The question of how to integrate demand goes to the heart of our understanding of value theory because it challenges us to decide what it means for a commodity to have value. Marxian theorists take one of three approaches to the question of how to deal with variations in demand—how a change in demand affects the value and exchange-value of a commodity.1 The first approach, the traditional one, maintains that demand affects the determination of the value of commodities only indirectly by changing the decisions of producers concerning the labor requirements for production. The second approach, which I refer to as the monetary approach, interprets demand as fully determining the value of commodities. In the monetary approach, the market-price is identified with the exchange-value so that changes in demand directly affect the magnitude of value attributed to each commodity. The third approach, which I call the diachronic approach, argues that in Chapter 10 of Volume 3 of Capital, Marx provides a method of determining the value of a commodity under conditions of excess or deficient demand. According to this interpretation demand directly affects the magnitude of a commodity’s value. It does so by affecting the magnitude of labor-time considered to be “socially necessary.” The conditions of production, however, define a range within which the exchange-value can vary. Each of these approaches draws upon exegetical evidence and analytic reasoning to defend the interpretation and each comes to a different conclusion concerning what value means and how value and exchange-value are related.
Theorists in the three approaches disagree over what Marx means by socially necessary labor-time and how demand affects the determination of value and exchange-value. Traditional theorists emphasize the first of two meanings that are attributed to the term: labor is socially necessary if it is expended with the average degree of skill and intensity prevalent at the time. Here, demand has no direct effect on the magnitude of a commodity’s value since production conditions alone determine the magnitude of value. Marx, however, attributes a second meaning to this modifier and this second meaning suggests that demand plays a direct role in the determination of value.
(S)uppose that every piece of linen in the market contains no more labor-time than is socially necessary. In spite of this, all these pieces taken as a whole, may have had superfluous labor-time spent upon them. If the market cannot stomach the whole quantity at the normal price of 2 shillings a yard, this proves that too great a portion of the total labor of the community has been expended in the form of weaving. The effect is the same as if each individual weaver had expended more labor-time upon his particular product than is socially necessary.
(Marx 1954, 109)
In Volume III, Marx adds:
in general too much social labor has been expended in this particular line; in other words, a portion of this product is useless. It is therefore sold solely as if it had been produced in the necessary proportion. This quantitative limit to the quota of social labor-time available for the various spheres of production is but a more developed expression of the law of value in general, although the necessary labor-time assumes a different meaning here. Only just so much of it is required for the satisfaction of social needs.
(Marx 1959, 636)
These passages apparently contradict earlier statements where Marx argues that socially necessary labor-time value is determined solely by the average labor-time required in production. Indeed, it implies that labor expended with average skill and intensity but in excess of existing social need is both socially necessary in the first sense and not socially necessary in the second. Marxian theorists have thus encountered the problem of how to make sense of this apparent contradiction.
In Chapter 10 of Volume 3 of Capital, Marx develops three examples to illustrate how demand contributes to the determination of market value—the exchange-value of a commodity considered at the industry level with competing producers all operating with varying compositions and productivities to produce identical products. The interpretation of these three examples highlights the differences between the traditional, monetary and diachronic approaches to demand.
In the first case, the commodity is produced by a number of techniques each providing roughly equal proportions of the total supply. The numerical average of these techniques defines the labor-time socially necessary to produce the commodity and thus determines the market-value. In the second case, one technique provides the bulk of the output of the industry. Here, the individual value of this dominant technique may define the market-value even if it does not represent the numerical average of the total labor expended (Rubin 1973, 176). In both cases, Marx assumes demand is just sufficient to absorb the existing supply at a market-price equivalent to the market-value.
Marx’s third case concerns the determination of market-value under conditions in which demand deviates from supply when the market-value is determined by one of the two above mentioned methods. Here, Marx argues that the market-value may be determined by one of the extreme techniques of production (the most or least efficient producer) and that it is the magnitude of demand which determines the extent to which the market-value deviates from the determination by the average or dominant technique (Marx 1959, 184–5).
While the magnitude of effective demand for the commodity has until this point in the analysis simply been assumed, it becomes “of essential importance as soon as the product of an entire branch of production is placed on one side, and the social need for it on the other. It then becomes necessary to consider the extent, i.e., the amount of this social want” (Marx 1959, 185). The introduction of this new contingency requires the reevaluation of what it means to say that a commodity represents a given amount of socially necessary abstract labor-time.
