Enver Hoxha :: The Marxist-Leninist Movement and the World Crisis of Capitalism



The international situation is becoming ever more complicated. In saying this I have in mind that the situation is not tranquil either for capitalism or for the revolutionaries. Capitalism is in a great fever, in crisis.

In my opinion, we Marxist-Leninists, the working class, the revolutionaries and ordinary progressive people in the world must take greater efforts to increase the superiority of the forces of the revolution. Why? Because capitalism, which is experiencing great disturbances at present possesses powerful means and has developed diverse modes of government, action, sabotage and disruption which hinder the advance of the revolution.

I think that our Marxist-Leninist parties and the progressive elements ought to look at this situation realistically and, on the basis of the theory of Marx and Lenin, find such means and forms of struggle that will turn the situation in favour of the revolution. This requires the creation of new Marxist-Leninist parties and the strengthening of the existing ones, of course, adhering firmly to the teachings of Marx and Lenin. They alone are able to make detailed analyses of the situation in the country, the ratio of classes, the strength of the working class, its strong and weak points, as well as the forms and methods which the bourgeoisie employs to subjugate the workers and the people. Such a study will serve each party, in its specific conditions, for struggle, for action, and not for sterile discussions which do not bring the liberation of the working class or the country, but, on the contrary, bring disruption and subjugation.

Let us not forget that while capitalism and the various parties in its service are in deep crisis, they are struggling to find forms, ways and expedients to befuddle and confuse the Marxist-Leninists who stand at the head of the working class, so that they will not manage to make the class conscious of the need to take action and capitalism and its parties will be able to split it while keeping it under their rule. The clear Marxist-Leninist ideas absolutely must be combined with actions; we cannot proceed from the idea that actions should be carried out only when the forces of the party are great, or capable of confronting the military machine of imperialism. But this should not be taken to mean that now the communists must hurl themselves into adventurous actions. Avoiding adventurism should not prevent us communists from acting in a Marxist-Leninist way.

Naturally, our actions must be well calculated. We must foresee the dangers threatening us and the possibilities of victory and always bear in mind that the revolution will have its zigzags. One thing must be clear to all, that the lofty reputation of the communist and the genuine Marxist-Leninist party cannot be earned by tailing behind the situation and remaining at the stage of sterile discussions, without becoming a real example for the working class and the other revolutionaries who want to fight against capital.

In thoughts and in actions, the place of the Marxist-Leninist parties is always in the vanguard. And if thoughts are to be combined with actions, we must not go into battle alone, but at the head of the working class and its allies. In order to go into battle together with them it is necessary to penetrate into the ranks and become one with them. It must be said, however, that in this direction unclear views, hesitation, fear and lack of perspective still exists.

Therefore, the task devolves upon us, Marxist-Leninists, to make good these shortcomings. In order to achieve this we must have a thorough understanding of the situation, know the forms, methods, ways and mechanisms which imperialism and capitalism use today to remain alive. They do not readily down the weapons with which they intimidate and oppress the peoples. Then, apart from weapons, they also use policy, diplomacy and demagogy. We must cope with all these weapons of the enemy without underestimating them, but at the same time, without overestimating them. If we can find the weak points in the strength, thought and actions of the enemy, then we shall more easily find the course we must pursue in our struggle and the most appropriate forms and methods for this struggle.

We have to realize that present-day imperialism and capitalism have adopted new forms of oppression and exploitation which, in essence, do not differ from the forms of the old colonialism. At present the metropolises are applying these forms, which we call neo-colonialist in all those countries which were their colonies in the past, that is, the countries of Africa, Asia, Latin America and other countries formerly under their military occupation, in which to this day they continue to exploit the sweat and blood of the peoples.

This military occupation had the structure and superstructure of the monopoly capitalism of the metropolises, had the same method of exploitation that was used against the people of the metropolis, but in a more savage form. The colonies were the prey of capitalism which oppressed the peoples in the most merciless ways, without hindrance.

After the Second World War colonialism assumed new forms. Many countries, with the exception of the few remaining colonies, are called “free”, “souvereign”, “democratic”, or what you will. Naturally, an “independent” capitalist system has been established in those countries, but they are always dependent on the big capitalist countries.

Our Party and the Marxist-Leninists everywhere in the world must make clear to the working class and the people of their own countries that we ought to exploit the existing revolutionary situation to the full, not only by undertaking political and ideological actions, but also by striking blows when the conditions have matured and when the oppression has become intolerable, and as the people themselves say: “Each must defend himself!” We must explain clearly to people so that they understand that neo-colonialism applies the forms of domination, exploitation and oppression which it uses today not only in the countries in which colonialism and the capitalist monopolies reigned previously, that is in the colonies, but also in the metropolises themselves.

In the metropolises, the working class, students and progressive working people have been and are subject to twofold oppression: that of internal capital, on the one hand, and that of foreign monopoly capital, on the other; they live under the terrible pressure of local monopolies and multinational companies. This is the new characteristic of capitalist society and its highest stage, imperialism, which is quite indiscriminate in regard to its oppression of peoples and the extraction of huge profits from their sweat and blood, both within the metropolises and outside them. Capital has become international, without a homeland.

Thus, the group of international monopolist makes no distinction between peoples and states, provided that the profits are great. Thus, the monopolies and the multinational companies recognize neither the freedom, independence, nor the souvereignity of the peoples, which for them are only formal. In this feverish activity they have made common cause with one another in order to share in the profits. But in capitalism the law of the jungle prevails in every direction: the great fish eat the small. This law prevails also in the division of profits.

Our Marxist-Leninist parties and revolutionaries are aware that the people living in the developed capitalist countries are more favoured than those of the former colonial or neo-colonial countries. It is an indisputable fact that the people are exploited more in the neo-colonialist countries where the big joint companies invest their capital. The actions of capital on the workers in the metropolises are somewhat less burdensome than in other countries, but the aim is the same.

Of course, in the various countries of the so-called third world, or non-aligned world, there are very weak points for big and local capital, but there are weak points, also, for the working class and the revolutionary elements, because of their political and ideological backwardness. Therefore, in order to ensure its financial, commercial and military potential, big capital is strengthening the local capitalist cliques in power day by day in order to keep their peoples in subjection, darkness and ignorance and to drown in blood any attempt at uprising by the people or interference by rival foreign capital in those countries.

The time has come when the mentality of the working class in the developed countries, one of the main obstacles of the revolution is the trade-unions which have been transformed into tools of the bourgeoisie to restrain movements of the working class. The owning class and their agents, one of which is the worker aristocracy which is bound to the various parties of social-democracy and modern revisionism, make the law in the unions.

The social democratic parties and the parties of modern revisionism are reformist parties, opposed to the revolution and for the defence of capital, for reforms of the structure and for a corrupted anti-proletarian superstructure, in order to undermine any revolutionary sentiment and action. Just like the parties of social-democracy which were exposed by Marx and Lenin long ago as lackeys of the bourgeoisie and preparers of the terrain for imperialism, the present-day revisionists are precisely those elements who come to the direct aid of ageing social-democracy against socialist society, in order to quell the uprising of the working class and the peoples, the revolution.

Therefore, the trade-unions in the capitalist countries must be considered as tools of the parties of capital and must be fought as such, but without hurting or damaging the unity of the working class. In my opinion the trade-unions in the capitalist countries will play a major role only if their dependence on parties of the bourgeoisie, whether social-democratic or revisionist, is broken and only if the influence of the worker aristocracy in them is totally eradicated. In other words, the unions will be placed in the service of the working class only if true representatives of that class, educated with the Marxist-Leninist ideology, place themselves at the head of them, mobilize them and hurl them into struggle against the state power of capital. Hence, it must be understood that this power, with all its forms, means, laws and constitution, has nothing democratic and revolutionary about it, as those in its service try to make out. They are the same forms and mechanisms of the old capitalist state, but dressed up with new elements which respond and are adopted to new situations.

Naturally, the development of the economy, the technical progress in the capitalist countries have created overproduction, which has caused the present great crisis, which has become a gangrenous wound for capitalism and imperialism. The broad working masses are impoverished and their life is becoming ever more difficult, while the profits of the capitalists are increasing, but the capitalists sense the danger and are striving continually, every day, to create economic, political and military forms and structures which will withstand any possible opposition or revolt on the part of the oppressed.

For the time being, in the developed capitalist countries we see this revolt expressed in demonstrations, but still peaceful and limited to slogans for economic demands. Such manifestations serve capital as an expedient, in order to create among its own parties the impression that allegedly the working class and the working people of all categories have complete freedom to hold strikes and demonstrations, to make complaints and criticisms, etc. However, as I pointed out above, in reality these movements do not have the results that the working class desires and demands, irrespective of the fact that now and again, when such manifestations become widespread, the bourgeoisie is obliged to part with a few extra crumbs to placate the anger and threat of the working people.

Hence, the working class, with its Marxist-Leninist party at the head, must be capable of understanding when the suitable national moment exists to organize and proceed towards the uprising. In this direction it is precisely the Marxist-Leninists who must be the most capable, the most wide-awake, the best organizers in order to become the subjective factor of the leadership of the revolution. In no way should we proceed from the idea that the conditions are not yet ripe for the revolution, or that the revolution cannot break out in the developed capitalist countries, therefore, we have to wait for it to develop in those states or continents in which the oppression, the forms and methods of exploitation are allegedly different from those in the metropolises. The working class and the Marxist-Leninist parties of the metropolises ought to give the peoples of various countries great aid, should assist their revolutionary movements. The greatest support and aid is to make life possible for monopoly capitalism and the foreign capital which collaborates with the local capital for the oppression of the peoples in the colonial and neo-colonial countries.

The situation in many countries of the world today is like that in Albania in the time of the reign of Ahmet Zog who formed a comic opera kingdom, with beys, feudal lords and reactionaries in order to oppress, bleed and exploit the Albanian people to the bone. Zog, of course, was penniless. He made money when sold the assets of the country to foreigners and when he granted them concessions in Albania. The Serbs and Wrangel’s white guard army helped Ahmet Zog to return to Albania. Subsequently he became a lackey of the Italian imperialists who, before their military occupation of Albania, had, in fact, made it a colony of theirs, or a neo-colony, if we can use the current term. Although fascist Italy invested little capital in Albania, it seized all the key positions in the economy and the strategic points of the country and prepared its occupation.

Therefore, the Marxist-Leninist parties in the capitalist countries will have to work and struggle unrelentingly in order to weaken international monopoly capital, the multinational companies which oppress and exploit the peoples, and make life difficult for them so that the people attack wherever the links in the capitalist chain are weakest, that is they must rise in insurrection to seize power and carry out democratic reforms and then to establish the dictatorship of the proletariat, a socialist structure and superstructure.

In various undeveloped capitalist countries today the people are rising in insurrection and revolution. We see this in Iran, Nicaragua, Central America, in the struggle of the Palestinians against the Americans and Israelis, and to a certain extent, we see it in the still disorganized resistance of the Arab countries against the superpowers, which manipulate this resistance in their own interests. We see people’s movements and uprising in Africa, too. But although the peoples in those countries are rising, fighting, and making sacrifices, the elements of the bourgeoisie, united with the big capital, are still doing everything they can through numerous tricks and intrigues to quell the insurrection, or turn it into a movement in their favour, and in that case, such a movement serves merely to eliminate this or that clique from the political scene in order to bring to power another more moderate but likewise capitalist clique which operates in agreement with big monopoly capital. This happens, of course, because of the political unclarity and the lack of organization of the working class. Thus, the anger and hatred of this class, its political-economic suffering and that of the poor peasantry are thus exploited in favour of the bourgeoisie.

Hence, we communists must analyse this situation in general and in particular, so that we understand it and then act. We analyse the situation in order to understand it, so that we know how to act, eventually in order to understand it and allow this difficult situation for the people to continue as before. We must not underestimate, the fear of war which big capital has created. It is a fact that time after time, when the crisis reaches its climax, partial wars, and perhaps even world war, could break out. Only the revolution on the Marxist-Leninist road can prevent, avert, or defeat world war. Otherwise, the major contradictions that exist between the superpowers, between multinational companies may cause it.

Therefore, since we understand this important problem in this way, we must make every effort to defeat the plans and actions which the bourgeoisie and its lackeys are making in preparation for a bloody, general war. This can be an insurrection which is led only by the working class which has the Marxist-Leninist doctrine as its guide.

The renegade of the Spanish Communist Party, Carillo, preaches transition to socialism through reforms. He says we should not charge the army of the bourgeoisie, should not even alter its ideology, but should introduce elements and cadres of the working class into its ranks and make it a defender of its order! And according to Carillo, this order in which the bourgeoisie, the priests, the police, and so on, are in power, will allegedly be socialist (!).

Hence, if we think as this traitor does, then we will not be able to undermine the attack force of the capitalist bourgeoisie. Therefore, we must not think and act as Carillo advocates, but in order to oppose the army of the capitalist bourgeoisie we must organize the people’s revolutionary forces and make them politically conscious of their great role, make clear to them who are those who oppose their actions to attack the state and achieve victory. Such a thing is highly possible.

We saw that the insurgent people in Iran stood up to the heavily armed forces of the Shah and his terrible security force SAVAK. Until that time it was unimaginable that the uprising of the people of Iran would be able to cope with an army equipped with the most sophisticated weapons and trained by the CIA and American officers. But it happened! Therefore, all Carillo’s prattle that we must infiltrate the ranks of the bourgeois army allegedly to convince the officer caste and the defenders of capital in order to bring them to socialism, is unscrupulous deception.

In this direction the bourgeoisie and capitalism are talking savage measures of suppression. One of these measures is the use of terrorism. Terrorism is the preliminary preparation for fascist military coups of the bourgeoisie, which, at moments of exacerbation of the class-struggle, when it sees that it cannot resists the strength and attack of the people goes on the offensive, launches a coup d´état and the fascist military junta takes power. But in order to succeed this has to be prepared, and it is clear that this preparation is being done through the organization of gangs and gangsters, who are armed and operating, to a greater or lesser extent, in every state, disguised under various “communist” and “Marxist” labels like “Brigate Rosse”, etc., precisely to intimidate and confuse the broad working masses and justify the fascist coup d´état. These gangsters operate by attacking banks, killing people, often attacking directors of big enterprises, taking wealthy people hostage and demanding collossal sums for their ransom. They do all this, first of all, to deceive, but also to terrorize the working class and the broad working masses. We notice that in these disturbances the worker aristocracy and all the social-democratic and revisionist parties do not take any active, militant action against terrorism.

Hence, terrorism is the preliminary preparation for fascism to come to power. Through the action of these gangsters, the bourgeoisie threatens the working class and gives it to understand that the existing order which capitalism has established must be protected, otherwise, with the overthrow of this capitalist state (which itself creates the conditions for the terrorists to thrive and is not afraid that they will overthrow it) the workers will loose even those very limited “rights” they have won through struggle and sacrifices, in the economic field, in social security, etc. Thus, we see that in the demonstrations which are held in the capitalist countries, after each terrorist act, the revisionist or social-democratic chiefs and the worker aristocracy, which rules in the trade-unions, cry out against terrorism, while it continues to develop at the rapid rate.

The anti-Marxist theoreticians condemn terrorism in the forms in which it manifests itself today, but they make no distinction between acts of terrorism and the militant actions towards revolution which the working class, led by a Marxist-Leninist party, has to carry out. Being against the revolution, they are against any action, and the state power of the bourgeoisie and its social-democratic and revisionist defenders call any such action, any attempt in this direction, and any military organization of the working class, led by the Marxist-Leninist party, a terrorist act. Indeed, the revisionists vote in favour of strengthening the police and security organs in order to combat terrorism and anarchism. This means allowing the bourgeoisie a free hand to attack any form of organization and struggle of the working class and its vanguard to liberate itself from the yoke of capitalism.

Therefore, we Marxist-Leninists and the working class must understand this question thoroughly and be able to make the distinction, because there is a great difference between Marxist-Leninists and anarchists and the terrorists. On the other hand, however, this question should not be taken to mean that in order to restrain terrorism, the working class with its vanguard and the progressive people should refrain from acting or even from fighting with arms against this state which oppresses them, as well as against all terrorist, anarchist and revisionist forms that support this state power of the bourgeoisie. If we do not understand this situation correctly, if we equate revolutionary action with terrorism and anarchism, then it will be impossible for the revolution, to advance and the working class will remain for ever at the mercy of capital, under the oppression of laws of the bourgeoisie, and, as a consequence, will tone down all its efforts to liberate itself from bondage. Hence, there are certain moments when it is necessary to delve deeper into the meaning which must be distinct from the meaning and judgement which the revisionists and the social-democracy want to give it in the interests of the monopolies and their state.

