MELT and the relationship between prices and values

The most naive theory of the relationship between values reckoned in hours of abstract human labor and prices reckoned in weights of gold bullion is that prices always equal values. More precisely, since hours of abstract human labor are not really the same thing as weights of gold bullion, the gold serving as the money commodity always exchanges for a quantity of commodities that embodies exactly the same quantity of labor that the gold did. However, as we have seen, this is ruled out even in theory, since if it were true, there would be no mechanism in a commodity-producing economy to allocate the labor available to society to carry out production in the proper proportions.

Still, as we have already noted, making the assumption that prices are indeed directly proportional to labor values is absolutely necessary for solving some problems including the most important problem in all economics, the origin and nature of profit—surplus value.

A somewhat less naive theory would be that while individual prices of commodities deviate from their values, the sum total of all prices always equals the sum total of the direct prices of all commodities. Under this assumption, the total sum of the prices of production will always equal the total sum of direct prices. We can then show that the total quantity of surplus value equals the total quantity of profit—surplus value—measured in terms of exchange value or physical weights of gold, assuming gold serves as money, both in terms of the mass of profit and the rate of profit.

Used correctly, this a powerful abstraction. It is absolutely necessary for solving certain problems such as the transformation of prices that are directly proportional to values into prices of production that ensure that equal quantities of capital yield equal profits in equal periods of time. It allows us to understand the division of the total social surplus value between the capitalists working with capitals of different organic compositions, as well as the nature of ground rent. Finally, it is necessary to explain the law of the tendency of the rate of profit to fall—the most important law of political economy according to Marx.

However, we have to keep in mind the limitations as well as the power of this abstraction. When we talk about the total sum of the prices of commodities, we are not actually talking about all commodities, because we are always leaving one commodity out—the commodity whose use value serves to express exchange value. We cannot forget that the total sum of commodities N does not equal N–1, the total sum of commodities minus the commodity that functions as money and serves as the “yardstick” that measures in its own use value the values of all other commodities. This inevitably transforms the exact equalities of prices and values—or direct prices—into approximateequalities. (See this previous post for a more in-depth discussion of the transformation problem.)

By failing to grasp this, many of our post-Marx Marxists have left the door open for the “neo-Ricardians”—who seek to replace Marxist economics with vulgar economics, or to the extent that the “neo-Ricardians” are socialists, replace scientific socialism with vulgar socialism.

MELT, paper money and metallic money

For the purpose of explaining surplus value, the concept of the monetary expression of labor time—MELT—is adequate, even if we do not need to understand that non-commodity money is impossible. We do not need Marx’s full theory of value to understand the most important problem in all economics, though we will need it later to defend Marx’s discovery on the origin and nature of surplus value against the “neo-Ricardian” attack.

But when it comes to examining the world of ever-fluctuating market prices, MELT without a money commodity will not do. We have to understand that market prices are virtually never equal to direct prices, whether of individual commodities or of commodities as a whole. Here we need to understand what laws really govern the movement of market prices.

As prices of commodities as a whole rise above their direct prices, as they do during an economic boom, the capitalists indeed make a higher rate of profit in money terms than they do in value terms. This is exactly what present-day neo-Keynesian economics—and its echo in the Keynesian-Marxist school that Kliman rightly polemicizes against—bases itself on. The Keynesian-influenced policy makers figure that as long as they ensure that there is a gradual rise in the general price level—called inflation targeting—they will ensure that business will always be profitable. However, we know that extra profits made by capitalists due to a rising general price level that does not reflect changes in values or a rise in the rate of surplus value are temporary.

Such price movements have no lasting effect on the rate of profit. Inevitably, such a rise in prices will set in motion forces that will lower them once again—at least when prices are calculated in terms of the use value of the money commodity—weights of gold.

Inevitably, the extra profits made by capitalists due to such a rise in prices above values will be offset by losses that will occur when prices inevitably fall once again to a level that is below the direct prices of commodities. When this happens, forces will be set in motion that will again raise prices. In the long run, therefore, the rate of profit calculated in terms of the use value of the money commodity—weights of gold—will fluctuate around a level that approximately corresponds to the value rate of profit, just like the prices of individual commodities fluctuate around an axis that approximately equals the direct prices of the commodities in question.

In only one sense are “physicalists” right when they claim that profit must be measured in terms of physical quantities. Profit must indeed be measured in a physical quantity but only the physical quantity of the use value of the commodity that serves as the universal equivalent, or money, commodity. If linen serves as the universal equivalent—like it does in Marx’s coat-linen example—profits would have to be reckoned in yards or meters of linen. If gold serves as the universal equivalent, profits have to be calculated in terms of weights of gold—metric tons.