Just as it is a condition for the sale of commodities at their value that they contain only the socially necessary labor-time, so it is for an entire sphere of production of capital, that only the necessary part of the total labor-time of society is used in the particular sphere, only the labor-time which is required for the satisfaction of social need (demand). If more is used, then, even if each individual commodity only contains the necessary labor-time, the total contains more than the socially necessary labor-time; in the same way, although the individual commodity has use-value, the total sum of commodities lose some of its use-value under the conditions as...the rise or fall of market-value which is caused by this disproportion, results in the withdrawal of capital from this branch of production and its transfer to another...
(Marx 1968, 521, emphasis added)
While Marx introduces this contingency in his discussion of the determination of market-value, more than once he states that the analysis applies to the determination of the price of production with the appropriated modifications. Marx indicates this progression in the following passage in which he alludes to the development of a more developed category of exchange-value:
Our analysis has revealed how the market value (and everything said concerning it applies with the appropriate modifications to the price of production) embraces a surplus-profit for those who produce in any particular sphere of production under the most favorable conditions. With the exception of crises, and of over-production in general, this applies to all market-prices, no matter how much they may deviate from market-values or market-prices of production.
(Marx 1959, 198; see also page 179)
Theorists in the three approaches disagree over the interpretation of these key passages.
Rubin (1973) argues that Marx’s third method for the determination of market-value is erroneous. According to Rubin, the correct method of determining the market value of a commodity in Marx’s third case, when demand does not equal supply, is to define the market-value according to the individual value of the technique capable of responding to the necessary adjustment in the quantity produced. Rubin argues for this correction of Marx’s argument with reference to the necessity of maintaining a state of equilibrium among industries—any other determination of market-value would destroy the condition of equilibrium which is assumed to exist between branches. For Rubin, the market-value thus serves to define the value which maintains a state of equilibrium between the various branches of production. If the market value were determined by the average technique, but the more efficient technique were capable of expanding production, this would lead to an expansion of the more efficient technique and a breakdown in the condition of equilibrium between industries.
According to Rubin, the term “socially necessary”, in the second sense that Marx identifies, refers to an abnormal situation of deviations of market demand from market supply. It does not therefore refer to the determination of market value; rather, it refers to the deviation of market-price from market-value. For Rubin, a consistent interpretation of Marx’s theory of value depends upon maintaining this distinction and traditional theorists have accepted this reasoning (Shaikh 1981, 278).
In contrast to Rubin, Rosdolsky (1954) offers an interpretation of the determination of market-value that accepts Marx’s statements concerning the role of demand. He argues that when demand deviates from supply, the market-value can equal the individual value of one of the two extreme groups of producers as Marx claims. Rosdolsky considers the case in which the predominant group in the industry is using the less efficient technique of production. In order for the market-value to equal the individual value of the less efficient group of producers, the demand for the commodity at the average value need only slightly exceed supply. However, in order for the market-value to equal to the individual value of the most efficient producers, supply must significantly exceed demand.
If demand is only slightly greater than supply, the individual value of the unfavorably produced commodities regulates the market-price... Should demand be weaker than supply, the favorably situated part, whatever its size, makes room for itself forcibly by paring its price down to its individual value. The market-value cannot ever coincide with this individual value of the commodities produced under the most favorable conditions, except when supply far exceeds demand.
(Marx 1959, 184–5)
The existence of excess or insufficient demand creates a deviation of market-price from market-value. However, as Rosdolsky notes, Marx clearly states that there are two distinct deviations that occur:
Should [the quantity produced] be smaller or greater, however, than the demand for them, there will be deviations of the market-price from the market-value. And the first deviation is that if the supply is too small, that market-value is always regulated by the commodities produced under the least favorable circumstances and, if the supply is too large, always by the commodities produced under the most favorable conditions; that therefore it is one of the extremes which determines the market-value, in spite of the fact that in accordance with the mere proportion of the commodity masses produced under different conditions, a different result should obtain. If the difference between demand and the available quantity of the product is more considerable, the market-price will likewise be considerably above or below the market-value.