At present there are difficulties and dangers for the new Marxist-Leninist parties which emerged after the 1960s, and especially for some that were created under the influence of the Chinese cultural revolution. In some of these new “Marxist-Leninist” parties, especially in certain countries of Europe and Latin-America, their emergence on the scene, the organization and uniting of their ranks was done not by sound elements of the working class, but by isolated elements, who had the experience of the weak, anti-Marxist, reformist work of revisionist parties. On top of this, these parties were formed and developed, so to say, in complete legality, and together with others, many elements who posed as Marxist-Leninists but were not such, entered their ranks.

Some leaders of these parties took the problem very lightly, a thing which, naturally, was reflected in their work. They considered the breaking away from the revisionist parties as a very important act. In fact this really was an important act, but the course they were to follow, the forms and methods of organization of their work, especially the political and the organizational line which were adopted and applied, were to have greater importance. As was seen, on certain international problems and theoretical issues they took more or less correct stands, but still, in some aspects, their political line was developed in the same forms as the line of the revisionist parties were unable to make a proper judgement of the situations within their own countries and in the international field. This was so over major events in the international communist movement, for example, over the struggle against Soviet revisionism and, later, in the analyses which should have been made of the development of the situation in China, the factional struggle which was developing there and the Chinese cultural revolution. In many instances it was clear that they lacked Marxist-Leninist depth in their judgements and opinions, but had sufficient arrogance to consider their actions as indisputable.

In fact, right from the formation of some of these parties it was apparent that among their members there were elements who were not properly tempered with the Marxist-Leninist ideas or whose mastery of them was superficial and rather for sentimental reasons. For example, many of them made no effort to gain a thorough understanding of the major role of the party as the vanguard detachment of the working class and of the major difficulties they would encounter in their work and struggle in the conditions of savage, oppressive and exploiting capitalist regime, a regime hostile, first of all, to Marxist-Leninists.

For these reasons, then, in some of the small parties, right from the start frictions appeared and splits occurred, no measures were taken against factionalists, because the leaders and members of the party were not properly acquainted with the Leninist-Stalinist organizational forms of the party in the dangerous and complicated conditions of their countries. Moreover, they did not foresee that reaction would have the activity of the party and its members under permanent surveillance, and would infiltrate dubious elements, their agents or wavering sympathizers into their ranks.

Performing our internationalist duty, wherever we had the possibility and contacts with some of these parties, we, the Party of Labour of Albania, stressed our experience to them and told them that in its whole line, including the problems of its organizational structure, our Party remained loyal to Marxism-Leninism, which it did not consider a dogma or a theoretical ornament, but applied it in practice with the greatest strictness and seriousness in the difficult conditions of our country, that is, in the struggle against the occupiers of the country and the local bourgeoisie which placed itself in their service.

Thus, in the organizational field, some of these new Marxist-Leninist parties which broke away from the revisionist parties, were organized, so to say, in those same legal forms as the revisionist and social-democratic parties, so the entire political and ideological opinion of the country could not fail to exert an influence within their ranks. To this day there are members of these parties who still think they can militate in legal ways as Marxist-Leninists communists without being disturbed by capitalism and its apparatus of oppression. In these circumstances, then, it can hardly be said that there exists that sound nucleus, as strong as it could be in conditions of illegality, which is able to withstand a sudden attack which reaction is sure to make against the party.

The very dangerous consequences of this work and this practice in some of these parties, especially in Europe, became apparent after the exposure of the Communist Party of China and the ideas of Mao Zedong. Splits occurred, anti-Marxist ideas and opinions emerged, which in some cases were embraced even by their leaders. That explains why some of those small, still unconsolidated parties, which began their activity with correct aims on the Marxist-Leninist road and were for revolutionary actions, deviated. This is what happened with the Communist (Marxist-Leninist) Parties of France, Belgium, Holland, the Scandinavian countries and recently with the Communist Party of Italy (Marxist-Leninist), etc.

In short, some of these Marxist-Leninist parties were split because they did not have a proper understanding of their role in the revolution, because they did not organize themselves for a fierce struggle with organized and armed reaction and the revisionist and social-democratic parties, which have long experience and numerous means to combat any opponents who emerge, to fight and undermine their work, as the tools of capital they are.

Proceeding from the experience of our Party and country, as well as from the experience of the genuine communist parties of the past, I think that the Marxist-Leninist parties must not isolate themselves, that is, they must not stand remote from the broad masses of the people, and especially, from the working class. In this question, we Marxist-Leninists reason and judge proceeding from the fact that the working class in the capitalist countries, or at least the overwhelming bulk of it today, is inspired and organized by the parties of social-democracy, the employers and modern revisionism in trade-unions manipulated by them, and that the bourgeois state has set up a broad network of informers and has brought out a large number of laws in order to implant the bourgeois mentality in this working class, to corrupt it ideologically and politically and intimidate it so that it does not undertake actions that are dangerous to the capital. Therefore, if the members of the Marxist-Leninist parties want to advance, to continue on the course for which the parties were set up, they must get into those big groupings of the proletariat, go among the ranks of the democratic progressive elements who are against the capitalist regime, against the constitution of the capitalist country and economic oppression and exploitation, and against the reactionary ideology which is presented in various forms in order to befuddle the minds of the people.

The new Marxist-Leninist parties cannot content themselves merely with the publication of a newspaper or magazine, which, naturally, have very limited circulation. These means of propaganda have their own importance, but frequently they fail to produce the desired effect among the masses, let alone penetrate and organize the work within big groupings of the masses. Both the Marxist-Leninists norms which organize, temper and make the party coherent and militant, and its penetration, organization and struggle inside the unions or other groupings of the working class, are matters of great importance for the revolution. The Marxist-Leninist parties, especially in Europe, must not remain onlookers behind the barricade on which the working class is fighting. In Latin America, many Marxist-Leninist parties newly formed after 1960 militated in illegality and not only operated correctly, in general, for their own development and education with the theory of Marxism-Leninism, but also accompanied this activity with concrete actions, with attacks through strikes and demonstrations setting their militant example. Of course, they also suffered losses during these attacks, but the party cannot be consolidated on the revolutionary road, cannot be the vanguard of the proletariat and the progressive and revolutionary elements without losses and without setting such a militant example.

Of course, legal work must be carried out, but parallel with this work the party must create its clandestine force which will direct the legal work. Precisely this force of the party is the soundest, most resolute part which will understand the situation thoroughly and correctly and will direct the activities. Some new Marxist-Leninist parties did not bear in mind this teaching of Marxism-Leninism. With their fraudulent propaganda, with allegedly leftist slogans, which in reality were reactionary slogans in the service of capital, the parties of the bourgeoisie deceived the working class and the revolutionary elements, because, as we know, in all their activity the revisionist parties aim to achieve alliances with the bourgeoisie and its parties, contenting themselves with a few concessions granted by the bourgeoisie through reforms. These comrades have been satisfied with some successes they achieved through demonstrations in the streets and meetings and speeches in the squares. But that is not enough to teach the working class how to fight and mount the steps of the revolution one by one until the final step, that is, the decisive attack against the apparatus of capitalist oppression.

Thinking that in the countries in which they militate the situations are such as to create the possibility for their legalization, some parties which now are in illegality have been faced with the question: “How should we act?” I think that the legalization of the party is a two-edged sword: it is good if the reason for, the forms and the limitations of this legalization are understood, but it is very harmful if elements of the bourgeoisie, wavering elements, revisionist elements and agents of the reaction penetrate the ranks of the party in legality. In this way the possibility is created for people trained for sabotage to infiltrate from the legal part of the party into the part working in illegality. While for illegality to serve the party actively, its members must not merely engage in propaganda for parliamentary reforms, as the revisionist parties openly linked with reaction do, but must go among the masses, work with them and organize them in a revolutionary way, winning them away from the influence of capital and its parties. Otherwise, the desired success cannot be achieved.

It is true that that section of the party which emerge in legality will have possibilities to go among the broad masses more easily and to organize joint fronts with them against the power of the bourgeoisie, to carry on propaganda and influence them in action. But the party must influence them in actions not in the revisionist and social-democratic way, because in that case the working class will be unable to distinguish between Marxist-Leninists and revisionists and will not be incited to actions more advanced than those which social-democracy and modern revisionism have taught it. In the contrary, the creation of fronts and the expansion of the influence of that section of the party which is legal, closely linked with the other part which is in illegality, must make the revolt of the people greater and in this way the revolutionary situations which are created will be turned to advantage. It is necessary to know how to utilize the contradictions which exist between the internal capital of the country and foreign capital, between the local bourgeoisie and the proletariat. This work will consolidate the existence of the party and its militant line, will disseminate genuine Marxism-Leninism and will expose revisionism.

It is absolutely essential that the exposures of revisionism and its parties, with their forms, methods and policies should be done, although the exposure through newspaper articles and speeches, but should be accompanied with actions so that the proletariat will clearly see the distinction between its Marxist-Leninist party and the revisionist and social-democratic parties, not just because their political and ideological objectives differ, but especially because the party of the proletariat struggles to put its objectives into practice and thus, it will strengthen its ranks with such elements by admitting them as party members. Only through such work can the Marxist-Leninist parties in the capitalist countries be sure that their ranks will be increased with convinced and disciplined people, loyal to Marxism-Leninism, prepared for the revolution through violence and not through reforms.

It is essential that the members of parties that militate in the capitalist countries understand that they are in stern struggle with the bourgeoisie and its repressive apparatus, especially with its parties, including the revisionist parties. Therefore, they must be clear and always bear in mind that this struggle demands efforts and material and moral sacrifices.

If they do not understand their being members of the party and their work and struggle in its ranks in this way, then the party in which they militate can hardly be called a genuine revolutionary party, but is a revolutionary party only in words. Such a party will fall apart at the first difficult moment, indeed it is likely to do so even before such a moment is reached. Even at moments which are allegedly peaceful, but which are not and never can be peaceful, hangs together simply because it presents no moral, political or material threat to anything.

We Marxist-Leninist parties must work to create the means of propaganda and struggle ourselves, without the material aid of anyone, because there is no one who will help is seriously and without destructive political motives.

It is impermissible for us Marxist-Leninists to work with the forms and methods of work of the permanent bureaucrats of revisionist parties who engage in commercial deals instead of revolutionary work. It is our duty to teach the members of the party and the elements of the working class they mobilize around themselves to make small sacrifices, while preparing themselves for greater sacrifices, up to giving their lives on the fronts of struggle against the bourgeoisie which are being waged and will be waged in the future.

In this sense, the objective of the Marxist-Leninist parties which militate in the capitalist countries is to be parties of the barricades, parties of the capture of factories, of clashes with the forces of the order, and not parties which submit to the laws, regulations and formulas that reaction has created. This is logical and lawful, because all the creations of reaction and capital have the objective of the suppression of the revolution and the genuine parties have the duty not to obey them, but to attack them. In saying this I am not advocating operating in adventurous ways. As I stressed above, we must consider where the weak spots are, although, once again, without ideo-politically sound organizational activity they cannot be exploited.

The important moments through which the capitalist world is passing at present, the moments of the great crisis, are objectively very suitable for launching attacks on capital at its weak points. It is up to us Marxist-Leninists to understand these weaknesses thoroughly so that the struggle and the resistance are developed both in the developed capitalist countries and in the backward countries. The responsibility devolves on the Marxist-Leninist parties of the developed countries to prove themselves up to their tasks and set the example for the Marxist-Leninist parties or the revolutionary elements of the backward countries.

At present we can say that the working masses and progressive elements in the economically backward countries, who suffer the oppression of capital, are more in the forefront, more active, more militant than those in the developed capitalist countries and although there are no Marxist-Leninist parties there, they have proved their superiority by carrying out militant activities against the internal oppression and external interference. This shows that the capitalist bourgeoisie in the metropolises has great experience in oppression and exploitation and, apparently, even though there are Marxist-Leninist parties, people have become accustomed to enduring this oppression and to being mislead by the false democracy and freedom advocated by the allegedly democratic parties.

The conclusion emerges that the metropolises continue to oppress the undeveloped, neo-colonial countries and, logically, that the Marxist-Leninist parties in some oppressor countries are not reacting with the revolutionary force required to prevent this oppression. It can be seen that the necessary internationalist solidarity with the progressive peoples of continents which are in revolt against the double yoke of foreign and local capital does not exist in these countries. This is a major problem of capital importance, which must concern all Marxist-Leninists, and in the first place, the Marxist-Leninist parties in the countries ruled by capital.

Our party is aware of these problems, has them on the agenda, makes every effort and has orientated its whole policy, propaganda and agitation, as well as its own actions, towards internationalist aid for the Marxist-Leninist parties and the people’s national liberation struggle. At this stage, the national liberation struggles of the peoples of the undeveloped countries have extraordinary importance, because they weaken the capitalist order, in general and facilitate the development of bourgeois democratic revolutions and their transformation into proletarian revolutions. Hence, it is up to the communist forces wherever they are, to reflect on their actions and activities and be guided by our great revolutionary theory, Marxism-Leninism, to assimilate it thoroughly and accurately and. through the practical actions, to incite and lead the masses in revolution.

We notice with regret that some Marxist-Leninist parties do not understand this question properly, do not operate actively, that is, they do not accompany their propaganda, however weak, with concrete actions, which they can do only if the militant spirit exists in their ranks. Indeed, in some countries there are occasions when we do not see Marxist-Leninist groups or parties which distinguish themselves with their political actions and give fire to the demonstrations, opposition and protests which the working class makes on the urging of social-democracy or modern revisionism- Such actions would really arouse interest among the workers who would see that the actions of Marxist-Leninists come into conflict with the slogans chanted by the revisionists and social-democracy in strikes and demonstrations. Tens of thousands of workers rally in the squares of various cities, and the Marxist-Leninist parties will strengthen and assert themselves if their representatives take the courage to come out with their own microphones, addressing the masses of the people with their line in order to explain to them how they should turn the strikes and demonstrations they hold into political strikes and demonstrations, and not limited themselves to economic strikes or “peaceful” strikes.

The enemy in power is afraid of such political strikes, therefore he calls them ferocious strikes. The question here is not that we should come out with weapons or fire them, but we must stand up to the repressive organs of the order, the police, the carabinieri, the army and, at the same time, expose the evils of capitalism and the revisionist parties among the people gathers in the streets and in squares. This, for example, is a field in which Marxist-Leninists can mobilize the working masses. But there are other fields and forms of work like this, which prepare public opinion for sterner actions against the wretched existing state of affairs, so the people see more clearly the crisis of the regime, the great economic financial crisis, the great energy crisis, all of which, in the final analysis, are loaded on to the backs of the working class.

The working class cannot follow our people, our Marxist-Leninist groups or parties, if it does not see us in action, because in regard to the means od propaganda which the capitalist bourgeoisie and its parties possess, they are far more powerful the ours. Therefore, the masses of the people have to see us the communists and men of action in concrete actions against the imposed order, against the status quo, against the flabby activity which the propaganda of the bourgeoisie creates.

The purpose of the propaganda of the bourgeoisie is to retain its electorate. By saying that voting for this or that party of the bourgeoisie will alter the situation, each bourgeois party tries to arouse vain hopes among the working class and the working masses, hence, it canvasses for votes. The only result of such propaganda is to lull the revolutionary energies of the masses to sleep, whereas we Marxist-Leninists face the task that we must involve the masses in concrete actions.

Wherever the capitalist bourgeoisie operates, it is striving with all its might to cope with the terrible economic crisis which has gripped it, and which, far from diminishing is becoming deeper, by shifting its consequences on to the shoulders of the masses. The energy-crisis, the financial crisis, the mounting prices, inflation, unemployment and terrorism which day by day is assuming alarming proportions, are arousing the distrust of the broad masses of the people towards the regimes ruling them, but at the same time, they frighten the middle strata of the people, obscure their view of the future, of the ways and means to escape from the crisis, that is, from the regime which has given birth to all these evils. Precisely here and in opposition to this situation, the burden falls on us Marxist-Leninists and our parties to fight the opposing current, to find the ways, means and forms to mobilize the masses.

On many capitalist countries the crisis is great, terrorism, which is supported by capital, is assuming major proportions. In order to emerge from the crisis and crush any possibility of insurrection and revolution by the working class and the people, the reactionary forces in these countries are preparing the terrain for an authoritarian state, for the fascist dictatorship. If the working masses, we Marxist-Leninist parties and the progressive peoples fail to understand that the fascist dictatorship comes as a result of the difficult situation which the power of the capital is experiencing and do not fight it, then,, sooner or later fascism will be established, because the crisis will continue, since capitalism will strive to protect its income at the expense of the working masses who will become more and more impoverished. Being unarmed, because they do not understand why such a thing is occurring and do not fight against it and the other actions of the capital, these masses will accept the bondage of a fascist circle, thinking that it will be a way out of the crisis. In fact it is not a way out for the working class and the working people, because fascism represents the most ferocious dictatorship of capital, which will oppress the masses of the peoples even more than it is doing today. It is the last resort of exploiting capital.

