Why can’t we use embodied labor to directly measure wealth?

But why do we need to measure value—embodied abstract human labor—indirectly though the value form of exchange value rather than directly? Why can’t we measure value directly in terms of labor time? Wouldn’t this be far superior to the system of using exchange value, which introduces the possibility, neigh the inevitability, of value being measured imperfectly?

In the 19th century, a whole series of reformers, including the Ricardian socialists and the French anarchist-socialist Pierre-Joseph Proudhon proposed just such a reform. These proposed reforms involved the setting up of a labor bank that would assess the value of every commodity presented to it in terms of the quantity of labor it took on average to produce. In exchange for the commodity, it was proposed by the reformers, the bank would issue a unit of currency that would represent the value of the commodity in question in terms of the labor that was necessary to produce it.

This “labor money” would then be exchangeable by its owner for any other commodity that represented the same quantity of labor as determined by the labor bank, whose employees would presumably be experts in determining the quantity of labor it takes on average to produce a given commodity of a given use value and a given quality.

The champions of labor money believed that such a system would be vastly preferable to the system of measuring the values of commodities indirectly through exchange values—or under modern conditions—the price system, because it would eliminate unequal exchanges between commodity users.

Pre-Marxist socialists such as the Ricardian socialists believed that by eliminating the unequal exchange of commodities, surplus value would be eliminated thus rendering the existence of a class of wealthy non-workers who live off the unpaid labor of the working class impossible.

These early socialist champions of labor money lived before Marx demonstrated that surplus value arises not through the unequal exchange of commodities but on the basis of the equal exchanges of commodities of a given value. This becomes apparent as soon as we distinguish between the labor performed by the workers and the ability of the worker to work (labor power), which is the actual commodity that the worker sells to the capitalist. Therefore, even if a system of labor money could actually work, it would not eliminate surplus value. Its only merit would be that it would make surplus value transparent rather than hidden behind equal and apparently voluntary exchanges by two equal contracting parties such as is the case under the money price system.

But could such a system of labor money work, at least in principle? Marx explained that it could not under a capitalist or indeed any other form of commodity production. Why is this? Because if every commodity producer was guaranteed the sale of his or her commodity at its value regardless of whether or not its use value actually met any real need, there would be no mechanism whatsoever to see to it that the use values would be produced in anything like the proper proportions. Social production would disintegrate entirely unless the labor bank was a “despotic ruler of production,” as Marx put it in “The Grundrisse,” and determined the proportions in which the use values were actually produced. (6)

In those circumstances, we would no longer have commodity production—a market economy—and without commodity production we would no longer have capitalist production because capitalist production is simply generalized commodity production where labor power itself has become a commodity.

Commodity producers know that they are producing too much of a commodity of a given use value and quality precisely when its price falls below its value, and they know that they are producing too little when the price of the commodity in question rises above its value.

Since the competitive relationship among commodity producers forcesthem to adjust the amounts they produce to maximize their appropriation of value as measured in money, the endless fluctuations of prices around the axis of values makes possible the production of material use values in approximately the right proportions. It is the price mechanism that makes the existence of commodity producing societies including capitalist society possible in the first place.

Therefore, what at first appears as a grave defect in the money-price system—the fact that it measures the values of commodities imperfectly—turns out to be absolutely necessity for the existence of the whole system of commodity production and therefore no defect at all.

Real money versus money of account

Since money must exist in the form of an actual commodity, it is possible to actually possess exchange value in a material form. Marx described metallic money such as gold bullion as the independent form of exchange value. Though I can’t carry around units of unchanging “real purchasing power” in my pocket, I can literally carry exchange value around in my pocket in the form of gold coins, or in the form of tokens, such as paper dollars, that represent the money commodity and are exchangeable for the money commodity.

IOUs payable in real money—credit money—or monetary tokens that are convertible on the “free market” into gold bullion can serve as money substitutes but only to the extent that they are convertible into real, that is commodity, money. Therefore, in addition to possessing real capital—capital that consists of material use values other than money—a capitalist has to possess a certain amount of wealth, even if only a small portion, in the form of money—either in the form of actual money—gold bullion—or in the form of money substitutes that represent real money such as token money, or credit money—for example, a checking account at a commercial bank.

