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The labor theory of value is one of Marxism’s most contested ideas. Both critics and supporters of socialism have labeled it inconsistent and outdated. In an interview with Jacobin, economist Duncan Foley offers a full-throated defense.

Marxists tend to like the labor theory of value because it provides a vivid account of exploitation and highlights a basic antagonism at the core of capitalism: capitalists and workers are locked in a battle over the appropriation of the surplus that workers produce. But many commentators assume it is either internally inconsistent or hopelessly outdated.

The theory is thus hotly contested but arguably poorly understood by both critics and advocates alike. The debate has also sometimes been mired in arcane mathematical issues. As a consequence, interesting philosophical and empirical questions have received less attention. Jacobin put a number of these questions to Duncan Foley, author of Understanding Capital: Marx’s Economic Theory.

David Calnitsky

John Clegg

The labor theory of value is today widely dismissed by both mainstream economists and commentators on Karl Marx’s work. You disagree. What distinguishes your approach?

Duncan Foley

In reconstructing any writer’s thinking, it is necessary to employ both close reading and a synthetic perspective that seeks to situate particular texts in a broad context. Because Marx’s ideas were genuinely original and dangerous to capitalist society, hostile or skeptical critics have tended to emphasize the analytical, close-reading aspect of reconstruction, largely with the aim of finding inconsistencies or fallacies in Marx’s arguments.

This is particularly true, in my opinion, of the literature on Marx’s theory of value, with a few notable exceptions, such as I. I. Rubin’s Essays on Marx’s Theory of Value. As a result, there tends to be a broad and rarely questioned consensus that Marx’s theory of value (or the “labor theory of value”) is fundamentally flawed. I think this consensus is far off the mark: Marx’s theory, grounded in his critical reading of Adam Smith’s analysis of capitalist commodity production based on what we now call the “long-period method,” is consistent and answers the questions Marx intended to address through it. These questions, however, are not in general the questions the critics of Marx’s theory want it to answer, and this discrepancy is responsible for much of the misunderstanding that has dogged the labor theory of value since Marx published the first volume of Capital.

It is possible to disagree with certain of the explicit and implicit premises of Marx’s theory, and on those grounds to reject the theory and its conclusions, but I believe Marx’s conclusions follow from his premises, properly understood. It is also possible to conclude that Marx’s findings cannot address what some people may regard as the crucial questions about capitalism and value. But these grounds for rejecting or questioning the relevance of Marx’s thinking to present-day capitalism are quite different from the charge of inconsistency in his reasoning.

David Calnitsky

John Clegg

Your “synthetic” interpretation is not just about situating Marx in his time. You also argue that Marx’s theory of value, properly reconstructed, may still be relevant today. What are some of the challenges we face in reconstructing that theory?

Duncan Foley

We can never know with certainty exactly how a historical figure thought about complex issues, for example, to answer questions like “What would Marx have to say about the information economy?” The best we can do is to use what someone (in this case Marx) wrote to reconstruct a possible version of their views and use that version as a framework within which to extrapolate cautiously. This process of reconstruction inevitably involves “filling in” certain parts of arguments that the original texts leave obscure and runs the risk of misinterpreting key ideas from the original texts.

There are some particularly important issues that arise in trying to reconstruct Marx’s thinking. One is the enormous volume of Marx’s surviving writing, which makes it all too easy to find apparent contradictions or inconsistencies between different texts. Another is the fact that much of Marx’s texts consist of unrevised first drafts and notes, which contain mistakes and inconsistencies that Marx would have corrected in revision and in some cases did. Yet another is language. Many of us read Marx in translation, which creates another layer of potential distortion in understanding what he had in mind. Marx read and had considerable fluency in German, French, and English, so that even his predominantly German texts very likely reflect influences from terms and ideas he encountered in other languages. I view these considerations as calling for considerable humility and caution in trying to reconstruct Marx’s thinking, and it is in that spirit that I put forward the ideas we are discussing here.

David Calnitsky

John Clegg

You referred to Marx as having a “long-period method.” What do you mean by that?

Duncan Foley

One fundamental point that emerges from my synthetic reading is that the labor theory of value addresses the question of the determination of what Adam Smith called long-period “natural prices” of produced commodities, as an integral part of a more general account of the approximate self-regulation of a decentralized commodity-producing system. It is impossible to separate these two aspects of the theory without distorting its logic and conclusions.