In all the capitalist countries, separately or jointly, in the political, military and economic organism in which they have assembled, there exits a situation of terrible crisis, which has brought about consequences in the economy and in all the other sectors of the life of the country and has aroused the sentiments of the internal disintegration of the capitalist state and nationalism. Thus, in the capitalist and revisionist countries we see the development of profound contradictions, not only between states combined in blocs, but also between individual states. Even in the so-called socialist community at present there is a very great crisis, caused by the relations of dependence on the Soviet Union which is in a major economic-financial crisis itself. The other countries, satellites of the Soviet Union, likewise, are suffering the consequences of the world capitalist crisis. Thus, recently we see a great rise of prices of every sort in those countries, a rise which amounts to 50 per cent. This has already stirred the broad masses of the people to silent revolt, and in some cases, as in the Soviet Union, Czechoslovakia and Poland, to open clashes.

The foreign debts of these countries are colossal. They amount to billions of dollars. These states are facing bankruptcy, because they are unable to further develop their economies, or even to pay their existing debts to the Soviet Union and the other capitalist countries. Hence, there is great discontent within this bloc. Wherever ethnic unity does not exist, nationalist groupings have begun to emerge.

I have said on other occasions that modern revisionism created difficult and complicated economic, political, and ideological situations. It disrupts the political unity of the country and incites desperate nationalism. In other words, modern revisionism incites the most reactionary, fascist nationalist elements to create those situations which are in the interest of world capital. Therefore, both in the capitalist countries and in the countries ruled by revisionists, the revolutionary situation, as an objective condition for the triumph of the revolution, has matured. The only thing lacking is the spark to kindle a revolt, organized and led, for the overthrow of the bourgeoisie, whether of the capitalist West or the revisionist East.

We find the most concrete example of this situation in Yugoslavia, where the national question has become as acute as it was at the time of the Second World War. The situation has not yet reached the stage where it bursts into flames, but the fire may break out due to the Titoite regime, which, contrary to its propaganda about “unity and fraternity”, is splitting the nations and nationalities more and more in Yugoslavia. The reactionary circles of the most powerful “krals” are operating for division, fragmentation and domination in Yugoslavia. These circles are the offspring of the anti-Marxist, capitalist-revisionist regime, which is arousing feuds, divisions and enmities among the peoples.

Our people have a wise saying: “Poverty breeds discord”, and this poverty is an outcome of capitalist regimes. The peoples in those countries are impoverished, therefore, in order to escape from poverty, the wretched absolutely must be made conscious and understand the situations, must organize themselves and strive to organize the resistance against oppression, to organize that popular striking force which gradually becomes a terrible force against the rotten capitalist regime, where the situation is ripe for revolutionary activity.

Our Marxist-Leninist theory teaches us: Every revolutionary activity must be guided by the Marxist-Leninist revolutionary theory which the Marxist-Leninist party masters, defends and faithfully applies. The objective of every genuine revolutionary movement must be to establish the hegemony of the working class. This hegemony does not in any way imply that the working class and its Marxist-Leninist party should not link up with all those classes and strata of the population which are very interested in opposing the oppressive capitalist and revisionist order. On the contrary, the hegemony of the working class presupposes alliance with the working peasantry, the progressive intellectuals, etc.

In the ranks of the unemployed in the capitalist-revisionist countries there is a great spiritual force of people revolted because they are short of food. In those countries there is a great force of people revolted because the prospects for a decent life have been closed to them. They cannot find jobs, and made desperate by this situation, they are easily corrupted and misled by the special intensive preparation of the regime to involve them in acts of terrorism. This is the source of the participation of young people in the terrorist “red brigades”. Many of these young people do not see any way out other than through terrorist acts. We Marxist-Leninists must show them that the isolated terrorist acts and gangsterism, in which the capitalist regime has involved them and is trying to involve them ever more deeply, do not bring any improvement of the situation for the people, the youth, or the unemployed, but, on the contrary, bring about the fascist coup of the reactionary bourgeoisie. These groups of youths are nothing but the vanguard detachments of fascism. In the face of these capitalist phenomena, we Marxist-Leninists must not sit idle. We must not permit the masses of the people, to be intimidated by the acts of terrorists, anarchists, on the contrary, we should work so that the people of this or that capitalist country are not afraid of them.

When the Marxists act against terrorism, it is likely that the class enemies will tax them with “taking part in the activity of elements who support the capitalist regime”, but the slanders of enemies must not inhibit the revolutionary activity. The Marxist-Leninists act in two parallel directions: both against the regime in power, against the bourgeois parties, whether social-democratic, socialist or revisionist, and at the same time, also, against terrorism. The revolutionaries cannot wage this struggle, simply by issuing a newspaper, but by carrying out extensive political, ideological propaganda and by acting together with the masses in order to make the truth clear to them and convince them in concrete actions, against the evils of the old society. The enemies must be attacked on all fronts in unity with the masses, otherwise, success cannot be achieved. To do this requires strong organization, courage and many sacrifices from our Marxist-Leninist parties.

At these difficult moments, when capitalism in crisis is seeking to establish its savage dictatorship, sacrifices on the part of Marxist-Leninists, the working class and progressive elements are indispensable, but every revolutionary action requires courage, intelligence and vigorous actions. There must be no retreat in the face of this situation.

The just and heroic struggle of the Palestinian people for the liberation of their territories seized and occupied by Israel is a fine example. Despite the fact that it is not led by Marxist-Leninists we support it. We support it since it is a national liberation, anti-imperialist struggle. In assessing their struggle we must appreciate their bravery in coping with countless difficulties against extremely strong powers, armed to the teeth, such as the American imperialists and the Israeli Zionists. We must also bear in mind the fact that, at the same time, the Palestinians have to fight the reactionary Arab forces, too. They are left without a homeland, but they have the strength of their spirit and the strength of their arms, their courage and honest aims to have their homeland liberated, which keep them alive. They are fighting tooth and nail against the Israeli Zionists, fighting for their existence as a people and for their right to have their own homeland. It is useful for the Marxist-Leninist parties of the capitalist countries to bear in mind this wonderful experience for the organization of their struggle, to draw inspiration from the example of the resistance of this small people who, although displaced and scattered, have been able to rally their energies for a great purpose. They are fighting in the ways which the conditions of bourgeois domination have allowed them for the creation of a Palestinian state in opposition to the great forces of capitalism and imperialism.

Despite some activities of a terrorist character by some groups, an activity which we Marxist-Leninists do not support, the struggle of the Palestinian people, in general, is a liberation struggle and should be assisted.

The tasks which emerge for us Marxist-Leninists in these situations are certainly very great and very difficult, because our enemies are numerous, highly organized and very powerful. These tasks become still greater and more difficult for the Marxist-Leninist parties which militate in the capitalist countries. But profound and correct understanding of Marxism-Leninism, that unerring guide which leads and directs us in every step of our life and ideological line, as well as in the organizational field, the effective co-ordination of illegal with legal activity, the selection of reliable allies and alliances, etc. will make our struggle and the overcoming of difficulties easier and will lead us to victory over the bourgeois-revisionist enemies.

Looter’s feast : The pillage of the USSR


In 1987 the external debt of the U.S. rose to $246 billion. On the 19 of October 1987, Wall Street crashed! Only a miracle could save the U.S. in dire straits. And the miracle took place, and the its saviour was Gorbachev.

Gorbachev, by saved the U.S. economy, by ruining that of the USSR.

Would you like to know how?

In January 1987 the restrictions on foreign trade were repealed. These restrictions protected the domestic market of the USSR from collapse. Without them the domestic market of the USSR – with its ridiculously low prices for food and essential consumer goods, in comparison with the foreign markets – could not maintain itself for a single day.

And all of a sudden, companies and individuals were authorised to export overseas foodstuffs, raw materials, electronics equipment, energy, chemical products, just about … everything!

It was as if a powerful hurricane had swept over the vast territory of the USSR. In a moment it sucked outside the country all products of value. Groceries and manufactured objects disappeared from store shelves.

The pillage of the gold reserves

On 21 July 1989 new customs regulations repealed all restrictions on the export of gold and precious stones.

The work of the Soviet customs for the last 70 years was instantly wiped out.

Gold, in quantities up to then unheard of, was thrown onto the internal market, to be bought at an internal price, and then exported overseas.

At the time the newspaper “The Moscow Komsomol” described the jewellery trade thus: “A glittering picture of unrestrained speculation, the sales quota of the State Treasury (Gokhran) for jewellery was allocated over and over … The counters were under assault, the State Treasury was bombed with mail requesting new supplies of gold and precious stones … “.

The newspaper “Izvestia” requested that as a control measure against queues for gold and diamonds: “Be put on the market a formidable quantity of gold such as the State’s gold reserves.”

The newspaper “Soviet culture” called outright for the removal customs barriers for the export of gold.

After some time G. Yavlinsky (responsible for the economy in the government at the time) alarmed the press with a statement about the disappearance of the gold reserves. But it all calmed down rather quickly.


It got worse and worse

That same year individuals exported 500,000 colour televisions and 200,000 washing machines. In 1988 just one single family exported: 392 refrigerators, 72 washing machines, 142 air-conditioning machines… The personnel of one of the thousands of foreign organisations exported: 1,400 irons, 174 fans, 3,500 pieces of soap and 242 kg of washing powder, products that were specifically bought by the State – at the insistence of MPS – with foreign currency supposedly for the use of Soviet citizens.

These data appeared inadvertently in the press at the time. In 1989 alone, at just one of the many customs controls points, individuals exported more than 2 million tons of products that were in short supply in the USSR.

The entire production of the Krasnoyarsk cotton combine was exported. At the time a good bed-sheet cost 5 roubles, a double sheet 8 roubles. The exports of cloth tripled, those of cotton nearly quadrupled, while those of linen multiplied by 7.

These are figures about State exports alone. Private exports surpassed those of the government. Moreover, determining the exact figures of exports was impossible. The same newspaper “Izvestia” wrote at the time: “Our State is one of the few in the world that does not compile customs statistics.”

 What is the Balcerowicz miracle about which so many media talk about?

American experts have suggested to Balcerowicz (the organiser and inspirer ideological economic reforms in Poland) to reduce production and normal trade and instead encourage unreservedly small business dealings from hand to hand.

That is to say debase the labouring population and transform it into a “nation of hucksters.” All these downgraded individuals, by the million, flocked into the USSR like grasshoppers and began to export everything they could lay their hands on, from imported furniture to toothpaste, and by the ton.

In the Congress of Deputies there was a terrible scandal and shouting about the lack of toothpaste for the Soviet population. It never occurred to the Representatives of the people to question themselves as to the causes that brought about that glaring penury of toothpaste. They simply decided to buy abroad $60 million worth of toothpaste.

 Who got rich with these $60 million?

In France, from where it was imported, the toothpaste tube cost 15 Francs, while in the USSR it sold for a rouble. Of course, in no time, the toothpaste found once again its way abroad. It was sent to Poland in packs of 500 tubes (the original package of the French factory) and again without any restrictions.

It was transported in car boots, entire train compartments, or containers on decks of boats. Just like ants who only leave the skeleton of the body of a dead lion, the “Balcerowicz piranhas” took everything and left the Soviet people with empty store shelves. There was not an article of consumption, from foodstuffs to household appliances that was not exported.

We were left to wonder about how these goods had disappeared, because industry over the years continued to produce at full capacity.

 “The Leningrad Pravda» 1992

“In the USSR until 1990-1991, we produced 38 meters of cloth per capita. This represented 75% of the world production of linen cloth, 16% of wool and 13% silk. According to official State figures, only 50% of linen products and 42% of wool products were exported.”

But these figures did not take into account exports by private individuals. Because, like locusts, they exported everything they could buy.

The USSR produced 21.4% of the world production of butter (the Soviet population was 4.88% of the world population). Butter production continued to increase, but because of exports, rationing tickets had to be introduced. In the Soviet Union the production of butter per capita was 26% more than that in Great Britain. This being so, there was no butter in Soviet stores but one could buy it in Britain without any problem. Strange, is it not?

Official statistics regarded as consumed in the USSR all the butter and the meat that were sent to storage warehouses that supplied the grocery stores. For the purchase of butter and meat, passports were not required, consequently products purchased in the USSR, yet exported beyond its borders, were considered as contributing to the well-being of the Soviet people. In fact tons of meat and butter, bypassed the retail stores, and went directly to warehouses abroad by sea in containers, by land (road and rail) and by air.

All the while statistics demonstrated that the insatiable Soviet people had devoured it all.

In the late-80s and early 90s, everything had disappeared. Socks and refrigerators, televisions and plates, sheets and washing machines! The flying grasshopper had devoured it all, the sausages and the fish, the semolina and the sugar. Aluminium pots, soup-bowls and spoons were exported as cheap very valuable material that had gone through the stages that require a lot of energy and polluting treatment. The wood boring insects and exporters eroded the once powerful ship that was the Soviet economy and reduced to dust.

In 1991 it collapsed.

Tatiana Yakovleva 6-07-2012

(French translation YB)


Thanks to George

Understanding The Labour Theory of Value

This FAQ tries to provide some answers to the very complicated Marxist economic understanding on the Labour Theory. We are posting this as it may serve as base towards greater understanding of this phenomenon dealt in detail by Marx in Capital and in his other writings.  We would like to hear more on this from other comrades.

Other Aspect


1.0 Introduction: What is the Labor Theory of Value (LTV)?
2.0 What Characteristic Features of Capitalism Provide the Setting for the LTV?2.1 What is a commodity?

2.2 What are “use values?”
2.3 What is “exchange value?”
2.4 What is meant by “concrete labor” and “abstract labor?”
2.5 What is “commodity fetishism?”
2.6 How does simple commodity production differ from capitalism?
2.7 What are the means of production?3.0 What Are Labor Values?3.1 Can you give an example?
3.2 Can you explain a more complicated example?
3.3 What units are labor values measured in?
3.4 How are labor values calculated for processes exhibiting joint production?
3.5 How is the use of capital goods accounted for in calculating labor values?
3.6 Can you illustrate how to calculate labor values with fixed capital by an example?
3.7 How is the use of natural resources accounted for in calculating labor values?
3.8 Not all workers have the same abilities. How can labor values be meaningful?
3.9 Doesn’t the LTV assert it is desirable for workers to become more lazy so the goods they produce would increase in value?
3.10 The cost of a good includes more than the cost of labor. Doesn’t this observation invalidate the LTV?
3.11 How can past costs determine value?4.0 What Is Exploitation?4.1 What is the Fundamental Theorem of Marxism?
4.2 If all commodities sold at their value, how would the capitalists be able to exploit the workers?
4.3 If all exchanges are freely made and no one is forced, how is exploitation possible?
4.4 What is labor power?
4.5 What is constant capital?
4.6 What is variable capital?
4.7 What is the organic composition of capital?
4.8 What is surplus value?
4.9 What is the rate of surplus value, also known as the rate of exploitation?
4.10 How can the capitalists increase absolute surplus value?
4.11 How can the capitalists increase relative surplus value?5.0 What Are Prices of Production?5.1 Can you give an example?
5.2 Can you give an example with a surplus and labor inputs?
5.3 Why call these exchange values “prices of production,” rather than “costs,” “costs of production,” “natural prices,” or “necessary prices?”
5.4 How are prices of production related to market prices?
5.5 What is the “realization problem?”
5.6 Aren’t prices of production merely Neoclassical long-run equilibrium prices?
5.7 How has an analysis of prices of production been used to construct a critique of bourgeois economics?6.0 What is the Transformation Problem?6.1 Why would one expect prices of production to differ from labor values?
6.2 When are prices of production equal to labor values?
6.3 What was Marx’s algebraic solution to the transformation problem?
6.4 Why was Marx’s solution to the transformation problem inadequate?
6.5 Can you provide an example in which the LTV is valid?
6.6 Can you provide an example in which prices of production are not proportional to labor values?
6.7What empirical evidence supports the LTV?7.0 What can I Read to Find Out More About the LTV?

1.0 Introduction: What is the Labor Theory of Value (LTV)?

The LTV is the theory that market prices are attracted by prices proportional to the labor time embodied in commodities. In other words, relative prices tend towards relative labor values. The LTV is restricted to the analysis of reproducable commodities that have a use value in a capitalist society. Although the LTV is commonly associated with Classical economics, arguably neither Marx nor any first tier Classical economist accepted the LTV as a valid theory for capitalist economies.

Much of the controversy about the LTV deals with associated doctrines, particularly the doctrine that exploitation of the worker is the ultimate source of profits in a capitalist economy. David Ricardo, one of the greatest Classical economists, and Karl Marx thought that their analyses had greater applicability than the special cases in which the LTV is valid as a theory of price. Terry Peach argues that Ricardo accepted the LTV when writing the first edition of The Principles of Political Economy and Taxation, but not before or when modifying his book for later editions. Marx seemed to think that abstract labor time is a common substance in all commodities, while denying that prices tended to be proportional to labor values.