(Marx 1959, 185–6)
Rosdolsky thus rejects Rubin’s “correction” of Marx: he concludes that the relative strength of demand affects the determination of the market-value directly by affecting the way that the labor expended on the production of the commodity is counted. Reference to the market-value does not imply determination by the industry average except in the special case in which demand and supply coincide at the average value. However, in the general case it cannot be assumed that markets clear and, as a result, profit rates across industries will differ. He argues that Marx’s analysis in this chapter provides a way to analyze how the market-value is determined when the possibility of excess or insufficient demand is introduced and profit rate differ across industries. In this case, the market-value moves within the range determined by the conditions of production according to the strength of effective demand for the commodity in question, “provided the demand is large enough to absorb the mass of commodities at values so fixed” (Marx 1959, 185).
The traditional interpretation thus accepts Rubin’s argument that Marx erred in suggesting that demand directly affects value. The monetary approach accepts the conclusion that demand affects value but ignores Marx’s analysis in Chapter 10 in which he discusses the limits, determined by the conditions of production, within which the market-value can move. The diachronic approach extends Rosdolsky’s interpretation, in which Marx’s statements about the effect of demand on the determination of market-value are accepted, and applies this analysis to inter-industry competition to further develop the concept of the price of production to define the market-price of production along the lines that Rosdolsky, following Marx, suggests.
Subsequent theorists have developed three distinct positions concerning the role of demand in the determination of value that accept Rubin’s argument that demand does not directly affect the magnitude of value or exchange-value. Semmler (1984) and Lianos and Droucopoulos (1992) defend a “linear production theory” that defines the commodity’s exchange-value with reference only to the average technique of production in each industry. This view does not integrate the second meaning of socially necessary labor-time—labor expended in accordance with existing social need. Changes in demand affect only market-prices which rise and fall above the prices of production determined by average labor requirement in each industry and the requirement that each industry achieves the general rate of profit. Market prices gravitate toward prices of production as a result of the profit rate differential that is created by excess or deficient demand.
Demand thus affects value only indirectly, by changing the relationship between market price and the exchange-value (price of production), altering the relative rates of profit among industries, eliciting movements of capital and changing the conditions of production in the industry. “The change in the relative market values—and later the prices of production—are determined by laws that are different from those of supply and demand, which regulate the fluctuations of the market prices” (Semmler 1984, 24). At the same time, conditions of exchange do play an indirect role in the regulation of value through changes in the relative rates of profit and the subsequent movements of capital that they cause. Dualist models, including the Sraffian models that use physical quantities to solve for prices of production, commonly adopt this approach.
Shaikh (1981) and Itoh (1988) develop a “regulating capital theory” in which exchange-value is determined not by the average technique, but by the technique that regulates the market-price in the industry. They define the regulating capital in slightly different ways. Shaikh reasons that since variations in demand provoke capital movements, it will be the techniques that dominate the industry that determine the center of gravity of the market-price since these will define the price of production once the perturbation of demand is resolved by capital flowing into or out of the industry. It is not necessary therefore to determine the average conditions of production; it is sufficient to identify the dominant or regulating capital.
Itoh (1988) defines the regulating capital as the most efficient generally available technique of production that is capable of responding to variations in demand. It is this technique that determines the price at which there is no incentive for producers to enter the industry. Since new production must be assumed to be undertaken by the most efficient generally available technique, if the rate of profit offered by this technique is higher than average, expansion of production in the industry will be expected to occur. A dynamic theory of price adjustments should therefore consider this “regulating” technique of production as defining the market price of production in order to theorize market processes. Sekine (1980) extends this approach and argues that it is necessary to consider the “marginal response ratios” of each technique of production in the industry - the proportion of the increase in demand that is met by each technique. The commodity’s market-price of production is determined by weighting the individual values of the various techniques according to their response ratio.2
Itoh and Sekine also identify a further theoretic development of the exchange-value, in this case the “price of production,” that Marx alludes to. The resulting price-form, the market-price of production, is used to show the effects of competition within and across industries once demand conditions are incorporated into the analysis. These authors conclude that the market-price of production is contingent on multiple factors and therefore can only be used to establish that a unique market-price of production is possible, not to theorize changes that may occur in markets due to competition.