I see Marx as developing the “long-period method” analysis of capitalist commodity production employed by Adam Smith and his successors, particularly David Ricardo. In my own view, Marx is much closer to Smith in his views than to Ricardo on those points where Smith’s and Ricardo’s views diverge. The version of the labor theory of value defended by Marx derives from Smith’s long-period method as applied to the allocation of labor across the branches of production. The labor theory of value is in this sense contingent on assumptions about the free mobility of labor among sectors and the exchange of products as private property through the mediation of money, not an independent, free-standing hypothesis. Failure to grasp this key point has led many commentators on Marx’s theory of value to misunderstand the status of the theory’s claims about the origin of surplus value in the exploitation of labor.

David Calnitsky

John Clegg

What specific aspects of Smith’s approach do you see Marx as drawing on?

Duncan Foley

Smith, like Ricardo and the other classical political economists, regards human beings as being essentially identical in their potential productivity, and Marx adopts this point of view. Smith characteristically makes this point in the form of a charming comparison of the “philosopher” and the “common street porter” in chapter two of Book I of The Wealth of Nations, with the implication that, somewhat like stem cells, all human beings have a similar potential to develop in any direction.

The key point here for Marx is not so much the precise equality in potential of all human beings as the essential fungibility of human labor due to its ability to adapt to changing concrete production technologies. The time scale of this adaptation, as Smith’s story of the porter and the philosopher suggests, may be on the order of the human life cycle, as human beings adapt, by training and sorting, to the concrete production requirements of a complex division of labor. It seems to me this assumption of the fungibility of human labor, its ability to adapt to the particular division of labor in any epoch and generationally over time to the changing demands of the division of labor, is essential to both Smith’s long-period analysis and to Marx’s theory of value.

Smith’s conceptual starting point for the long-period method is the division of labor, a misleadingly familiar idea. In my thinking, the division of labor at any historical epoch resembles the spokes of a wheel, each spoke representing specialization in a particular product that meets some human need, that is, a use value. The central point is that a team of human producers can produce a much larger volume of use values by specializing and occupying the spokes of the wheel than they can as diversified producers who produce all or most of their needs themselves. It is worth noting that this assumes economies of scale in production that are inconsistent with the almost-universal assumption of diminishing returns in Ricardo and later marginalist economics.

David Calnitsky

John Clegg

What is the connection between this account of the division of labor and the theory of value?

Duncan Foley

Smith argues that the potential increase in average productivity from economies of scale due to specialization and division of labor creates two social coordination problems, the decentralized solution of which is one of Smith’s great themes. The first problem is to assure a reasonably balanced occupation of the specialized spokes of the wheel to meet average social requirements for production and reproduction. The second problem is to redistribute the specialized products, so that each producer winds up with a share of the social product that matches their needs. The individual specialized producer winds up with far more of her own product than she needs, so the product ceases to be a use value to the producer.

Smith assumes that the solution to the problem of distribution is an exchange of products as the private property of producers, in line with what he regards as the “natural” human propensity to “truck and barter.” Marx more formally calls this “commodity production” and views it as only one possible, historically specific and limited, solution to the distribution problem, which can and will be transcended by the socialization of production. Both Smith and Marx argue that the exchange of products through barter is unstable and inevitably evolves into a system of monetary exchange where some produced commodity, such as gold, or some other asset, such as the debt of the state, becomes what Marx calls the “socially accepted general equivalent.” While Smith views the monetization of exchange as largely a matter of convenience and reduction of transaction costs, it has much wider ramifications for Marx’s theory.

Smith’s analysis of the way in which a decentralized commodity-producing economy solves the coordination problem of staffing the spokes of the division of labor wheel to meet social requirements is the heart of the long-period method, and, I will argue, also the heart of Marx’s analysis of capitalist commodity production. It is worth quoting Smith’s brief but far-reaching account verbatim:

The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to choose what occupation he thought proper, and to change it as often as he thought proper. Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment.

What are “advantages and disadvantages of different employments” in a society where specialized producers own or produce their own means of production and exchange their products through money? The disadvantage to a producer of an employment is the time and trouble of practicing the employment, together with the longer-term costs of acquiring the necessary concrete skills through formal or informal training or experience. The primary advantage to the producer is the monetary income to be expected from the employment on average over many cycles of production, though Smith (as Marx recognizes) carefully itemizes other advantages and disadvantages, such as the inherent attractiveness or distastefulness of the production activity.