This FAQ is an introduction to the LTV. It’s perspective is mainly that of a “Dual System” approach that has dominated Western academic economists’ discussion of the LTV for the last century (when they have noticed the LTV at all). Recent developments, such as the “New Interpretation” of Gerard Dumenil, A. Lipietz, and Duncan Foley and the “Temporal Single System” approach of Guglielmo Carchedi, Alan Freeman, Andrew Kliman and others, are, at most, treated cursorily. A more comprehensive treatment of formalizations of Marx’s economic theory would discuss his third volume argument for the law of the tendency of the rate of profits to decline, the Okishio theorem’s use in refuting this law, and Andrew Kliman’s defense of Marx’s law in a dynamic setting.

2.0 What Characteristic Features of Capitalism Provide the Setting for the LTV?

The LTV applies to commodities produced and sold in capitalist societies. Commodities have both use values and exchange values. Value, in Marx’s view, is abstract labor time. The accumulation of exchange values as an end in itself distinguishes capitalism from simple commodity production.

2.1 What is a commodity?

A commodity is…an object outside us, a thing that by its properties satisfies human wants of some sort or another… (Karl Marx 1867, Chapter I, Section 1)

Marx later adds that a commodity implies exchange; it is regarded as containing exchange-value. Thus a person who produces something to use themselves is producing a use-value, not a commodity:

A thing can be useful, and the product of human labor, without being a commodity. Whoever directly satisfies his wants with the produce of his own labor, creates, indeed, use-values, but not commodities. In order to produce the latter, he must not only produce use-values, but values for others, social use-values. (Karl Marx 1867, Chapter I, Section 1)

2.2 What are “use values?”

Every useful thing…is an assemblage of many properties, and may therefore be of use in various ways…The utility of a thing makes it a use-value…When treating of use-value, we always assume to be dealing with definite quantities, such as dozens of watches, yards of linen, or tons of iron. (Karl Marx 1867, Chapter I, Section 1)

Utility then is not the measure of exchangable value, although it is absolutely essential to it. If a commodity were in no way useful, – in other words, if it could in no way contribute to our gratification, – it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labor might be necessary to procure it. (David Ricardo 1821, Chapter I, Section I)

Note that for Marx and arguably for Ricardo, use values are qualitative, not quantitative measures along a single dimension.

2.3 What is “exchange value?”

The exchange value of a commodity is “the power of purchasing other goods which the possession of that object conveys” (David Ricardo). Exchange value “presents itself as a quantitative relation, as the proportion in which values in use of one sort are exchanged for those of another sort” (Karl Marx 1867, Chapter I, Section 1). In other words, exchange value initially presents itself as the relative prices of a commodity.

2.4 What is meant by “concrete labor” and “abstract labor?”

In Marx’s view, just as a commodity is “a complex of two things – use-value and exchange-value,” so labor has a two-fold nature under capitalism. Just as the physical properties of a commodity determine its use value, so concrete labor activities are required to produce commodities. Marx mentions the labor of the joiner, mason, and spinner, for example.

The rate at which a coat and linen exchange in the market shows the coat and linen to be different quantities of some common substance. The coat and linen are qualitatively different use values, and so they are produced by qualitatively different kinds of concrete labor activities – tailoring and weaving:

Just as, therefore, in viewing the coat and linen as values, we abstract from their different use-values, so it is with the labour represented by these values: we disregard the difference between its useful forms, weaving and tailoring. As the use-values, coat and linen, are combinations of special productive activities with cloth and yarn, while the the values, coat and linen, are, on the other hand, mere homogeneous congelations of undifferentiated labour, so the labour embodied in the latter values does not count by virtue of its productive relation to cloth and yarn, but only as being expenditure of human labor-power. Tailoring and weaving are necessary factors in the creation of the use-values, coat and linen, precisely because these two kinds of labor are of different qualities; but only in so far as abstraction is made from their special qualities, only in so far as both possess the same quality of being human labor, do tailoring and weaving form the substance of the values of the same articles.(Karl Marx 1867, Chapter I, Section 2).

Abstract labor is this homogeneous human labor in which abstraction has been made from concrete labor activities.

2.5 What is “commodity fetishism?”

The confusion of social relationships between people as relationships between things. Marx’s account of commodity fetishism in Capital is related to his views on alienation in his earlier work.

The reproduction of a capitalist society requires many concrete activities to be performed in parallel in different industries, as in this simple example. There is a certain allocation among industries of all of the labor available to a society when it reproduces itself smoothly. But this allocation is not apparent to the workers or the capitalists. Nor can the participants know if labor is allocated properly until the capitalists try to sell the products on the market. Only then can the capitalists determine if the labor they employed was socially necessary.

Since the producers do not come into social contact with each other until they exchange their products, the specific social character of each producer’s labour does not show itself except in the act of exchange. In other words, the labour of the individual asserts itself as a part of the labour of society, only by means of the relations which the act of exchange establishes directly between the products, and indirectly, through them, between the producers. To the latter, therefore, the relations connecting the labour of one individual with that of the rest appear, not as direct social relations between individuals at work, but as what they really are, material relations between persons and social relations between things. (Karl Marx 1867, Chapter I, Section 4).

Commodity fetishism prevents socially necessary abstract labor from being perceived as the substance of value.

Connections between Marx’s views on commodity fetishism and value theory can be seen by comparing and contrasting the above explanation of commodity fetishism with his 11 July 1868 letter to Kugelmann:

Even if there were no chapter on ‘value’ in my book, the analysis of the real relationships which I give would contain the proof of the real value relation. The nonsense about proving the concept of value arises from complete ignorance both of the subject dealt with and of the method of science. Every child knows that a country which ceased to work, I will not say for a year, but for a few weeks would die. Every child knows too, that the mass of products corresponding to the different needs require different and quantitatively determined means of the total labour of society. That this necessity of distributing social labour in definite proportions cannot be done away with by the particular form of social production but can only changeform it assumes, is self evident. No natural laws can be done away with. What can change, in changing historical circumstances, is the form in which these laws operate. And the form which this proportional division of labour operates, in a state of society where the interconnection of social labour is manifested in the private exchange of the individual products of labour, is precisely the exchange value of these products. The science consists precisely in working out how the law of value operates. So that if one wanted at the very beginning to ‘explain’ all the phenomena which apparently contradicted the law, one would have to give the science before the science.

2.6 How does simple commodity production differ from capitalism?

Marx uses the formula C-M-C to describe the exchange of commodities under simple commodity production, also called petty commodity production. C denotes commodities and M denotes money. The formula C-M-C shows that money, that is, a commodity’s value form, intervenes in a process in which one set of use values is traded for another.

Marx contrasts the role of money in simple commodity production with its role in the formula M-C-M. Here one finds

the transformation of money into commodities, and the change of commodities back again into money; or buying in order to sell. Money that circulates in the latter manner [M-C-M] is thereby transformed into, becomes capital, and is already potentially capital. (Karl Marx 1867, Chapter IV)

The merchant who buys a commodity in order to sell it again is trying to obtain more money than with which he began. Money, or more generally, the accumulation of capital has become a motive in itself. But what a trader gains in monetary value in a trade another trader loses. So gains from trade cannot be generalized to the world as a whole as an explanation for the source of surplus value. Yet capitalism is a system in which capitalists systematically make profits from the buying and selling of commodities, including the buying of inputs into production and the selling of produced goods. How, in principle, is this possible? The Marxist theory of exploitation answers this question,

Marx later expands M-C-M to M-C…P…C’-M’ where money is used to purchase commodities consisting of the means of production and labor power. The capitalist removes these commodities from the market and they enter the production process P. The products re-enter the market as commodities which sell for money.

2.7 What are the means of production?

The tools, raw materials, and technology required to produce a commodity. The means of production are privately owned in a capitalist society.

3.0 What Are Labor Values?

The labor value of a commodity is amount of socially-necessary abstract labor time embodied in that commodity.

3.1 Can you give an example?

Consider a very simple capitalist economy with a yearly cycle of production in which iron is produced from inputs of iron and labor. The inputs are purchased at the beginning of the year, and the produced iron is available at the end of the year. All the iron input is used up in producing the iron outputs. Suppose quantities flows are as shown in the following table:

Example 3.1 Quantity Flows
28 t. iron & 56 workers -> 56 t. iron

One Method of Calculating Labor Values. Twenty eight tons of the produced iron can be used to replace the iron input into this production process, leaving a surplus of 28 tons. In net terms, 56 workers produce a net output of 28 tons, or the net output is produced by 2 workers per ton iron. Thus, the labor value of a ton of iron is 2 person-years.

Another Method of Calculating Labor Values. Imagine that this technique has been used forever in the past. So the inputs of iron used in the current year, say 1997, were produced by inputs of labor and iron acquired in the previous year. This intellectual construction can be extended backwards indefinitely:

Example 3.1 Dated Quantity Flows
Year Iron Input/Output Labor Input
1997 56 t. iron
1996 28 t. iron 56 person-years
1995 14 t. iron 28 person-years
1994 7 t. iron 14 person-years
1993 3.5 t. iron 7 person-years
Sum: 56 ( 1 + 1/2 + 1/4 + … ) = 112 person-years

Notice that the above table shows the same proportions of inputs and outputs for each year’s production process, as is to be expected if this technique is repeated year by year. With the exception of 1997, the output of iron for each year is used as input for the following year. The production of iron in this example with iron and labor in one year can be reduced to production with dated inputs consisting solely of labor. Fifty six tons iron embodies 112 person-years of labor. That is, one ton iron embodies two person-years.

3.2 Can you explain a more complicated example?

Consider another simple capitalist economy. This economy produces wheat and iron in a yearly cycle of production. Inputs and outputs are shown in the following table:

Example 3.2 Quantity Flows
74 qr. wheat & 37 t. iron & 592 workers -> 592 qr. wheat
18 qr. wheat & 3 t. iron & 48 workers -> 48 t. iron

These quantity flows can be broken down into two subsystems, one for wheat and another for iron, as shown in the following tables:

Example 3.2 Wheat Subsystem
73 9/17 qr. wheat & 36 13/17 t. iron & 588 4/17 workers -> 588 4/17 qr. wheat
14 12/17 qr. wheat & 2 23/51 t. iron & 39 11/51 workers -> 39 11/51 t. iron
Example 3.2 Iron Subsystem
8/17 qr. wheat & 4/17 t. iron & 3 13/17 workers -> 3 13/17 qr. wheat
3 5/17 qr. wheat & 28/51 t. iron & 8 40/51 workers -> 8 40/51 t. iron

The proportions of inputs and outputs in the wheat industry are the same in each subsystem and the overall economy. These proportions identify the production process used in the wheat industry. The proportions of inputs and outputs in the iron industry are also unchanged between the subsystems and the overall economy. The subsystems show a conceptual division of the given economy-wide quantity flows across subsystems.

39 11/51 tons iron are produced and productively consumed in the wheat subsystem. The net output of the wheat subsystem consists of 500 quarters wheat alone. In effect, the wheat subsystem is a vertically-integrated industry for producing wheat. 627 23/51 person-years labor is the only non-reproduced input in the wheat subsystem. Hence 627 23/51 person-years are embodied in 500 quarters wheat, or the labor value of wheat is 1 13/51 person-years per quarter.

The iron subsystem shows a vertically-integrated industry for producing a net output of 8 tons iron with inputs of 12 28/51 person years. The labor value of iron is 1 29/51 person-years per ton. Notice that the ratio of the labor value of iron to the labor value of wheat, 1 1/4 quarters per ton, has the dimensions of a relative price.

One could also calculate labor values for this example by a reduction of all inputs to dated labor flows.

3.3 What units are labor values measured in?

The answer would seem to be obviously hours or person-years, which is indeed the unit David Ricardo used to measure labor values. But Marx measured value in monetary units, such as British pounds. In some of his most difficult passages, Marx argues that money is the “universal equivalent form” of “value in general.” For example,

The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as auniversal measure of value…It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time. (Karl Marx 1867, Chapter III, Section 1).

The opening chapters of Capital have been a continual subject of debate among Marxists. For example, some have located an initial statement and solution of the transformation problem here, rather than in the third volume. The opening chapters of Volume 1 provide suggestive passages along these lines:

The price-form, however, is not only compatible with the possibility of a quantitative incongruity between magnitude of value and price, i.e., between the former and its expression in money, but it may also conceal a qualitative inconsistency, so much so, that, although money is nothing but the value-form of commodities, price ceases altogether to express value. Objects that in themselves are no commodities, such as conscience, honour, etc., are capable of being offered for sale by their holders, and of thus acquiring, through their price, the form of commodities. Hence an object may have a price without having value. (Karl Marx 1867, Chapter III, Section 1).

Notice that besides stating that the expression of value in money offers the possibility of a divergence between value and price, Marx here extends the LTV to cover commodities that are not and cannot be produced by labor.

3.4 How are labor values calculated for processes exhibiting joint production?

This question is not really asked frequently, but it’s answer is helpful in understanding issues associated with fixed capital (machinery) and natural resources.

Joint production occurs when a single production process has outputs of two or more commodities, such as wool and mutton. A process can no longer be identified with an industry; more than one process may be simultaneously in use for producing the same set of outputs. The analysis of the choice of technique must be handled simultaneously with the analysis of joint production.

Many analytical difficulties arise in the study of joint production, and some are associated with the determination of labor values. In general, one cannot calculate labor values for joint production by a reduction of inputs to dated labor flows. Nor can one necessarily calculate the labor value of a given commodity by creating a subsystem with the same processes used in the chosen technique, but a net output consisting solely of the desired commodity. One can, however, create two subsystems whose net output differs only by a quantity of the given commodity. The difference in labor inputs between these two subsystems can be said to be the labor embodied in that quantity of the given commodity. The labor value calculated by this method may be negative. Michio Morishima has proposed an alternative method for calculating labor values for systems with joint production. He proposes that the labor value of a commodity bundle should be the minimum amount of person hours needed to produce the desired quantities of commodity net.

3.5 How is the use of capital goods accounted for in calculating labor values?

Marx considers capital to consist of variable capital and constant capital. Those who might ask this question are probably thinking of the material components comprising constant capital alone. These material components can be divided into circulating capital and fixed capital. That portion of circulating capital that is also constant capital consists of those commodities, such as raw materials and semi-finished goods, that are totally used up in the (yearly) cycle of production and must be reproduced. Fixed capital consists of commodities that last for several production cycles, namely machinery and tools. Marx criticized the classical economists for frequently confusing circulating and variable capital.

Labor values are easily calculated for production processes that use circulating capital. This was demonstrated above with Example 3.1 and Example 3.2. Fixed capital can be correctly analyzed as a type of joint production. The outputs of a production process using a machine consist of whatever commodity is usually thought of as being produced by that process and a machine one year older. The labor value of the commodity can be defined as either the minimum amount of labor needed to produce it or the labor inputs into a system with just that commodity as net output and the machine being used for the same length of time that it is actually used in the economy.

3.6 Can you illustrate how to calculate labor values with fixed capital by an example?

(This example is taken from Ian Steedman.)

Consider a simple capitalist economy in which wheat is produced with the aid of a machine that can be used for two years. The machine is produced by a production process using inputs of wheat and labor. The production processes in use in this economy, each of which require a year to complete, are shown in the following table:

Example 3.3 Quantity Flows
84 qr. wheat & 0 machines & 84 workers -> 84 new machines
1,372 qr. wheat & 84 new machines & 840 workers -> 2,464 qr. wheat & 84 old machines
84 qr. wheat & 84 old machines & 840 workers -> 840 qr. wheat

Assume these production processes exhibit constant returns to scale.

In this example, 1,764 workers produce a net output of 1,764 qr. wheat net. So the labor value of wheat seems to be 1 person-year per quarter.

Choice of Technique. Could a capitalist economy operate with the technique shown above? Assume that a one-year old machine can be disposed of without cost. Then the capitalists could choose to produce the same net output with two production processes operating at the levels shown in the following table:

Example 3.3 Quantity Flows With A Machine Only Used For A Year
147 qr. wheat & 0 machines & 147 workers -> 147 new machines
2,401 qr. wheat & 147 new machines & 1,470 workers -> 4,312 qr. wheat

The proportions of inputs to outputs are unchanged from the corresponding processes when the machine is used for two years. Thus the processes for producing a new machine and for producing wheat with a new machine are unchanged between these two techniques, merely operated at different scales.

When the year-old machine is discarded, 1,617 workers can produce the same net output of 1,764 qr. wheat. So the efficient technique that would be chosen by a planned socialist state would result in 11/12 person-years being embodied in a quarter wheat. That is, more output can be produced with the same labor inputs by discarding the machine after it is used for only a year. But a physically inefficient technique can be adopted in a capitalist economy!