None of these traditional theories of the role of demand adequately incorporate the second sense of socially necessary and they provide no direct role for demand in the determination of values. Value is determined by the labor-time socially necessary in the first sense, that required on average to produce the commodity, where the average is calculated according to the mean or the modal or regulating capital. Changes in demand act only to regulate the market-price, creating incentives for capital movement, but not directly affecting the determination of commodity values.
The strength of this approach lies in resolving questions that do not rest on the short-run adjustment process. These include the resolution of the question of the relationship between value and exchange-value and the way that changes in productivity affect the distribution of value in the long run. Working with the average or dominant technique of production in the industry allows theorists to utilize the input-output matrices to mathematically establish the effect of changes in technical conditions of production on the long-run value and exchange-value in competing industries. It also permits the careful specification of the determination of values and prices of production that is needed to resolve differences concerning the proper specification of value and exchange-value that lie at the root of the transformation problem.
The difficulty with the traditional theory is not that it gives a poor account of long-run changes in prices; rather it lies in what the theory ignores by directing its focus only to the long-run and abandoning attempts to theorize the adjustment of prices in the short-run. Long and significant deviations of market prices from these prices of production can be expected to occur even with capital mobility given the presence of long-lived capital and the uncertainty and variability of demand. By relegating these factors to the determination of market prices and labeling them contingent, the traditional theory ignores precisely those factors that have the most immediate effect on economic outcomes. Indeed, the extremely limited role for demand in this approach can be established by showing that the trajectory of price changes in the industry remains the same whether or not demand rises or falls even in the long run (Horverak 1988). The concepts of value and exchange-value, which are able to show the distribution of value among producers within and industry and among competing industries, are not used to show how demand redistributes value and instead are utilized only to determine long-run trajectories of market-prices. Since the short-run distribution of value is vital to an understanding of Marxian theories of crises as well as to the theory of money, this feature of the traditional interpretation represents a serious weakness.
According to monetary theorists, demand directly determines the magnitude of a commodity’s value, but this conclusion is justified in two different ways. An early approach, which came to be known as the Rubin School, argues, following Rubin, that the reduction of concrete, private labor to abstract, social labor can only occur through exchange. Value-form theorists, on the other hand, argue along Hegelian lines that the contradiction between the value and the exchange-value of the commodity necessarily implies the expression of value in the form of money.
The Rubin School takes issue with two elements of the traditional attempt to theorize the relationship between value and price. First, since traditional theorists assume that value exists prior to and independently of exchange, they leave no meaningful role for money. Second, the distinctions between private and social labor; concrete and abstract labor, do not have any meaningful content. Instead, the Rubin School theorists argue that the act of exchange articulates the private concrete labors of producers into a social division of labor. Consequently, it is exchange that validates private, concrete labor as socially necessary, abstract labor. Value is therefore determined not in production but through exchange.
In this approach, labor is not simply assumed to be simple homogenous labor at the outset; instead, the reduction of concrete labor to abstract labor is understood to result from the act exchange itself. Colletti (1973) justifies this conclusion on the basis of the characteristics of capitalist commodity production.
Lacking any conscious assignment or distribution on the part of society, individual labor is not immediately an articulation of social labor; it acquires its character as a part or aliquot of aggregate labor only through the mediation of exchange relations or the market.
(Colletti 1973, 462, emphasis in original)
Indeed, there appears to be no other way to effect the reduction from one to the other. As Gerstein notes: “… the process of commodity production is not directly social...[As a result]...there is no way to reduce observable concrete labor to social abstract labor in advance, outside of the market which actually effects the reduction” (Gerstein 1976, 52, emphasis in original).
One important implication of this view is that value can only be measured in units of money. Since “abstract labor can be observed in only one place—the market—...its palpable reality takes the form of money...abstract labor as such can be ‘measured’ only when it takes the independent form of money, a form that poses it against the bodily form of the commodity in which it is embodied” (Gerstein 1976, 53; see also DeVroey 1981, 189).
A second implication is that Marx’s theory of value, according to the Rubin School, cannot provide the basis for a quantitative theory of price determination. Because the market itself determines the magnitudes of abstract labor and because the actual relations of exchange are subject to contingencies which lie outside the purview of theory, “...in principle, Marx’s theory of value cannot be used to obtain prices” (Gerstein 1976, 53). Furthermore, the determination of value with reference to exchange ratios in the market implies that value cannot be the only determinant of prices, as Rubin himself argued. This approach thus rejects both Marx’s theory of prices and his theory of exploitation (DeVroey 1981, 193).
