division when they in 1948 created the deutschmark, which replaced the reichmark, in the U.S., British and French occupation zones. This led rapidly to the creation of the Federal Republic of Germany-West Germany out of these three occupation zones as an imperialist satellite state of the U.S. empire. Starting in 1949, West Germany was throughly integrated into the U.S.-dominated NATO alliance.

The Soviet Union was then forced to organize the German Democratic Republic in its occupation zone, leading to the division of Germany into capitalist West Germany and a much smaller socialist East Germany. In the GDR, the German Communist Party (KPD) and the left wing of the German Social Democratic Party (SPD) merged into the Socialist Unity Party (SED), large-scale industry was nationalized, and socialist construction began.

In 1952, just before Stalin’s death, his government offered to support the reunification of Germany on capitalist lines on condition that the unified German capitalist state agree to break with NATO and act as a buffer between the U.S. world empire and the Soviet Union, just as the Soviet government had originally hoped postwar Germany would do.

In making this offer, Stalin presumably expected that at least a section of the German capitalists would respond favorably and attempt to break West Germany away from the U.S. world empire. If Germany really was unified along capitalist lines, the German capitalists’ state would be extended to cover the territory of the GDR and they would no longer have to worry about the socialist example of East Germany. In return, Stalin would presumably expect that the reunified capitalist Germany would kick NATO out and start to act as an independent country once again.

But the German capitalists, who were making huge profits within the U.S. world empire, were not prepared to take the risks that such a rebellion would entail. Besides the very real chance that the U.S. would use military force against a rebellious West Germany, the U.S. government could have denied the German capitalists access to the huge U.S. home market, much as they had done after World War I, as well as numerous other markets that were guarded by the huge military forces at Washington’s disposal. West Germany, therefore, flatly rejected the Soviet proposal.

Just after the death of Stalin in March 1953, a conflict developed in the Soviet leadership over the German question. On one side was Lavrenti Beria, who headed the powerful ministry of internal affairs. This “power ministry,” which controlled the militia (regular police) and the political police, the security forces that guarded the Kremlin and the personal security of the Soviet leaders, had its own military units and controlled foreign intelligence. On the other side, was Nikita Khrushchev, who had succeeded Stalin as the CPSU’s first secretary, which gave him control of the powerful apparatus of the CPSU, and the veteran Soviet leader V.M. Molotov, who as foreign minister was in charge of the foreign policy of the post-Stalin government.

Beria proposed agreeing to the reunification of Germany on U.S. terms in a bid to end the Cold War, while both Khrushchev and Molotov backed continued socialist construction in a separate GDR. Beria was arrested in June 1953 and executed in December 1953 after a closed trial, partly for his attempted capitulation to the U.S. demands over Germany but more fundamentally for his attempts to seize power and liquidate the leading role of the Soviet Communist Party within the Soviet Union.

In 1989, Gorbachev was moving to have himself named executive president with broad powers over the state apparatus, which was formally done in March 1990, giving him a base of power that was independent of the Communist Party. He had adopted both planks of Beria’s old program, both in regards to the reunification of Germany on U.S. terms and on the liquidation of the leading role of the Communist Party within the Soviet Union.

In return, for accepting the capitalist reunification of Germany Gorbachev settled for vague promises by Western leaders that NATO would not be extended to the east. This promise was promptly broken beginning with the continued NATO membership of the Federal Republic of Germany once it was extended to include what had been socialist East Germany. (back)

2 In my opinion, one pamphlet by Marx, Engels, Lenin and the other great Marxists of the past is worth all the portraits and statues that could ever be displayed or built. However, the display of portraits or lack of such display reflects deeper trends among young people today and as such cannot be ignored. (back)

3 Strictly speaking, surplus value becomes profit only when it is realized in money form. If the capitalists cannot find buyers of their commodities at profitable prices no matter how much surplus value they contain, they cannot make a profit. (back)

4 In contrast, just try carrying in your pocket a quantity of value—a given quantity of abstract human labor measured in some unit of time. This is of course impossible. (back)

5 Or production for the sake of production. (back)

6 The fact that both labor, the substance of value, and the commodity labor power are measured by the clock is one of the factors that leads to confusion of labor and labor power, both in the minds of economists and in everyday life. (back)

7 The term “value of the price” is as far I know not generally used in writing on economics. In everyday life and among today’s learned economists, price is considered the same as value, so how can price itself have a value. In reality, price always represents a definite quantity of some other commodity with a use value that is different than that of the commodity whose value is measured with the yardstick of “price.” Therefore, price itself has a value separate from the value of the commodity whose value is being measured by price. (back)

8 See Marx’s “Notes on Wagner” (back)

9 To avoid misunderstanding, I am not saying—and I doubt Che Guevara would have said—that the growing domination of bourgeois economic theory in the socialist counties was the only reason or even the chief reason for the return to capitalism in the Soviet Union and the socialist countries of eastern Europe. But the rise to domination of marginalist economics from the 1960s onward in both the Soviet Union and eastern Europe played a crucial role in the battle of ideas in the ongoing class struggle within the Soviet Union. (back)