A full analysis of the choice of technique can only be performed by considering prices of production. Accordingly, consider the following set of prices:

Possible Prices in Example 3.3
Price of 1 qr. wheat: $1
Price of 1 new machine: $1 79/84 = $1.94
Price of 1 old machine: $0
Wage for one person-year: $311/504 = $0.62
Rate of profits: 20%

These prices will result in revenues covering costs at the going rate of profits for the two processes in the technique in which the one-year old machine is junked:

   ( 147 x $1 +  147 x $0.62 )( 1 + 0.20 ) = 147 x $1.94

   ( 2,401 x $1 +  147 x $1.94 +  1,470 x $0.62 )( 1 + 0.20 ) =  4,312 x $1

Firms producing wheat at these prices will have no incentive to enter into machine manufacturing. Likewise, firms producing machines will have no incentive to remove their capital from machine manufacturing and enter into wheat production. But will a firm producing wheat have a monetary incentive to put some of their labor force to work producing wheat with a one-year old machine? Consider the costs and revenues at these prices for adding this new process:

   Cost = ( 84 x $1 + 84 x $0 + 840 x $0.62 )( 1 + 0.20 ) = $726

   Revenue =  840 x $1 = $840

So extra profits will be earned by using the machine for its full lifetime. Thus, a capitalist economy can adopt the inefficient technique in which the machine is run for two years and in which one person-year is embodied in each quarter wheat produced.

Labor Values of Machines. Now that one has seen that the technique in which machines are operated for two years can be adopted, we can consider the labor embodied in one and two year old machines. Suppose the processes in this technique are operated at the levels shown in the following table:

Example 3.3 Quantity Flows for Producing New Machines
172 qr. wheat & 0 machines & 172 workers -> 172 new machines
1,437 1/3 qr. wheat & 88 new machines & 880 workers -> 2,581 1/3 qr. wheat & 88 old machines
88 qr. wheat & 88 old machines & 880 workers -> 880 qr. wheat

The net output here is 1,764 qr. wheat and 84 new machines. We have seen that 1,764 of the 1,932 workers are required to produce the wheat. Hence the remaining 168 workers produce the 84 new machines. In other words, the labor value of a new machine is 2 workers per new machine.

We can also consider levels of operation of the production processes such that net output consists of the same quantity of wheat and additional old machines. In this example, this increase in net output is brought about by changing the scale of the processes such that total labor inputs decrease:

Example 3.3 Quantity Flows for Producing Old Machines
120 qr. wheat & 0 machines & 120 workers -> 120 new machines
1,960 qr. wheat & 120 new machines & 1,200 workers -> 3,520 qr. wheat & 120 old machines
36 qr. wheat & 36 old machines & 360 workers -> 360 qr. wheat

Net output, which is produced by 1,680 workers consists of 1,764 qr. wheat and 84 old machines. 1,764 workers are required to produce 1,764 qr. wheat. So -84 workers are required to produce 84 old machines. Hence, the labor value of old machines is -1 worker per old machine. Labor values can be negative when they are calculated by this method.

Conclusions. This example demonstrates that labor values can be determined for capitalist economies that make use of fixed capital (that is, actually existing capitalist economies). If one adopts a definition of labor values such that Marx is correct in treating the labor embodied in a commodity basket as the sum of the labor values of the individual commodities, the following problems arise:

  • The analysis of labor values requires a prior analysis of the choice of technique, which, contrary to Marx’s theory, requires a consideration of phenomena on the level of prices of production.
  • The labor value of some commodities can be negative.
  • The rate of profits can be positive even when workers are not exploited.

Alternatively, one can define the labor value of a bundle of goods as the minimum number of person-hours needed to produce that bundle as the net output. With this definition, the fundamental theorem of Marxism, that the rate of profits is positive if and only if labor is exploited, remains true. Furthermore, although the calculation of labor values requires an analysis of the choice of technique, this analysis need only consider the physical data of available production processes; the calculation of labor values does not require a prior determination of prices of production. Marx’s method of summing labor values, however, is invalid under this approach.

3.7 How is the use of natural resources accounted for in calculating labor values?

Durable non-produced means of production, such as land of a given fertility, are a special case of joint production. Land can be regarded as simultaneously an input and an output to certain production processes. Accordingly, the labor value of a commodity produced with the aid of natural resources (either directly or indirectly) is determined by the labor time required to increase the net output of society by one more unit of that commodity. This calculation will require an analysis of marginal land.

Exhaustible resources, which can be used as inputs but are not outputs of any production processes, present difficulties for the LTV. Examples include coal, oil, and various sorts of metallic ores. The Classical economists analyzed exhaustible resources by analogy to land. They generally ignored in their value theory that fertile mines would eventually be depleted. This procedure might be defended on the grounds that the time scale in which mines are depleted is longer than the time period for which labor values are calculated. This defense seems weak today when ecological issues are of concern.

3.8 Not all workers have the same abilities. How can labor values be meaningful?

Those seriously interested in this question should consider all of Chapter 1 of Marx (1867), especially Marx’s distinction between concrete and abstract labor. Part of the difficulty in understanding Marx’s notion of abstract labor is that he thought his theory reflected the topsy-turvy world of capitalism:

When I state that coats or boots stand in a relation to linen, because it is the universal incarnation of abstract human labor, the absurdity of the statement is self-evident. Nevertheless, when the producers of coats and boots compare these articles with linen, or, what is the same thing with gold or silver, as the universal equivalent, they express the relation between their own private labour and the collective labour of society in the same absurd form. (Karl Marx 1867, Chapter I, Section 4)

Robert Paul Wolff argues Marx chose the writing style he did, with all its attendant difficulties, to reflect his theory of the absurdities of capitalism.

Marx claims that different labors are equated when products of labor exchange on capitalist markets:

Hence, when we bring the products of our labour into relation with each other as values, it is not because we see in these articles the material receptables of homogeneous human labour. Quite the contrary; whenever, by an exchange, we equate as values our different products, by that very act, we also equate, as human labour, the different kinds of labour expended upon them. We are not aware of this, nevertheless we do it. Value, therefore, does not stalk about with a label describing what it is. (Karl Marx 1867, Chapter I, Section 4).

Perhaps Marx is more clear on this point in The Poverty of Philosophy:

Does labour time, as the measure of value, suppose at least that the days are equivalent, and that one man’s day is worth as much as another’s? No.Let us suppose for a moment that a jeweller’s day is equivalent to three days of a weaver; the fact remains that any change in the value of jewels relative to that of woven materials, unless it be the transitory result of the fluctuation of demand and supply, must have as its cause a reduction or an increase in the labour time expended in the production of one or the other. If three working days of different workers be related to one another in the ratio 1:2:3, then a change in the relative value of their products will be a change in the same proportion of 1:2:3. Thus values can be measured by labour time, in spite of the inequality of value of different working days; but to apply such a measure we must have a comparative scale of the different working days: it is competition that sets up this scale.

Is your hour’s labour worth mine? That is a question which is decided by competition. (Karl Marx 1955, Chapter I, Section 2).

The Classical economists Adam Smith and David Ricardo also thought different concrete labors could be reduced to a single measure of homogeneous labor. They relied on the supposed empirical fact of the stability of relative wages:

In speaking, however, of labour, as being the foundation of all value, and the relative quantity of labour as almost exclusively determining the relative value of commodities, I must not be supposed to be inattentive to the different qualities of labour, and the difficulty of comparing an hour’s or a day’s labour, in one employment, with the same duration of labour in another. The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes, and depends much on the comparative skill of the labourer, and intensity of the labour performed. The scale, when once formed, is liable to little variation. If a day’s labour of a working jeweller be more valuable than a day’s labour of a common labourer, it has long ago been adjusted, and placed in its proper position in the scale of value. (David Ricardo 1821, Chapter I, Section IV)

Ricardo quotes Adam Smith with approval:

But though labour be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated. It is often difficult to ascertain the proportion between two different quantities of labour. The time spent in two different sorts of work will not alone determine this proportion. The different degrees of hardship endured, and of ingenuity exercised, must likewise be taken into account. There may be more labour in an hour’s hard work, than in two hours easy business; or, an hour’s application to a trade which it costs ten years’ labour to learn, than in a month’s industry at an ordinary and obvious employment. But it is not easy to find any accurate measure, either of hardship or ingenuity. In exchanging, indeed, the different productions of different sorts of labour for one another, some allowance is commonly made for both. It is adjusted, however, not by any accurate measure, but by the higgling and bargaining of the market, according to that sort of rough equality, which though not exact, is sufficient for carrying on the business of common life. (Smith 1776, Book I, Chapter V)

(See also Smith 1776, Book I, Chapter X.) It is interesting to note similarities between the Marx and Smith quotes above.

Anyways, Ian Steedman has shown that the fundamental theorem of Marxism is consistent with heterogeneous labor activities not reduced to a single measure of homogeneous labor.

3.9 Doesn’t the LTV assert it is desirable for workers to become more lazy so the goods they produce would increase in value?


A country prospers not by increasing the labor value of a given output, but by increasing the use values that can be produced by the labor force. The “necessaries and conveniences of life,” as Adam Smith has it, are increased by decreasing the labor values of commodities.

Furthermore, capitalists have no incentive to increase labor values as such. Capitalists increase their profit by increasing surplus value. Surplus value is increased by increasing relative and absolute surplus value. Absolute and relative surplus value is increased by increasing the rate of exploitation of the workers. Decreasing the labor values of commodities results in an increase in relative surplus value.

Finally, Marx explicitly denied the premise of this question:

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskillful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour-power. The total labour-power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour-power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour-power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more time than is socially necessary. The labour-time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time…We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour-time socially necessary for its production. (Karl Marx 1867, Chapter I, Section 1).

3.10 The cost of a good includes more than the cost of labor. Doesn’t this observation invalidate the LTV?

The labor value of a commodity is not the exchange value of the labor that is used to produce that commodity. Rather, the labor value of a commodity is the time required to produce a commodity, including the labor time needed to produce the capital goods with which that commodity is produced.

The price at which a good is typically sold exceeds the wages which would cover the labor time required to produce the good. This excess reflects a going rate of profit. This observation is no refutation of the LTV, but exactly what the LTV was used by Marx to explain, namely the exploitation of the worker under capitalism. Interestingly enough, Adam Smith makes a related observation:

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials…The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. (Smith 1776, Book I, Chapter VI)

Perhaps, those who ask this question are objecting to the nonsymmetrical treatment of factors in the LTV. Bourgeois economists typically explain the incomes received by labor, capital, and land by an incorrect theory in which the forces of supply and demand operating in each factor market determine each factor’s return. Although the LTV does include an analysis of capital and land, factors are not treated symmetrically in the LTV. For example, profits are explained as a residual in Classical economics.

3.11 How can past costs determine value?

As noted above, labor values are not costs. The first example above illustrates that labor values can be thought of as sums of past labor inputs or as quantities reflecting production processes occurring simultaneously. Labor values are not measures of past decisions under this latter conception. Marx was aware of this distinction:

Since the continuous, constantly repeated process of production is, at the same time, a process of reproduction, it is equally dependent on the coexisting labour which produces the various phases of the product simultaneously, while the product is passing through metamorphosis from one phase to another. [Raw] cotton, yarn, fabric, are not only produced one after the other and from one another, but they are produced and reproduced simultaneously, alongside one another. What appears as the effect of antecedent labour, if one considers the production process of the individual commodity, presents itself at the same time as the effect of coexisting labour, if one considers the reproduction process of the commodity, that is, if one considers this production process in its continuous motion and in the entirety of its conditions, and not merely an isolated action or a limited part of it. There exists not only a cycle comprising various phases, but all the phases are simultaneously produced in the various spheres and branches of production. If the same peasant just plants flax, then spins it, then weaves it, these operations are performed in sucession, but not simultaneously as the mode of production based on the division of labour within society presupposes. (Karl Marx 1971, Chapter XXI, Section 3.b)

This idea is also insightfully presented in Volume 2 of Capital.

4.0 What Is Exploitation?

Workers are exploited under capitalism when the commodities which they purchase with their wages embody less labor-time than they expend in earning their wages.

4.1 What is the Fundamental Theorem of Marxism?

The rate of profit is positive in the system of prices of production if and only if some workers are exploited. Michio Morishima stated and proved this mathematical theorem in his interpretation of Marx’s economics. It is true, with an appropriate definition of labor values, under a wide range of assumptions, including the existence of joint production, of production processes using circulating and fixed capital, of natural resources used in production, and of heterogeneous labor not reducible to a single dimension of abstract labor time.

4.2 If all commodities sold at their value, how would the capitalists be able to exploit the workers?

Marx assumed the assumptions under which the LTV holds just so as to be able to pose and answer this question in the first volume of Capital.

Given Marx’s definition of labor values, the labor value of output is the sum of the direct labor hours used to produce that output and the labor embodied in the means of production the laborers work up into the output. Since the labor value of the means of production are transferred unchanged to the output, Marx calls the means of production constant capital, and their labor values are denoted by C. According to Marx, workers do not sell their labor time, but the ability to work under the capitalists’ direction. Marx called this commodity labour power. The use value of labour power is the labor time for which laborers work. Since this commodity produces a greater value than it costs, Marx called labor power variable capital when viewed from the standpoint of the capitalist production process. The labor value of variable capital is denoted by V. Surplus value, denoted by S, results from the laborers working longer hours than needed to reproduce C + V. The labor value of output, in Marx’s labor accounting scheme, is C + V + S.

Exploitation is possible under capitalism because the capitalists purchase variable capital with part of their capital. When workers labor under the capitalists’ direction, the capitalists do their best to ensure the use value of labor power is a greater amount of time than the labor value of labor power.

4.3 If all exchanges are freely made and no one is forced, how is exploitation possible?

This objection seems to miss the point of Marx’s account of exploitation. Marx acknowledged that market exchanges are freely made:

This sphere,…within whose boundaries the sale and purchase of labour-power goes on, is in fact a very Eden of the innate rights of man. There alone rule Freedom, Equality, Property, and Bentham. Freedom, because both buyer and seller of a commodity, say of labour-power, are constrained only by their own free will. They contract as free agents, and the agreement they come to, is but the form in which they give expression to their common will. Equality, because each enters into relation with the other, as with a simple owner of commodities, and they exchange equivalent for equivalent. Property, because each disposes only of what is his own. And Bentham, because each looks only to himself. The only force that brings them together and puts them in relation with each other, is the selfishness, the gain and the private interests of each. Each looks to himself only, and no one troubles himself about the rest, and just because they do so, do they all, in accordance with the pre-established harmony of things, or under the auspices of an all-shrewd providence, work together to their mutual advantage, for the common weal and in the interest of all. (Karl Marx 1867, Chapter VI)

Perhaps Marx intended that last sentence ironically. But consider the following quote, in which Marx describes the gains from trade:

So far as regards use-values, it is clear that both parties may gain some advantage. Both part with goods that, as use-values, are of no service to them, and receive others that they can make use of. And there may also be a further gain. A, who sells wine and buys corn, possibly produces more wine, with given labour time than farmer B could, and B, on the other hand, more corn than wine-grower A could. A, therefore, may get, for the same exchange value, more corn, and B more wine, than each would respectively get without any exchange by producing his own corn and wine. With reference, therefore, to use-value, there is good ground for saying that ‘exchange is a transaction by which both sides gain.’ (Karl Marx 1867, Chapter V)

So it would seem that proponents of the objection to the Marxist account of exploitation need to consider how Marx could have found these ideas consistent with his theory. Note that these quotes describe only the exchange of use-values. They do not characterize the unity of production and circulation under capitalist institutions.

4.4 What is labor power?

By labour-power or capacity for labour is to be understood the aggregate of those mental and physical capabilities existing in a human being, which he exercises whenever he produces a use-value of any description. (Karl Marx 1867, Chapter VI).

According to Marx, labor power is available on the market as a commodity that the capitalist can buy only if the worker has the “double freedom” (Karl Marx 1867, Chapter XXVI) of being free to sell his labor-power and from encumberances resulting from owning land or produced means of production. If the worker used means of production that he owned, he would sell the products of his labor, not his labor power.

The labor embodied in labor power is the labor value of the means of subsistence which the worker requires to reproduce his labor power. In other words, the value of labor power is the labor value of “necessary consumption” used to maintain the workers. The use value of labor power is the labor which the capitalist can get out of the worker. The difference between the number of hours which the worker works and the labor value of labor power is the source of profit under capitalism.

4.5 What is constant capital?

That part of capital then, which is represented by the means of production, by the raw material, auxiliary material and the instruments of labour, does not, in the process of production, undergo any quantitative alteration of value. I therefore call it the constant part of capital, or, more shortly constant capital(Karl Marx 1867, Chapter VIII).

4.6 What is variable capital?

…that part of capital, represented by labor power, does in the process of production, undergo an alteration of value. It both reproduces the equivalent of its own value, and also produces an excess, a surplus-value, which may itself vary, may be more or less according to circumstances. That part of capital is continually being transformed from a constant into a variable magnitude. I therefore call it the variable part of capital, or, shortly variable capital. The same elements of capital which, from the point of view of the labour process, present themselves respectively as the objective and subjective factors, as means of production and labour power, present themselves, from the point of view of the process of creating surplus value, as constant and variable capital. (Karl Marx 1867, Chapter VIII).