A second monetary approach reaches similar conclusions from different premises. For value-form theorists, money must express values as a result of the dialectical development of the form of value in Capital. According to this Hegelian interpretation of Marx’s methodology, the contradiction between the use-value and the exchange-value of the commodity results in the development of the money form as the expression of the essence of value. “Just as the value of a commodity is only expressed in exchange relation, so can the magnitude of value only be expressed in these relations” (Eldred and Hanlon 1981, 35). Value cannot therefore be considered to exist prior to the exchange of commodities.
Demand directly affects the determination of the value of commodities in this view, since exchange relations in the market determine the value of commodities. “The commodity’s price expresses the extent to which the particular concrete dissociated labor embodied in the commodity are acknowledged as universal... For this reason, and in contrast to Marx, fluctuations in price are to be regarded as fluctuations in the commodity’s magnitude of value” (Eldred and Hanlon 1981, 39).
A number of theorists have attempted to develop a monetary approach that can be used to quantitatively analyze value. These approaches incorporate a definition of the value of money to translated value magnitudes into quantities of abstract labor-time. Some argue that this conversion can only be applied at the macro level. These theorists thus interpret Marx’s value theory as a macroeconomic theory and forgo any attempt to calculate individual prices or values (Bellofiore 1989; Foley 2000). Others argue that, contrary to Foley’s position, the value of money can be applied at the level of individual prices (Mohun 1994; Moseley 1993; 2005; McGlone and Kliman 1996; Kliman 2006).
For Mohun, the conditions of production of a commodity prior to and independent of exchange determine the commodity’s value as a distinct magnitude of socially necessary labor-time. Value is determined without reference to exchange and “measured in terms of socially necessary time (standardizing for different work intensities, productivity levels, skills and so forth” (Mohun 1994, 395).
Abstract labor, on the other hand, is a magnitude that is determined through the exchange of commodities against money. The role of money as the equivalent form of value serves to effect the reduction from concrete, private labor to abstract social labor in the way Rubin suggests. Exchange with money determines the magnitude of the form of value, which is denominated in money units. Expressed in money,
use-value appears directly as value, concrete labor as abstract labor, and private labor as social labor... The value of a commodity is thereby expressed in units of the universal equivalent... and expresses the value of any commodity as a sum of money, or in (money) value-form.
(Mohun 1994, 395)
The value of money thus “enables a translation between prices into labor-times” (Mohun 1994, 409). For Mohun, “[t]his is the fundamental meaning of ‘price’; ‘price’ is a representation of a proportion of society’s total labor-time allocated to a particular commodity. In this sense prices are forms of value, of abstract labor” (Mohun 1994, 403).
Both prices of production and market prices are thus conceived as forms of value. The former are defined under conditions of profit rate equalization among industries; the latter are “what is observed at any particular time in the market, determined by prevailing demand and supply conditions... [D]eterminations generating market prices differing from prices of production can be understood as a concretization of the analysis” (Mohun 1994, 399). So according to Mohun, the exchange of commodities merely redistributes labor-time among the industries according to the level of demand. Market prices are themselves forms of value and can be translated from money magnitudes into magnitudes of abstract labor by dividing them by the value of money. The abstract labor theory of value inspired by Rubin, combined with the definition of the value of money thus provides a strictly quantifiable theory of the relationship between value and price.
McGlone and Kliman (1996) and Kliman (2006) argue that the market-price of constant capital in the previous period determines its value in the current period. This temporary single-system solution thus adopts a monetary approach to demand that follows the Rubin School theorists. The value of the constant capital component of value entering and leaving a given production period is determined by its market-price. Kliman argues that this temporal approach is able to resolve difficulties in translating value and price magnitudes and provides a more consistent theory of crisis than the simultaneous approaches of linear production theory (Kliman 2006). However, there is no development in Kliman of the market-value or the idea that there are limits, determined by the techniques of production, to the movement of market-value as demand varies, so his approach, in spite of its attention to techniques of production, does not incorporate the second sense of socially necessary labor-time. Moseley (2005) also overlooks the determination of market-values. He argues that because Marx defines capital first with reference to money (money which begets money), the idea of value as a magnitude of money is conceptually prior in Marx to the idea of value as socially-necessary, abstract labor-time. Value magnitudes are therefore amounts of money that correspond to a magnitude of abstract labor. He does not introduce the idea of the second meaning Marx attributes to socially necessary labor-time and therefore follows the monetary approach in which demand fully determines the magnitude of value.