Smith notes that day-to-day money prices of products vary due to vagaries of the market and calls these “market prices,” but he argues that the need to staff the branches of the division of labor to meet social requirements dictates that these fluctuating market prices average out over time to “natural prices” (also money prices) that secure to each employment at least a roughly equivalent balance of advantages and disadvantages. If we interpret the time and trouble above as “labor effort” in a broad sense, including lifetime costs of training, then Smith’s logic implies that natural prices of commodities will tend to proportionality with labor effort, a simple and transparent version of the labor theory of value. Gérard Duménil and I have called this the “commodity law of exchange.”

David Calnitsky

John Clegg

Before turning to the difference between the commodity law of exchange and what you call the “capitalist law of exchange,” let’s interrogate some of the assumptions underlying the argument thus far. First, does the commodity law of exchange assume that there is an objective measure of labor effort to which prices could be compared?

Duncan Foley

Not as an empirical matter. If labor effort could be observed objectively, the capitalist employer could contract for it. Their inability to do so is the central point of efficiency wage theory. But while external observers struggle to measure empirically labor effort, workers themselves have a direct experience of labor effort they can compare to the money return from an employment. Theoretically this contrast is akin to questions of interpersonal comparisons of utility or disutility. How do we know just how hard someone experiences a particular labor task as being? Framed in this way, the solution I’m suggesting is along the lines of revealed preference: workers reveal the labor effort in moving from jobs with lower to higher ratios of money income to labor effort. The monetary nature of commodity exchange makes the decision of producers as to which branch of production to pursue much simpler, since the advantages of all the branches of production become directly comparable as money income.

The commodity law of exchange, which is simultaneously a theory of the allocation of social labor across branches of production and a theory of long-period natural prices, enforces a uniform ratio of labor effort to money income on average across the branches of production. This ratio, which plays a key role in Marx’s exposition of the theory of value, has come to be known in modern Marxist economic terminology as the Monetary Expression of Labor Time (MELT). The commodity law of exchange makes each branch of production effectively a scale model of the whole commodity production system: on average in terms of natural prices, producers in each branch of production receive a money income proportional to the labor effort required to pursue that branch of production. Looked at from the point of view of allocating social labor, this balancing of advantages and disadvantages of different employments is a necessary condition for the balanced staffing of all the branches of the division of labor to meet the social needs of production and reproduction.

David Calnitsky

John Clegg

If the dis/advantages are subjectively assessed from the workers’ perspective, doesn’t this move us away from the objective value tradition? Couldn’t these net advantages be reasonably interpreted as utility?

Duncan Foley

Marx tends to view individual behavior as reflecting class positions. Just as it is the class characteristic of capitalists to seek the highest profit rate on their capital, it is the class characteristic of wage workers to seek the highest money wage for any level of labor effort, broadly understood to include costs of training and experience. Marx does not use the concept of “utility” or “utility maximization” in this context, but if you prefer to think of choices in terms of utility maximization, you could interpret Smith’s phrase “balance of advantages and disadvantages” in terms of the utility of a given employment. The important insight is that competition among mobile laborers (or among mobile capitals that hire mobile wage laborers) will tend to increase employment when the ratio of money income to the disadvantages of the employment is high and vice versa.

David Calnitsky

John Clegg

Here’s another classic objection along the same lines: A nice pair of shoes might require the same amount of labor as an ugly pair, and beaver and deer could both require an hour of hunting but be unequally appetizing or nutritious. Could use values affect the long-term ratios at which products exchange?

Duncan Foley

The Smith-Marx formulation of the long-period theory has a definite place for effective social demand, which determines the scale of the different sectors of production on average over the long period. Because social labor is fungible, fluctuations in effective social demand can raise or lower market prices relative to natural prices or prices of production, but over the long period cannot influence the natural prices themselves. Over the long period, ugly shoes cannot be produced unless they have some use-value advantage to offset their ugliness.

David Calnitsky

John Clegg

Aren’t there other advantages and disadvantages that workers consider in addition to effort and reward? What about the level of danger or risk of an industry, how sociable the work is, how routine it is, how much training is required, and so on?

Duncan Foley

The broad interpretation of “labor” as the whole of the advantages and disadvantages of an employment including the money income arising from it that I’m advocating requires us precisely to acknowledge that workers are sensitive to the level of danger and risk and the other factors you mention. As Smith’s formulation makes clear, this broad interpretation must also include the costs of training and experience. Whatever factors influence the movement of social labor from one sector to another (except for money income) will influence the formation of natural prices. In volume three of Capital, Marx remarks that he accepts Smith’s general account of these various dimensions of the advantages and disadvantages of the employments of labor.