4.7 What is the organic composition of capital?

All capital is either constant or variable. The organic composition of capital is the ratio of the labor value of constant capital to the labor value of variable capital. In other words, the organic composition of capital is the ratio of the labor value of the means of production (constant) to total wages (variable). Roughly, the organic composition of capital is a measure of capital intensity.

According to Marx, surplus value can only be realized through exploitation of variable capital; therefore, a change in the organic composition of capital has an effect on working hours and wages.

4.8 What is surplus value?

Surplus value is the difference between the number of hours the laborer works and the amount of labor time necessary to maintain the worker. In other words, it is the difference between the worker’s use value and the labor value of variable capital.

4.9 What is the rate of surplus value, also known as the rate of exploitation?

The rate of surplus value is the ratio of surplus value to the value of variable capital, or S/V. It can also be thought of as the ratio of surplus labor to necessary labor, where necessary labor is the labor needed to reproduce the means of production used up in a yearly production cycle and the consumption goods which support the workers. A third way of thinking of the rate of surplus value is as the ratio of the labor time for which the capitalists do not pay to the paid labor time:

The rate of surplus-value is therefore an exact expression for the degree of exploitation of labour-power by capital, or of the labourer by the capitalist. (Karl Marx 1867, Chapter IX)

Therefore the rate of surplus value is also called the rate of exploitation.

4.10 How can the capitalists increase absolute surplus value?

The surplus-value produced by prolongation of the working day, I call absolute surplus value. On the other hand, the surplus-value arising from the curtailment of the necessary labour-time, and from the corresponding alteration in the respective lengths of the two components of the working day, I call relative surplus value(Karl Marx 1867, Chapter XII).

Absolute surplus value is increased by increasing surplus value for a given labor value of variable capital. That is, absolute surplus value is increased by making laborers work for more hours per day, more weeks per year, etc.

4.11 How can the capitalists increase relative surplus value?

Marx’s definition of relative surplus value was given above along with his definition of absolute surplus value. Relative surplus value is increased by a reduction in the labor value of variable capital for an unchanged working day (S + V). This reduction can be accomplished by:

  • Decreasing the wage
  • Increasing the intensity with which laborers work
  • Reducing wasted output and output that cannot be sold because of inadequate quality
  • Reducing the use of material inputs per unit output, for example, by reducing wasted inputs
  • Adopting more productive machines and using existing machines more efficiently

Since surplus value is the source of profits, it is in the capitalists’ interest to increase both absolute and relative surplus value. Marx provided an analysis of many historical and contemporary examples of the practical consequences of these pressures.

5.0 What Are Prices of Production?

Prices of production for a competive capitalist economy show the same rate of profit being earned in all industries. They are a set of prices that allow smooth reproduction of an economy in which goods and services are traded on markets.

5.1 Can you give an example?

The clearest example of “exchange-values [which] spring directly from the methods of production” (P. Sraffa) are found in a simple economy which does not produce a surplus and in which labor inputs do not explicitly appear. Consider an economy that produces three goods – wheat, iron, and pigs – with a yearly cycle of production. The wheat industry begins the year with inputs of 240 quarters wheat, 12 tons iron, and 18 pigs and uses these inputs to produce 450 quarters wheat. The iron industry uses 90 quarters wheat, 6 tons iron, and 12 pigs to produce 21 tons iron. The pig industry uses inputs of 120 quarters wheat, 3 tons irons, and 30 pigs to produce 60 pigs. This economy can be presented in tabular fashion:

Example 5.1 Quantity Flows
240 qr. wheat & 12 t. iron & 18 pigs -> 450 qr. wheat
90 qr. wheat & 6 t. iron & 12 pigs -> 21 t. iron
120 qr. wheat & 3 t. iron & 30 pigs -> 60 pigs

Notice that the outputs just replace the inputs. Each industry only has their own goods at the end of year. Production cannot continue without trade to redistribute the outputs among industries into the proportions needed for inputs. The exchange values which ensure replacement all round are 10 qr. wheat = 1 t. iron = 2 pigs. So prices of production for this example could be:

Example 5.1 Prices
Price of 1 qr. wheat: $1
Price of 1 t. iron: $10
Price of 1 pig: $5

One could interpret this example economy as implicitly using labor in the production of commodities. Perhaps some of the wheat and pig inputs are used to feed the workers in each industry. Also note that this economy’s reproduction requires triangular trade among the industries. Probably one good would be used as money.

(The example is taken from Piero Sraffa.)

5.2 Can you give an example with a surplus and labor inputs?

Consider another simple economy. This economy produces wheat and iron in a yearly cycle of production. Inputs and outputs are shown in the following table:

Example 5.2 Quantity Flows
74 qr. wheat & 37 t. iron & 592 workers -> 592 qr. wheat
18 qr. wheat & 3 t. iron & 48 workers -> 48 t. iron

Each industry’s output must be sold at a price that covers the cost of the inputs so as to allow the reproduction of this economy. Since this is a competitive capitalist economy, the rate of profits must be constant across industries. Hence prices of production solve the following system of equations:

   ( 74 pw + 37 pi + 592 w )( 1 + r ) = 592 pw

   ( 18 pw +  3 pi +  48 w )( 1 + r ) =  48 pi


  • pw is the price of wheat
  • pi is the price of iron
  • w is the wage
  • r is the rate of profits.

This system of equations shows the capitalists advancing the wages to the workers. A different formulation would show the workers as advancing their labor power to the capitalists and being paid from the output.

There are four unknowns, but only two equations. One unknown is fixed by choosing a numeraire, say the net output per worker. The other degree of freedom is typically taken to be the wage-rate of profits frontier. The location on that frontier could be given by taking either the wage or the rate of profits as given data. Prices of production for this little model economy are:

   pw = 320/(255 + r)
   pi = 80 (5 + r)/(255 + r)
   w = 5 (3 - r) (17 + r)/[ (255 + r) (1 + r) ]

Notice that the wage is higher for a lower rate of profits.

5.3 Why call these exchange values “prices of production,” rather than “costs,” “costs of production,” “natural prices,” or “necessary prices?”

These are all roughly equivalent terms in Classical and Marxian economics, but “prices of production” seems the least likely to mislead.

The expressions “costs” and “costs of production” seem to imply that prices of production depend merely on what must be paid for the means of production, wages, and profits. But this impression is one-sided for commodities that enter directly or indirectly into the production of all other commodities. Their prices of production depend upon their use in the production of other commodities as much as they depend upon the extent into which they enter their own production. For instance, the price of iron in the second example above depends both on the commodities needed to produce it and on how much iron is used in producing wheat.

The Classical economists, particularly Adam Smith and David Ricardo, used the expressions “natural prices” or “necessary prices.” These terms are avoided here because of their association with mistaken or unclear theories in these authors.

Adam Smith had an “adding-up” theory of natural prices:

When the price of any commodity is neither more nor less than than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. (Smith 1776, Book I, Chapter VII)

Smith incorrectly thought natural wages, rents, and profits could vary independently of one another. This Smithian theory is connected with Smith’s mistaken belief that a rise in natural wages would cause a rise in all prices.

Ricardo assumed natural prices as equal to labor values as an aid to criticism of Smith’s theory. If prices of production were equal to labor values, the rate of profit would be found from the industry producing wage-goods alone, where wage-goods are those commodities which the workers buy with their wages. Profits in the wage-good industry would be the difference between the labor embodied in wage-goods and the sum of the labor embodied in the means of production and the labor embodied in the wage-goods consumed by the workers in the wage-good industries. The rate of profits would be the ratio of the labor value of profits in the wage-good industry to the sum of the labor embodied in the means of production and the labor embodied in the wage-goods purchased by the workers producing wage-goods:

        r  =  [  v1 - ( c + v ) ] / ( c + v )  =  [ v1 / ( c + v ) ]  -  1


  • r is the rate of profits
  • v1 is the labor embodied in wage goods
  • c is the labor embodied in the means of production of the wage-good industry
  • v is the labor embodied in the wage goods consumed by the workers in the wage-good industry.

The use of labor as a measure of both input and output in the production of wage-goods shows the rate of profits as a ratio of physical quantities, independent of valuation. This makes it apparent that (real) wages cannot rise without a fall in the rate of profits, given technology. This conclusion, however, can be shown without the simplifying assumption, while elaborating Ricardo’s analysis of the effects of a rise of wage on prices, including a fall in the prices of production of some commodities.

Although Ricardo’s approach is an insightful simplification, it can mislead the unwary into confusing labor values and natural prices in Classical economics. Since Marx clearly distinguished between labor values and prices of production, his terminology is adopted here.

5.4 How are prices of production related to market prices?

The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its [price of production]. (Smith 1776, Book I, Chapter VII)

The price of production,

therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it. (Smith 1776, Book I, Chapter VII)

The articulation of this metaphor of prices of production acting as centers of gravitational attraction is a research question among some contemporary economists. For example, even if one does not think market prices tend toward prices of production, might the differences between market prices and prices of production be useful in analyzing investment plans?

5.5 What is the “realization problem?”

The realization problem is Marxist terminology arising in the analysis of differences between market prices and prices of production. If proportions between industries are inappropriate, some capitalists firms may find that they cannot sell all of their output at the corresponding prices of production. Or there may be a general overproduction in which all the commodities produced cannot be sold. (Marx, in contrast to some Classical economists, denied Say’s law. Say’s law implies that persistent general overproduction (depression) is impossible.)

In either case, not all firms will receive the appropriate rate of profit for their cost structure. Consequently, capitalists will disinvest in some sectors and more heavily invest in others. This process will cease only if all firms can sell their output at prices of production. Adam Smith called this level of output the level of “effectual demand.” Notice that effectual demand is a specified quantity, not a schedule relating quantities and prices.

5.6 Aren’t prices of production merely Neoclassical long-run equilibrium prices?


Neoclassical economics is commonly regarded as having been the dominant school of thought among Western academic economists for over a century. Although they had interesting precursors, W. Stanley Jevons, Carl Menger, and Leon Walras are usually thought to have initiated Neoclassical economics in the 1870s with almost simultaneous presentations of their theories. Briefly, Neoclassical economists claim to explain prices as the result of an equilibrium of Supply and Demand in all markets. The ultimate determinates of prices are technology, tastes (in the form of utility functions), and endowments. Equilibrium prices are thought to coordinate individual maximization problems.

Alfred Marshall replaced the Classical distinction between market prices and prices of production with the notion of equilibrium existing in various runs. The most important of Marshall’s equilibrium concepts are short run and long run equilibrium. In short run equilibrium, agents in the economy have chosen the optimal level of operation of a given capacity. In long run equilibrium, capacity output, levels of operation, and the mix of all inputs are all choice variables. The associated set of long run equilibrium prices are known as “normal prices.” Normal prices show all industries earning the same normal rate of profits in competitive conditions.

Prices of production are sufficiently close to the notion of Neoclassical long-run equilibrium prices that a critique of Neoclassical economics can be built upon an analysis of how prices of production vary with distribution. Prices of production, however, are conceptually distinct from Neoclassical long-run equilibrium prices. Some distinctions between the settings for Neoclassical normal long run equilibrium prices and Classical prices of production are outlined here. Elaborations on most of these themes can be found in the writings of Krishna Bharadwaj, Pierangelo Garegnani, and Alessandro Roncaglia.

Competition. Neoclassical long run equilibrium prices and prices of production are based on different conceptions of competition. Perfect competition, according to Neoclassical economists, exists when no participant in the market has the power to change prices solely through their own actions. Each agent accepts all prices as given parameters. The Classical conception of competition, on the other hand, is merely that there are no barriers to entry or exit in a market. Consequently, there will be a tendency for differences in prices and the rate of profit to level out.

These different abstractions regarding competition are reflected in different theories for non-competitive markets. The Classical economist sees monopolistic barriers to entry as being reflected in persistent differences in rates of profits. A simple approach would be to assume given ratios between rates of profits in different industries in calculating prices of production.

Some academic economists have recently elaborated Classical theories of oligopoly. These Classical theories can be seen in the work of Joe Bain and Paolo Sylos Labini. Sylos Labini, at least, explicitly acknowledges the Classical elements in his theories.

Unemployment and clearing of the labor market. The Neoclassical conception of competitive equilibrium shows all markets clearing, including the labor market. Thus, persistent involuntary unemployment can be analyzed by Neoclassical economics only with great difficulty, if at all:

The structure of modern economics is inhospitable to the idea of persistent unemployment and is always trying to extrude it. Only the stubborn refusal of the brute fact to go away has kept the analytical problem alive. (Robert Solow)

On the other hand, the quantity relationships for which prices of production are calculated are compatible with involuntary unemployment. Capacity is fully used when prices of production are realized, but this issue is separate from whether or not all workers can find a job. Since the same rate of profits is being achieved in all industries, there is no tendency for investment to change. Neoclassical economists may think there would be a tendency for wages to fall in a situation with involuntary unemployment and for firms to adopt relatively more labor-intensive techniques of production. But Classical economics was not based on substitution principles, and modern economists have vindicated the Classical analysis.

Some economists have therefore concluded that prices of production, and Classical economics more generally, provide the natural long period setting for a generalization of Keynes’ economics. Heinrich Bortis, Jan Kregel, Edward Nell, and Luigi Pasinetti are some contemporary economists currently researching the integration of Classical economics and Keynes. This position is controversial. Some economists, for example, Paul Davidson, think this approach risks downplaying the existence of nonergodic uncertainty, which they think is the fundamental cause of unemployment in a monetary production economy.

Normative versus positive analysis. As shown by William Jaffe, Walras developed General Equilibrium Theory to illustrate a “realistic” utopia conforming to certain of his ideas of justice in exchange. Neoclassical economists have continued to found their analysis on the examination of the logical consistency of an utopia. Actually existing societies are analyzed by examining deviations from utopian norms.

Classical economics, on the other hand, is a matter of trying to understand how actually existing capitalist societies function. Although the Classical economists had a pre-analytical vision of essential characteristics of their societies, their analysis in itself is not explicitly normative in the same sense that Neoclassical economics is. Of course, the Classical economists were doing political economy and applied their analyses to political ends.

Production and consumption. Neoclassical economics begins with consumption. A pure exchange economy is a standard introductory model for Neoclassical economists. This is true historically for Walras, and quite frequently papers in bourgeois economics journals are restricted to consumption. For example, a famous paper dealt with a Prisoner of War (POW) economy in which no production occurs, but Red Cross packages provide a periodic flow of consumer goods. Neoclassical economists have not reached a consensus on how to model production. In the opinion of the original author of this FAQ, there is no Neoclassical theory of production that is theoretically coherent, logically consistent, and empirically applicable.

Production is the focus of Classical economics and of analyses associated with prices of production. Although Marx recognized that commodities have a use value, he explicitly stated with his famous formula M-C…P…C’-M’ that capitalist production is directed at profit.

Reproducability versus the allocation of given resources. Neoclassical theory is not based on analyzing the reproducability of an economy. Rather, Neoclassical theory is about the allocation of given goods and a one-way process beginning with scarce resources and ending with consumer goods being purchased to satisfy given tastes. Equilibrium prices are mistakenly taken as indicators of relative scarcities, not as ratios linked to a regular repetition of production processes. Classical economists put reproducability at the center of their analysis. This emphasis predates the LTV and can be seen in Francois Quesnay’s Tableau Economique. If one wants to understand how capitalist economies have continued to expand for centuries and why this process might terminate, Classical economics seems to provide more appropriate analytical tools than Neoclassical economics.

Relationships between quantities and prices. Neoclassical economics shows quantities and prices as simultaneously and mutually determined in all markets. Tastes, technologies, and endowments are taken as given data. Calculating normal prices from these data leads to a logical inconsistency or, at least, theoretical incoherence. Walras attempted to obtain equilibrium prices for a stationary state. But, if endowments of produced means of production are given, only one of these capital goods is likely to be reproduced. The production of the others will obtain a lower rate of profit, and they will not be reproduced.

Prices of production, on the other hand, are calculated from a different set of data. The level and composition of output, that is, quantities, are taken as given. So is distribution. Either the rate of profits or the wage is given data. (If labor is taken as heterogeneous, either relative wages and the absolute level of one wage, or the rate of profits and all but one wage are given data.) Given quantities and distribution, prices of production and the remaining distributive variable can be calculated. This structure of Classical value theory allows one to analyze effects which directly change coefficients of production, such as the increasing returns that Adam Smith stated result from an increase in the extent of the market. With the prior determination of quantities,

…the theory of value will lose the all-embracing quality it assumed with the marginal method. But what will be lost in scope will certainly be gained in consistency and, we may hope, fruitfulness. (P. Garegnani)

5.7 How has an analysis of prices of production been used to construct a critique of bourgeois economics?

By showing that given their own assumptions, Neoclassical economists lack any sound conceptual basis for establishing the existence of markets, particularly factor markers, with well-behaved supply and demand relationships. Thus, Neoclassical economists have yet to show that an equilibriation of supply and demand, as conceived in Neoclassical economics, can explain prices.