Monetary theories have the great merit of recognizing the important role that exchange plays in the determination of value and the integration of private, concrete labor into a social division of labor that is a key element of the way Marx distinguishes capitalist commodity exchange from other modes of production. Money, too, is given a central role: it is integrated into the way commodities function rather than simply assigned the role of measuring value. The factors affecting the function of money in capitalist economies, the form that money takes, the ways in which it is created and distributed, and the contradictions that ensue are all integrated into the analysis in a coherent manner.
By incorporating demand directly into the determination of the magnitude of value, however, the early monetary theorists encounter three difficulties. First, by collapsing the quantitative determination of value into one dimension—money units or price—these approaches forfeit the ability to conceptualize exploitation as unpaid labor. “It has no power to explain the determination of prices by values, since the latter are measurable only in units of the former” (Gleicher 1983, 105). Second, neither approach incorporates the second meaning of socially necessary labor. As a result the market value and market price are conflated and the determination of the former with reference to the conditions of production as suggested by Marx’s third method is lost. Third, the value-form approach leads to the abandonment of the quantitative theory of price determination.
Later monetary theorists partially resolve some of these difficulties. It might be argued that by defining market price as value, Mohun in effect incorporates the second meaning of socially necessary. However, by defining value as the socially necessary labor-time required to produce a commodity, and the value form as the abstract labor attributed to it in exchange, the second meaning of socially necessary is only applied to value, not to exchange-value. Socially necessary must therefore be understood only with reference to the first meaning—labor of average intensity and duration—in order to maintain the proposition that production conditions alone determine the value of commodities. Furthermore, and contrary to Mohun’s claim, the value of money cannot serve to translate the values of individual commodities into prices. By leaving the value of constant capital out of the determination of the value of money, the latter serves only to measure the value produced by the new labor expended. The analysis cannot therefore account for the transfer of value into and out of the period due to the use of constant capital. Foley (2000) acknowledges this implication, which is why he argues for the redefinition of the theory of value as a theory of aggregate value flows.
In each of these monetary approaches, however, socially necessary labor-time is defined solely with reference to the first meaning identified by Rubin. There is no mention of the second sense of the term—labor expended in accordance with existing social need. By defining value and exchange-value as the money price realized in exchange, these approaches lose the ability to distinguish value and exchange-value. They are therefore unable to theorize how demand affects the redistribution of value from those who have produced it, to those who receive it in exchange.
The final approach follows Rosdolsky’s interpretation of Marx’s analysis of demand. I refer to this approach as “diachronic” because a key insight common to these theorists is the idea that the order of exposition represents a diachronic progression in the meaning of value and its relationship to exchange-value. A recognition of this diachronic ordering helps to resolve the apparent contradictions and difficulties encountered by alternative explanations. Horverak (1988) and Indart (1990) provide early attempts to explain the relationship between value and exchange-value under conditions of excess or deficient demand. They both conclude that Marx did not err when he described the third possibility he considers in Chapter 10. When demand exceeds supply at the market-value, the market-value and market-price both rise in tandem. When demand exceeds supply at a market-value determined by the least efficient technique of production, the market-price will then deviate above the market-value of the commodity. The opposite occurs with excess supply. The conditions of production thus define a range within which the market-value can vary and the market-price moves with the market-value within this range.
Horverak and Indart argue that in the first two examples Marx develops in Chapter 10 he assumes that the effective demand for the commodity is just sufficient to absorb the supply at the market-value “no matter which of the three aforementioned cases regulates this market-value. This mass of commodities does not merely satisfy a need, but satisfies it to its full social extent” (Marx 1959, 185). Provided the market-value lies within the range defined by the techniques of production, the labor expended on the commodity satisfies “the full social extent” of the need for the commodity. The question of the distribution of demand arises only in the third case Marx considers—when the industry is considered in relation to competing industries. At that point the possibility of a divergence between demand and supply must be taken into account.