The quantity of money substitutes that can be created by the “monetary authority” and the banking system, measured in terms of weights of real money without depreciating against real money, will ultimately be limited by the amount of real money in existence.

Money of account

In addition to real money—and its representatives such as token and credit money—there is also the purely imaginary money that capitalists use to value the commodity elements of their real capital. This type of imaginary money used for valuation Marx called money of account.

With this in mind, let’s take another look at the question as to whether profit should be calculated on the basis of historical costs, as Kliman insists it should, or current costs. The formula for capitalist production is M—C..P..C’—M’. Our industrial capitalist must start with a definite sum of money M—called “seed money” in business terminology. He can invest the money in a business in the hope of making a profit in terms of money or he can for the time being hold onto wealth in the form of money. If the capitalist chooses the latter course, he will forgo the opportunity of making a profit. In this case, he won’t strictly be acting as a capitalist just yet but rather as a miser.

Since our man wants to be a capitalist and not a miser, he will if at all possible use his money to create a business that realizes a profit in terms of money. But under certain conditions, such as a crisis, he will be well advised to postpone the founding of a business until favorable conditions for profit-making return. In the wake of a crisis—like the present—there are widespread complaints that the capitalists—corporations and banks—are sitting on huge sums of accumulated money. Why are they seemingly so irrational?

In reality, they are waiting for the prospects for profit-making to become more favorable. When these prospects become favorable enough, they will indeed invest the money and keep on investing and then borrowing money in ever greater quantities until the market is again flooded with unsold commodities and profits again collapse.

In order to grasp this, let’s tell a story of two would-be capitalists. Each of our capitalists starts with an equal amount of money. Exactly how they got the money—whether through inheritance, winning the lottery, theft, or some other way—is of no concern here. One of our would-be capitalists correctly senses that a crisis is approaching and expects a sharp fall in prices that will preclude any possibility of realizing a profit in terms of money in the immediate future. He decides to hold onto his money until the approaching crisis runs it course.

Capitalist number two wrongly expects that prosperity will continue and goes ahead and invests his money by setting up factories and purchasing raw materials and labor power. The crisis arrives and prices fall exactly as capitalist number one expected. In money terms, our first capitalist has neither made a profit nor a loss. (We assume he has some other source of income to keep himself alive as he waits for the crisis to bottom out.) He has exactly the same amount as wealth, all in the form of money, that he had before.

Our second capitalist has made a loss in terms of money but due to the rise in the purchasing power of money, he is in a position to actually expand the scale of his operations. In terms of historical prices—the way Kliman calculates profit—our second capitalist has made a loss but in terms of current costs he has made a profit.

Now let’s assume that the crisis has run its course. Prices have bottomed out and are set to rise. In terms of money, which capitalist possesses greater wealth? Our second capitalist has lost wealth in terms of money though he has increased his wealth in real terms—that is, in terms of accumulated material use values. Our first capitalist has neither gained nor lost wealth in terms of money, since all his wealth is in the form of money, but he too has gained in terms of real wealth because the purchasing power of his money is greater than it was before the crisis caused prices to fall.

The first capitalist who has kept his wealth in money has two advantages over the second capitalist. First, he has a greater mass of wealth in terms of money. Second, since all his wealth is in the abstract form of money, he can convert his money wealth into any specific form of wealth he wants to. Since it is his intention to act as an industrial capitalist, he enters the market as a buyer and buys up means of production, raw and auxiliary materials, and labor power. He now has a greater mass of real capital than our first capitalist. He also has the advantage of having not only more machines but the latest models that are more efficient than the older models possessed by our second capitalist.

Since our first capitalist’s cost prices are lower and he can undersell our second capitalist as well as produce on a greater scale, he drives our second capitalist out of business depriving him of all his capital. Very likely he will be in a position to buy our second capitalist’s means of production at bargain basement prices and add it to his own means of of production. The fact that our second, now ex-capitalist made a profit in terms of current costs is small consolation to him.

Therefore, Kliman is absolutely correct on the need to calculate profits from historical costs, not current costs. Profits have to be calculated in terms of the amount of money capital that the capitalist actually advanced when he bought his means of production, raw materials and labor and not the costs that the means of production and labor power would have cost him at the present time. If these have fallen, so much the worse for him.