This critique was promoted among academic economists by the Neo-Ricardian or Sraffian school in what has become known as the Cambridge Capital Controversy (Harcourt 1972). Neoclassical economists have responded to this critique by:

  • Encouraging ignorance of the economics literature, the history of thought, and scholarship in general so as to ignore the critique.
  • Misrepresenting the critique as addressing only the measurement problem of constructing an adequate index number for capital.
  • Discarding long run Neoclassical theories, aggregate macroeconomic theories, and the marginal productivity theory of distribution in favor of disaggregated intertemporal and temporary General Equilibrium models, in which nearly anything can happen and nothing need happen.

The Cambridge Capital Controversy is generally agreed to have exposed certain problems with Neoclassical capital theory. For example, Bohm-Bawerk’s theory in which the interest rate is determined by the interaction of subjective time preferences and the supposedly greater productivity of techniques with a longer period of production was shown to be incoherent in multicommodity models. More recent capital theories shown to be incoherent include Robert Solow’s growth theory and his formulation of Irving Fisher’s capital theory in which interest rates are the price of intertemporal trades.

Neo-Ricardians have yet to formulate a definitive critique of short-run disaggregated theories. Garegnani has recently suggested that a sequence of temporary equilibria can exhibit behavior Neoclassical economists find perverse. Bertram Schefold argues that the Cambridge Capital Controversy is related to stability problems in neoclassical models of intertemporal equilibrium paths. A general conclusion of the critique is that equilibrium prices are not scarcity indices. A higher price of an input into production is not necessarily associated with a tendency for firms to adopt techniques that use that input less intensively. Nor need firms necessarily increase the production of commodities that use that input less intensively and decrease the production of commodities that use that input more intensively.

6.0 What is the Transformation Problem?

The transformation problem is how to transform relationships in the system of labor values into relationships in the system of prices of production. The principle relationships to have been investigated in the literature revolve around:

  • Relative prices and values
  • The rate of profit
  • Total surplus value and total profits
  • Total value and total prices.

All of these quantities have been investigated in input/output models that abstract from concrete phenomena characteristic of actually existing capitalism, such as monopolies. Some Marxists have questioned whether quantitative relationships should be expected to hold between values and prices since they belong to different levels of analysis.

6.1 Why would one expect prices of production to differ from labor values?

Because of the variability of organic composition of capital among different industries:

Suppose I employ twenty men at an expense of 1000 pounds for a year in the production of a commodity, and at the end of the year I employ twenty men again for another year, at a further expense of 1000 pounds in finishing or perfecting the same commodity, and that I bring it to market at the end of two years, if profits be 10 per cent., my commodity must sell for 2,310 pounds.; for I have employed 1000 pounds capital for one year, and 2,100 pounds capital for one year more. Another man employs precisely the same quantity of labour, but he employs it all in the first year; he employs forty men at an expense of 2000 pounds, and at the end of the first year he sells it with 10 per cent. profit, or for 2,200 pounds. Here then are two commodities having precisely the same quantity of labour bestowed on them, one of which sells for 2,310 pounds – the other for 2,200 pounds. (David Ricardo 1821, Chapter I, Section IV)

So if market prices tend towards prices of production, market prices will not tend towards relative labor values. Marx thought Ricardo did not totally understand his own examples on this point. According to Marx, Ricardo mistakenly emphasized how relative prices alter with variations in wages, rather than the differences between relative prices of production and relative labor values at any positive rate of profits:

What [Ricardo] does in fact examine is this: supposing that cost-prices differ from the values of commodities – and the assumption of a general rate of profit presupposes this difference – how in turn are these cost-prices (which are now, for a change, called “relative values”) themselves reciprocally modified by the rise or fall in wages, taking also into account the varying proportions of the organic component parts of capital? If Ricardo had gone into this more deeply, he would have found that – owing to the diversity in the organic composition of capital which first manifests itself in the immediate production process as the difference between variable and constant capital and is later enlarged by differences arising from the circulation process – the mere existence of a general rate of profit necessitates cost-prices that differ from values. He would have found that, even if wages are assumed to remain constant, the difference exists and therefore is quite independent of the rise or fall in wages. (Karl Marx 1968, Chapter X, SectionA.4.a)

Anyways, Marx understood that the LTV, considered as a determination of relative prices, cannot be expected to be true. But Ricardo and Marx investigated the LTV for reasons connected with distribution, accumulation, laws of motion of capitalist economies, and an explanation of the source of profits.

6.2 When are prices of production equal to labor values?

When the rate of profits is zero or when the organic composition of capital does not vary between industries.

6.3 What was Marx’s algebraic solution to the transformation problem?

Marx’s solution to the transformation problem is in chapter 9 of the third volume of Capital, in Part II (Chapter VIII, Section 6 and Chapter XV, Section 5) of Theories of Surplus Value, and in a letter to Engels (2 August 1862). Marx presents his solution by means of various examples, the most straightforward from the third volume being presented in the table below.

Example 6.1 Illustrates Marx’s Solution
Sphere of Production Capitals Surplus Value Labor Value Price of Production Divergence
I. 70c + 30v 30s 130 120 -10
II. 80c + 20v 20s 120 120 0
III. 90c + 10v 10s 110 120 +10
Total 240c + 60v 60s 360 360 0

The economy is assumed to be composed of three sectors of varying organic compositions of capital (second column). Note that the second sector has an average organic composition of capital. The quantities of surplus value shown in the third column are derived under the assumption that the rate of surplus value is 100%. The ratio of total surplus value to the total value of capital is 20%. Marx mistakenly derives the rate of profits from a system with constant capital costed up with embodied labor values, thereby assuming the rate of profits is 20%. Since the value of capital is 100 in each sector, Marx sets the price of production of the output of each sector to 120.

As can be seen in the table, prices of production deviate from labor values except for a sector with an average organic composition of capital. The labor value of total output, though, is equal to total output when evaluated in prices of production, 360. Likewise, under Marx’s procedure, total profits are equal to total surplus value, 60. If Marx were correct, surplus value would be generated from exploitation of the worker and then redistributed in the form of profits. This redistribution would result in prices of production that deviate from labor values so as to obtain equal rates of profits in all sectors. In short,

[the] average rate of profit can and must come about, not only without violating the law of value, but precisely on the basis of this law… (From Frederick Engels’ preface to Volume 2 of Capital)

6.4 Why was Marx’s solution to the transformation problem inadequate?

Marx calculated the rate of profit on inputs evaluated at untransformed labor values. Marx seems to accept that his arithmetic examples are not fully worked out:

The development given above also involves a modification in the determination of a commodity’s cost price. It was originally assumed that the cost price of a commodity equalled the value of the commodities consumed in its production. But for the buyer of a commodity, it is the price of production that constitutes its cost price and can thus enter into forming the price of another commodity. As the price of production of a commodity can diverge from its value, so the cost price of a commodity, in which the price of production of other commodities is involved, can also stand above or below the portion of its total value that is formed by the value of the means of production going into it. It is necessary to bear in mind this modified significance of the cost price, and therefore to bear in mind too that if the cost price of a commodity is equated with the value of the means of production used up in producing it, it is always possible to go wrong. (Karl Marx 1894, Chapter 9)

When the inputs are evaluated at their prices of production, equalities that Marx relied on no longer obtain in the dual system approach. If the same prices of production are used for the inputs to and the outputs from production processes, the correct rate of profit will generally not be equal to Marx’s rate of profit in the value schema ( S/( C + V ) ). Total profits will generally deviate from total surplus value. And the total labor value of the national product will deviate from its price when all commodities are evaluated at prices of production. (One of these latter two equalities can be imposed by choosing an appropriate numeraire.)

6.5 Can you provide an example in which the LTV is valid?

Consider a simple capitalist economy in which wheat and iron are produced by the production processes described in the following table. Notice that if both processes are operated at an unit level, twice as many workers are employed in the iron industry as the wheat industry. When the processes are operated in the ratios shown, the net output consists solely of 204 qr. wheat. Since this output is produced by 272 workers, the labor embodied in each quarter wheat is 1 1/3 person years.

Example 6.2 Quantity Flows
30 qr. wheat & 15 t. iron & 240 workers -> 240 qr. wheat
6 qr. wheat & 1 t. iron & 32 workers -> 16 t. iron

The following table shows a vertically integrated iron industry for the same processes operated at different ratios. 102 workers produce a net output of 272 t. iron. So the labor value of each ton of iron is 2 2/3 person-years. Note that the ratio of the labor value of iron to wheat is the same as the ratio of direct labor inputs. This equality always holds in these circulating capital models when the organic composition of capital is constant across industries.

Example 6.2 Quantity Flows for Iron Subsystem
6 qr. wheat & 3 t. iron & 48 workers -> 48 qr. wheat
42 qr. wheat & 7 t. iron & 224 workers -> 112 t. iron

Prices of production satisfy the following system of equations:

   ( 30 pw + 15 pi + 240 w )( 1 + r ) = 240 pw

   ( 6 pw +  1 pi +  32 w )( 1 + r ) =  16 pi

Given a certain choice of numeraire, the solution is as follows:

   pw = $1.33
   pi = $2.67
   w = (3 - r)/[3 (1 + r)]  or  r = 3 (1 - w)/(1 + 3 w)

Notice that prices of production for this example do not vary with the distribution of income. Furthermore, prices of production are equal to labor values in this example. Having calculated labor values and prices of production, one can construct the following table for this example:

Comparison of Value and Price Accounting for Example 6.2
Sector Constant Capital Variable Capital Surplus Value/Profit Value/Price of Output
Wheat 80 240 w 240 (1 – w) 320
Iron 10 2/3 32 w 32 (1 – w) 42 2/3
Total 90 2/3 272 w 272 (1 – w) 362 2/3

It does not matter in the above table whether one calculates in labor values or prices of production; the entries are the same. Notice that the ratio of the value of variable capital to constant capital is the same in both industries. This observation is another manifestation of the constancy of the organic composition of capital across sectors.

Finally, one can express the wage as a function of how much labor time is obtained free by the capitalists:

   w = 1/(1 + e)

where e is the rate of exploitation. When the workers obtain pay for all time worked, the rate of exploitation is zero and the wage is unity. If physical quantity flows remain unchanged, a lower wage results from the capitalists paying for less of the time that the labor force works.

6.6 Can you provide an example in which prices of production are not proportional to labor values?

The same example was used to illustrate the calculation of labor values and prices of production. Since the organic composition of capital differs between sectors in this example, it provides an illustration of difficulties with the LTV. The following table shows the quantity flows in this example:

Example 6.3 Quantity Flows
74 qr. wheat & 37 t. iron & 592 workers -> 592 qr. wheat
18 qr. wheat & 3 t. iron & 48 workers -> 48 t. iron

Comparison of Value and Price Accounting. It was shown above that the labor emodied in wheat is 1 13/51 person-years per quarter and that the labor embodied in iron is 1 29/51 person-years per ton. Assume that the value of the yearly wage is equal to the proportion of the net output it can purchase. Then one can calculate the labor value quantities shown in the following table:

Value Accounting for Example 6.3
Sector Constant Capital Variable Capital Surplus Value Value of Output
Wheat 150 46/51 592 w 592 (1 – w) 742 46/51
Iron 27 5/17 48 w 48 (1 – w) 75 5/17
Total 178 10/51 640 w 640 (1 – w) 818 10/51

Prices of production were also calculated above. Notice that prices of production are equal to labor values only when the rate of profits are zero. The following table is constructed using the physical quantity flows and prices of production:

Price Accounting for Example 6.3
Sector Price of Constant Capital Wages Profits Price of Output
Wheat 2,960 (13 + r)/(255 + r) 592 w 2,960 (51 – r)/(255 + r) – 592 w 189,440/(255 + r)
Iron 240 (29 + r)/(255 + r) 48 w 240 (51 + 15 r)/(255 + r) – 48 w 3,840 (5 + r)/(255 + r)
Total 640 (71 + 5 r)/(255 + r) 640 w 640 (1 – w) 1,280 ( 163 + 3 r)/(255 + r)

Only one of Marx’s equalities is satisfied for this data. Total surplus value is equal to total profits. This equality was established by choosing the net output per worker as the numeraire. At wages corresponding to positive profits, the prices of outputs and capital goods differs from labor values. Consequently, the total labor value of output differs from the total price of output for this example. Also, the rate of profit is not S/(C + V). Does this re-evaluation of output invalidate Marx’s theory that the source of profits is the exploitation of the worker? Notice that profits are positive if and only if the rate of exploitation is positive.

More on the Organic Composition of Capital. Prices of production are proportional to labor values when the organic composition of capital is constant across industries. When this condition is met, capital per worker is also constant across industries, where capital per worker is calculated by evaluating per capita capital goods at prices of production. Since relative prices deviate from labor values in this example, capital per worker must also vary across industries.

The example illustrates this variation. Using the data in the price accounting table and the known relationship between wages and the rate of profits, the capital intensity for this economy as a whole, k, is established to be

k = (71 + 5 r) (1 + r)/[ 5 (3 - r) (17 + r) ].

The wheat industry is less capital-intensive than average, and the iron industry is more capital-intensive. The difference between capital-intensities in these industries and the average capital intensity is (in obvious notation):

k - kw = 6 (1 + r)/[ 5 (3 - r) (17 + r) ]
ki - k = 74 (1 + r)/[ 5 (3 - r) (17 + r) ]

It is interesting to compare these deviations of the wheat and iron industries from the average capital intensity with the deviations of the vertically integrated wheat and iron industries. It was shown above how to reapportion the given quantity flows so as to create two subsystems whose net outputs are wheat and iron, respectively. Wages and the prices of the capital goods can be totaled in each subsystem to obtain capital per worker for each subsystem. The vertically integrated wheat industry is still less capital intensive than average, and the vertically integrated iron industry remains more capital intensive. The capital intensities of the vertically integrated wheat industry and the vertically integrated iron industry differ from the average capital intensity, respectively, by

(1 + r)/[ 5 (3 - r) (17 + r) ]


50 (1 + r)/[ 5 (3 - r) (17 + r) ]

So the capital intensity of the wheat industry differs from the average six times as much as the capital intensity of the vertically integrated wheat industry. The capital intensity of the iron industry differs only 1.48 times as much as the difference of the vertically integrated iron industry and the average capital intensity. The analytical process of vertical integration seems to reduce variations among industries in the value of capital per head.

The point of these observations is difficult to explain without advanced mathematics. The LTV is a valid theory of price when both direct labor coefficients and labor values are eigenvectors of the input-output matrix corresponding to the Perron-Frobenius root of the input-output matrix. If the difference between the average capital intensity and the capital intensity of vertically integrated industries is usually smaller than the difference between the average capital intensity and the capital intensity of non-vertically integrated industries, then labor values will usually be a better approximation than direct labor inputs to an eigenvector for the Perron-Frobenius root of the input-output matrix. That is, the LTV will usually be a good approximate theory of price.

On the Production of a Commodity of Average Organic Composition. One can also decompose the given quantity flows to consider the production of a commodity of average organic composition, in some technical sense different from Marx’s. The other sector produces the wheat remaining in the gross output. The following table shows the production of a composite commodity of average organic composition.

Example 6.3 Modified Quantity Flows
18 qr. wheat & 9 t. iron & 144 workers -> 144 qr. wheat
18 qr. wheat & 3 t. iron & 48 workers -> 48 t. iron

Total capital in this sector consists of 36 qrs. wheat and 12 t. iron, a ratio of three to one. Gross and net outputs are also in this ratio. This is a defining property of Piero Sraffa’s “standard commodity.” Since these quantity flows result from a mere rescaling of the given production processes, the labor values of wheat and iron remain unchanged. Labor values can be used to evaluate inputs and outputs, resulting in the following table:

Value Accounting for Modified Example 6.3
Sector Constant Capital Variable Capital Surplus Value Value of Output
Wheat 36 12/17 144 w 144 (1 – w) 180 12/17
Iron 27 5/17 48 w 48 (1 – w) 75 5/17
Total 64 192 w 192 (1 – w) 256

Prices of production need to be recalculated for a new numeraire, that being the net output per worker of the standard system. Prices of production are then found to be:

   pw = 64/[ 3 (17 + r) ] = 16 (3 w + 1)/[ 3 (12 w + 5) ]
   pi = 16 (5 + r)/[ 3 (17 + r) ] = 16 (3 w + 2)/[ 3 (12 w + 5) ]
   w = (3 - r)/[ 3 (1 + r) ]
   r = 3 (1 - w)/(3 w + 1)

When the rate of profits is zero, the wage is unity. Notice that prices of production are equal to labor values only if the rate of profits is zero. Evaluating inputs and outputs with prices of production yields the following table:

Price Accounting for Modified Example 6.3
Sector Price of Constant Capital Wages Profits Price of Output
Wheat 48 (9 w + 4)/(12 w + 5) 144 w 576 (3 w + 1)(1 – w)/(12 w + 5) 768 (3 w + 1)/(12 w + 5)
Iron 16 (21 w + 8)/(12 w + 5) 48 w 192 (3 w + 2)(1 – w)/(12 w + 5) 256 (3 w + 2)/(12 w + 5)
Total 64 192 w 192 (1 – w) 256

All Marx’s equalities hold for this modification of the example. Total value equals the total price of the standard commodity. Total surplus value equals total profits. Individual price-value deviations result in the prices of ouput and capital goods varying from labor values in individual sectors. But these differences cancel out for the economy as a whole when the economy is in standard proportions. One can calculate the rate of profit indifferently in labor values, physical quantities, or prices of production.