This explanation allows this approach to integrate both senses of socially necessary labor-time while recognizing that initially, in Volume I, the first sense of the term is dominant since the second sense is not yet relevant. Only with the introduction of competing industries in Volume III does Marx relax the assumption that demand is just sufficient to absorb the supply and the assumption that the labor required for its production is socially necessary in the second sense is no longer enforced. It must be established through successful competition in the market.
Market-value is thus not a fixed magnitude determined solely with reference to the conditions of production independent of exchange as in traditional, linear production theory. However, market-value is not simply equal to the market-price as in the monetary approach. Instead, the market-value varies with the market-price according to the strength of effective demand within the limits imposed by the conditions of production. Outside these limits there is a deviation of market-value from market-price. The conditions of production in the industry thus impose a strict limit to the range in which the market-value can move. “For according to Marx’s conception, market-value can only move within the limits set by the condition of production (and consequently the individual value) of one of the three categories of producers” (Rosdolsky 1954, 92).
However, since inter-industry competition implies exchange at prices of production, not market-values, this diachronic interpretation must be applied to the formation of prices of production. These theorists argue that just as the introduction of competing industries implies the evolution of exchange-value from market value to price of production, the introduction of demand requires a further evolution in the exchange-value from price of production to market-price of production. Roberts (1997; 2004; 2005) extends the arguments of Wolff, Callari and Roberts (1984) to explain how exchange effects a conversion of private, concrete labor to socially necessary, abstract labor in the formation of prices of production. Here, the value of the means of production in the period are determined not by the concrete labor-time required on average to produce them, but by the socially necessary abstract labor those means of production represent in equivalent exchange. The exchange-value of the means of production thus denotes the value of that those means of production transfer to the commodity in the production process. This non-dualist approach both resolves the transformation problem and explains what the monetary theorist could not explain—how exchange could directly take part in the formation of value while maintaining a quantitative theory of value at the micro level.
Roberts, however, maintains the assumption that demand is just sufficient to absorb the supply: he thus only considers the prices of production, not how those prices of production are affected by variations in demand. Integrating demand into Roberts’ approach to abstract labor implies defining the techniques of production in each industry and showing how changes in demand affect the determination of exchange-value when demand deviates from supply. The resulting market-price of production incorporates the effect of demand at the level of analysis that introduces competing industries and can thus be used to show how variations in demand redistribute socially necessary, abstract labor-time among competing producers in different industries (Kristjanson-Gural 2003; 2005).
This interpretation thus accomplishes two things that the traditional “centers of gravity” explanation attempted to do. It shows that the conditions of production determine the value and exchange-value by setting limits on the movement of the market-prices of production. It also consistently integrates the concept of the market-price of production that Marx alludes to but does not develop (Kristjanson-Gural 2009). The approach also achieves what the monetary theory argues is essential. It provides a meaningful role for exchange in the determination of value and incorporates money. The monetary expression of value, defined with reference to the total value in circulation, is used to convert the monetary expression of value and exchange-value from money units to units of socially necessary labor-time. Both value and exchange-value continue to be denominated in both labor-hours and money (Kristjanson-Gural 2008). The approach thus integrates the strengths of the monetary approach, while retaining the micro-economic analysis of how changes in conditions of production affect profitability and the distribution of value that the traditional, linear production theory develops.
Further applications of the analysis include the development of Marx’s theory of both absolute and differential rent as special cases of the market-price of production under conditions of non-reproducible elements of constant capital (Balardini Chapter 11, this volume). Further applications to introduce monopoly pricing have yet to be explored. The question of demand is a crucial and largely overlooked aspect of Marx’s theory of value. Further debate about and development of demand in Marx’s value theory and the related concept of the market-price of production is clearly warranted.
1 For clarity, value is the socially necessary abstract labor-time required to produce a commodity; its exchange-value is the socially necessary labor-time the commodity represents in equivalent exchange. Both value and exchange-value manifest in money form and can be measured in both money and labor units. Prior to introducing competing producers, value and exchange-value have the same magnitude. With competing producers within an industry the exchange-value is its market-value; with competing industries it becomes the price of production; with competing industries and variations in demand it becomes the market-price of production. Market prices are distinct from exchange-values. They are the average money prices for all producers of a given commodity over a given period.
2 Sekine’s and Itoh’s interpretation of the market-price of production has a curious affinity to marginal cost analysis in neoclassical economics.
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