Of course, one cannot expect an economy to be in “standard proportions.” Can one still say that the total value added in any period is the labor expended in that period, due allowance being taken for variations in skill? The prices of capital goods will differ from their labor values in individual industries. Since the economy is not in standard proportions, the total labor value of capital will not be its price. Nor will the total labor value of output be equal to its price. But the price of outputs in each industry and in the economy as a whole will be the sum of the price of capital goods and labor inputs. Furthermore, although labor contributes total value-added, the workers are not paid the entire net output. Perhaps these observations are enough to justify Marx’s theory of value.

The New Interpretation Applied to This Example. Marx’s equalities can also be justified by the “New Interpretation.” Since the net output per worker was chosen as the numeraire when calculating prices of production, a dollars worth of net output represents, in some sense, one person year. In the technical terminology of the New Interpretation, the Monetary Expression of Value is unity. Notice that the Monetary Expression of Value can be calculated with any set of prices; it need not be found only for prices of production.

The labor value of constant capital was previously calculated as the labor embodied in the means of production. According to the New Interpretation, the labor value of constant capital should rather be calculated as the labor value expressed by the money with which the capitalists purchase the means of production. Likewise, the labor value of variable capital should be calculated as the labor expressed by the money with which the capitalists purchase labor-power, not the labor embodied in the commodities the workers buy with their wages. (The example has already used this method of calculating the labor value of variable capital.) The following table shows labor values calculated under the guidance of the New Interpretation.

Value Accounting for Example 6.3 Under the New Interpretation
Sector Constant Capital Variable Capital Surplus Value Value of Output
Wheat 2,960 (13 + r)/(255 + r) 592 w 592 (1 – w) 1,184 (160 + 3 r)/(255 + r)
Iron 240 (29 + r)/(255 + r) 48 w 48 (1 – w) 96 (200 + 3 r)/(255 + r)
Total 640 (71 + 5 r)/(255 + r) 640 w 640 (1 – w) 1,280 (163 + 3 r)/(255 + r)

The New Interpretation does not provide an alternative approach to calculating prices of production; they are calculated as above. Labor values of individual commodities are found as the sum of the labor value of constant capital, the labor value of variable capital, and surplus value. Since surplus value is generated in proportion to direct labor inputs, the labor values of individual commodities differ from their prices of production. Yet total labor value equals total prices of production, and total surplus value equals total profit. Furthermore, the rate of profit in the terms of labor values is numerically equal to the rate of profit used in calculating prices of production. All of Marx’s equalities are vindicated by this controversial interpretation.

The Temporal Single System approach offers another way of thinking about the arithmetic of the transformation problem. When Marx sets prices equal to values in Volume 1 of Capital, he determines both labor values and prices as the labor embodied in commodities. The transformation in Volume 3 is not a transformation merely of labor values to prices of production. Rather, both labor values and prices are transformed to new quantities in a single system in which capitalists obtain profit in each industry in proportion to the capital advanced. Although contravening a century’s interpretation of Marx, proponents of the Temporal Single System approach argue with style for their reading of Marx.

6.7 What empirical evidence supports the LTV?

As noted above, the LTV may be a good approximate theory of prices if the price of capital per worker for vertically integrated industries is closer to the average price of capital per worker than for non-vertically integrated industries. Anwar Shaikh has checked this condition with the 1947 input-output table collected by Wassily Leontief for the United States. This input-output table divides the U.S. economy into 190 sectors. Anwar Shaikh found that the ratio of the standard deviation of the capital-labor ratios to the mean capital-labor ratio (the coefficient of variation) is 1.14. The coefficient of variation for capital-labor ratios of vertically integrated sectors is 0.60. So the desired condition is confirmed. Furthermore, 96% of sectoral variations in the logarithm of relative prices are explained by variations in the logarithm of relative labor values. (Anwar Shaikh provided a theoretical argument for using natural logarithms.)

Anwar Shaikh also tested the ability of the LTV to explain temporal variations in prices. He used Italian input-output tables developed by Graziella Marzi and Paolo Varri for 1959 and 1969. These tables contain 25 sectors. Anwar Shaikh found that 92% of the temporal variation of the logarithm of prices of production is explained by variations in the logarithm of relative labor values.

Paul Cockshott, Allin CottrelEd Ochoa, and Pavle Petrovic are some other economists whose recent empirical results support the LTV. Edward Wolff found empirical evidence against Marx’s law of the tendency of the rate of profits to fall. He argues, though, that Marx’s theory provides an adequate framework for empirical exploration of such issues. Anwar Shaikh and E. Ahmet Tonak found empirical evidence in favour of Marx’s law. In other empirical work, William Nordhaus used a Smithian labor-commanded standard to measure technological change. Ian Steedman and Judith Tomkins found empirical evidence against the LTV in their sophisticated formulation of the question.

7.0 What can I Read to Find Out More About the LTV?

The LTV, as presented in this FAQ, is a mostly 20th century, mostly Anglo-American interpretation of Classical economics and Marx. The most important Classical economists, in this context, are Adam Smith and David RicardoPhilip Wicksteed and Eugen von Bohm-Bawerk each produced an early and influential critique of Marx from a neoclassical perspective. Paul Sweezy made Bohm-Bawerk’s criticisms available to an English-speaking audience in 1949. From the perspective of this FAQ, Sweezy’s decision to include an essay by Ladislaus von Bortkiewicz was even more important. Von Bortkiewicz laid out the mathematical framework of the transformation problem in terms of dual systems of labor values and prices of production. There were other similar early criticisms of Marx, for example, by V. K. Dmitriev, and even another more general essay by von Bortkiewicz that was not restricted to the specific sectors examined in the essay Sweezy chose to translate. Awareness, however, of this other non-English language literature only came later among Anglo-American economists.

J. Winternitz developed one response to Sweezy’s presentation of the problem. He generalized von Bortkiewicz’s statement of the problem, and showed that restrictions imposed by Marx’s Volume 2 reproduction schemes are irrelevant to the transformation problem. Winterniz and, in response, Kenneth May unnecessarily restricted themselves to three-sector economies. A 1957 essay by Francis Seton further developed the standard dual-system interpretation. Seton presented a general N-commodity model. He showed that in the dual system setting, all of Marx’s “normalization” properties generally do not hold simultaneously. For example, either total surplus value equals total profits, or total values equal total output evaluated in prices of production, but not both. A book by Ronald Meek is a good example of an English defense of Marx of that era.

One of the greatest 20th century mathematicians, Johnny Von Neumann, comes into the story here. He presented a growth model that some economists think is a formalization of Classical theory. Despite the misleading translation of the title, the English-language translation may be superior to the German original in that it is accompanied by David Champernowne’s commentary. The Classical contextualization of the Von Neumann growth model is heavily influenced by Piero Sraffa‘s independently-developed 1960 masterpiece. Prices of production are determined in these models, given physical quantity flows and the wage; labor values are not mentioned. Nobuo Okishio provided another seminal paper of that era. Okishio’s paper, which I have not read, “proved” that Marx’s theory of the falling rate of profit is not logically valid. Okishio’s paper is in Japanese, and Japan has long had an established tradition of Marxist economics.

Critiques of Marx produced in the 1970s brought together some strands of this literature. Paul Samuelson presented one such critique from what he termed a Sraffian position. (See also Samuelson’s debate with William J. Baumol and Michio Morishima.) In an angry bit of mathematics, Ian Steedman added the charge of redundancy to the traditional assertion of inconsistency of Marx’s theory. Steedman argued not only that Marx’s normalization conditions are inconsistent in the system of prices of production, but that a materialist theory could be developed using prices of production and no reference to labor values.

Three important recent schools of thought reacted to these findings. G. A. Cohen, Jon Elster, and John Roemer are the most prominent developers of “Analytical Marxism.” Analytical Marxists use the techniques of mainstream economics, particularly General Equilibrium theory, to evaluate Marx. Analytical Marxists provide criticisms of many points of detail, but Jon Elster, at least, seems to find promising Marx’s accounts of technical change, exploitation, and the sociology of knowledge. Gerard Dumenil’s, A. Lipietz’s, and Duncan Foley’s “New Interpretation” of the transformation problem makes it seem much less problematic. The New Interpretation emphasizes the role of money in Marx’s theory of value. Under this interpretation, all of Marx’s normalization conditions hold. Guglielmo Carchedi, Alan Freeman, Andrew Kliman and other developers of the Temporal Single System (TSS) approach also present an interpretation in which Marx’s normalization conditions are logically consistent. The TSS emphasizes the use of dynamic models in interpreting Marx.

At the end of the day, where are we? Neoclassical value theory is incoherent. Prices of production are internally consistent and may be used for a materialist theory of value. It is not clear how important labor values are to such a theory, or whether it can properly be described as a labor theory of value. Marx’s legacy is a matter of contemporary lively debate among some economists. Perhaps other elements of a theory of value are to be found in Chapter 17 of Keynes’ General Theory or in (Old) Institutionalism. Or perhaps the questions addressed by theories of value should be reformulated.


  • David R. Andrews, “Nothing is Hidden: A Wittgensteinian Interpretation of Sraffa,” Cambridge Journal of Economics, Volume 20, p. 763-777, 1996.
  • William J. Baumol, “The Transformation of Values: What Marx ‘Really’ Meant (An Interpretation),” Journal of Economic Literature, Volume 12, Number 1, 1974.
  • Eugen von Bohm-Bawerk, “Karl Marx and the Close of His System,” in Sweezy (1949)
  • Ladislaus von Bortkiewicz, “On the Correction of Marx’s Fundamental Theoretical Construction in the Third Volume of Capital,” in Sweezy (1949)
  • W. P. Cockshott and A. F. Cottrell, “Labour Time versus Alternative Value Bases: A Research Note,” Cambridge Journal of Economics, Volume 21, Number 4, p. 545, 1997.
  • V. K. Dmitriev, “The Theory of Value of David Ricardo,” in Economic Essays on Value, Competition, and Utility, (edited by D. M. Nuti), Cambridge University Press, 1974.
  • Jon Elster, Making Sense of Marx, Cambridge University Press, 1985.
  • Duncan K. Foley, Understanding Capital: Marx’s Economic Theory, Harvard University Press, 1986.
  • Alan Freeman and Guglielmo Carchedi, Marx and Non-Equilibrium Economics, Edward Elgar, 1996.
  • Pierangelo Garegnani, “Quantity of Capital,” in The New Palgrave: Capital Theory, edited by John Eatwell, Murray Milgate, and Peter Newman, Macmillan, 1990.
  • G. C. Harcourt, Some Cambridge Controveries in the Theory of Capital, Cambridge University Press, 1972.
  • Geoffrey M. Hodgson, Warren J. Samuels, and Marc R. Tool, The Elgar Companion to Institutional and Evolutionary Economics, Edward Elgar, 1994,
  • M. C. Howard and J. E. King, A History of Marxian Economics (two volumes), Princeton University Press, 1992.
  • John Maynard Keynes, The General Theory of Employment Interest and Money, Harcourt, Brace and Company, 1936.
  • A. Lipietz, “The So-Called ‘Transformation Problem’ Revisited”, Journal of Economic Theory, V. 26, N. 1, February 1982, p. 59-88.
  • Karl Marx, Capital, Volume 1, 1867.
  • Karl Marx, Capital, Volume 2, 1885.
  • Karl Marx, Capital, Volume 3, 1894.
  • Karl Marx, The Poverty of Philosophy, Progress Publishers, 1955.
  • Karl Marx, Theories of Surplus-Value, Part II, Progress Publishers, 1968.
  • Karl Marx, Theories of Surplus-Value, Part III, Progress Publishers, 1971.
  • Kenneth May, “Values and Price of Production: A Note on Winternitz Solution” Economic Journal, Volume 58, pp. 596-599, 1948.
  • Ronald L. Meek, Studies in the Labour Theory of Value, Lawrence & Wishart, 1956.
  • Michio Morishima, Marx’s Economics: A Dual Theory of Value and Growth, Cambridge University Press, 1973.
  • John Von Neumann, “A Model of General Economic Equilibrium,” Review of Economic Studies, 1945-1946.
  • William D. Nordhaus “Traditional Productivity Estimates are Asleep at the (Technological) Switch,” Economic Journal, V. 107, No. 444, September 1997, pp. 1548-1559.
  • Nobuo Okishio, “Technical Changes and the Rate of Profit,” Kobe University Economic Review Volume 7, pp 86-99, 1961.
  • Eduardo M. Ochoa, “Values, Prices, and Wage-Profit Curves in the U. S. Economy” Cambridge Journal of Economics, V. 13, No. 3, September 1989, pp. 413-429.
  • Terry Peach, Interpreting Ricardo, Cambridge University Press, 1993.
  • Pavle Petrovic, “The Deviation of Production Prices from Labour Values: Some Methodology and Empirical Evidence,” Cambridge Journal of Economics, V. 11, No. 3, September 1987, pp. 197-210.
  • David Ricardo, On the Principles of Political Economy and Taxation, 3rd Edition, 1821.
  • John Roemer, Analytical Foundations of Marxian Economic Theory, Cambridge University Press, 1981.
  • Paul A. Samuelson, “Understanding the Marxian Notion of Exploitation: A Summary of the So-Called ‘Transformation Problem’ Between Marxian Values and Competitive Prices,” Journal of Economic Literature, Volume 9, Number 2, pp. 399-431, 1971.
  • Bertram Schefold, “Classical Theory and Intertemporal Equilibrium,” in Normal Prices, Technical Change and Accumulation, St. Martin’s Press, 1997.
  • Francis Seton, “The Transformation Problem,” Review of Economic Studies, Volume 24, pp. 149-160, 1957.
  • Anwar Shaikh, “The Transformation from Marx to Sraffa,” in Ricardo, Marx, Sraffa: The Langston Memorial Volume, edited by Ernest Mandel and Alan Freeman, Verso, 1984.
  • Anwar Shaikh and E. Ahmet Tonak, Measuring the Wealth of Nations: The Political Economy of National Accounts, Cambridge University Press, 1994.
  • Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
  • Piero Sraffa, Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory, Cambridge University Press, 1960.
  • Ian Steedman, Marx after Sraffa, NLB, 1977.
  • Ian Steedman and Judith Tomkins, “On Measuring the Deviation of Prices from Values,” Cambridge Journal of Economics, V. 22, No. 3, May 1998, pp. 379-386.
  • Paul M. Sweezy (editor), Karl Marx and the Close of His System by Eugen von Bohm-Bawerk & Bohm-Bawerk’s Criticism of Marx by Rudolf Hilferding, Together with an Appendix Consisting of an Article by Ladislaus von Bortkiewicz on the Transformation of Values into Prices of Production in the Marxian System, A. M. Kelley, 1949.
  • Philip Wicksteed, “The Marxian Theory of Value,” To-Day, October 1884, (Reprinted in The Common Sense of Political Economy).
  • J. Winternitz, “Values and Prices: A Solution of the So-Called Transformation Problem,” Economic Journal, Volume 58, pp. 276-280, 1948.
  • Edward N. Wolff, “The Rate of Surplus Value, the Organic Composition of Capital, and General Rate of Profits in the U. S. Economy, 1947-1967,” American Economic Review, March 1979, pp. 329-341.
  • Robert P. Wolff, Moneybags Must be so Lucky: On the Literary Structure of Capital, University of Massachusetts Press, 1988.


This FAQ was written by Robert Vienneau. This is version 1.2.4 (Last modified April 2004). The FAQ for alt.politics.socialism.trotsky was useful in writing the original version. Participants in various Usenet forums commented on previous versions. I am grateful for comments by Aldo Balardini, Jacques-Phillippe Dupre, Alan Freeman, and E. Ahmet Tonak and to David Andrews for discussion of his paper. It is really necessary to emphasize that usual caveats apply.


The classical Marxian definitions are:

Productive labour is labour power within the sphere of production which is exchanged with capital and which is the direct source of surplus value.

Unproductive labour is labour power within the sphere of exchange (circulation) which is exchanged with revenue, (i.e. wages and profits) and which is not a source of surplus value. Continue reading