David Calnitsky

John Clegg

How strong is the fungibility requirement in this theory? Do we need to make a strong claim that anyone could be a fireman, an athlete, or a scientist?

Duncan Foley

You do need to make a strong enough claim to allow for the movement of social labor in response to differences in the ratio of money income to labor effort. The claim that “by and large” anyone can adapt to do any of the ordinary tasks involved in production and reproduction is a simple and plausible sufficient condition. One could think of slightly more relaxed assumptions that would have the same analytical consequences: for example, if human temperaments and talents differed, but in such a way that complementary balanced teams of labor were completely substitutable for each other, that would do the trick as well.

On the other hand, significant essential differences among human beings would prevent the mobility of labor and capital from enforcing the tendency of market prices to gravitate around natural prices. The classical political economists associated long-period deviations from natural prices with the phenomenon of rent. On this view, certain unusual and rare types of talent could be seen as parallel to rare and unreproducible works of art, the prices of which are not subject to the law of value, but to the law of rent. The neoclassical tradition, heavily influenced by [the nineteenth-century Austrian intellectual] Eugen Ritter von Böhm-Bawerk’s critique of Marx based on the premise of essentially heterogeneous labor, sees all wages as rents, not as the reproduction cost of labor-power. This is one of the core divisions between the classical Marxist and marginalist-neoclassical schools.

David Calnitsky

John Clegg

Do you view the commodity law of exchange more as a simplifying abstraction or as describing an actual historical period?

Duncan Foley

I think it’s important to address this question as much in the context of Adam Smith’s original discussion as in the context of Marx’s adaptation and extension of Smith’s argument. It’s useful to remember that for Marx the central question is the impact of social relations of production on social outcomes. The commodity law of exchange is going to hold for independent producers who own or produce their own means of production, because it is under those social relations of production that Smith’s natural prices of products will tend to proportionality with the broadly defined labor effort required to produce them. I’d characterize this as a “starting point” rather than as a “simplifying abstraction”: if we can work out the thought experiment of how a society of independent producers would allocate social labor, that is a good starting point from which to move on to the question of how a capitalist society would allocate social labor.

This raises the question of whether there are any historical examples of societies where production is organized through “independent producers.” This is a slippery question to answer, because it depends on how faithfully you require the historical example to reflect the analytical assumptions in order to accept it as an example. For instance, in the late Middle Ages and early modern periods in Europe, commodity production (of art objects, textiles, musical instruments, and the like) was organized through the workshops of independent master craftsmen who employed apprentices as trainees. While this kind of production required inputs, if the masters accounted for the value of those inputs as costs rather than as capital investments on which they charged a rate of profit, this kind of commodity production would have approximated the conditions of Smith’s “independent producer” thought experiment.

David Calnitsky

John Clegg

You described the “commodity law of exchange” as an essential starting point for Marx’s theory of value. However, you don’t think it is sufficient to understand value under capitalism. Why not?

Duncan Foley

The commodity law of exchange expresses the abstract conditions in which an economy of independent producers who own or produce their own means of production would self-organize through monetary market exchange. The key idea of Smith’s “long-period method” is the formation of “natural prices” as averages of market prices over many cycles of production that equalize the “advantages and disadvantages” of the various branches of production. The advantages consist mainly, though not exclusively, of the money income the producer receives, and the disadvantages consist mainly, though not exclusively, of the effort required to acquire the skills necessary to the branch of production and to carry on production. Under the commodity law of exchange, natural prices are enforced by the movement of producers (assumed to be freely mobile) between branches of production and make it possible to staff all the branches. These natural prices include the costs of the means of production, but not a markup on those costs to provide a profit.

Capitalist commodity production, by contrast, is carried out by capitalist firms that own the means of production and charge a profit rate on them, and by means of wage labor. Both of these changes in what Marx calls “social relations of production” lead to modifications of the commodity law of exchange. The “advantages” of a branch of production from the point of view of a capitalist firm consist primarily of the profitability of production, and, as Adam Smith points out, specifically the profit rate. The “disadvantages” are the capital investment required to carry on production in any branch. The wage-labor contract is an exchange of a money wage for “labor power,” the capacity of workers to add value to the means of production by producing useful goods and services.

Like the independent producers in the commodity law of exchange, wage workers under the ideal conditions of “perfect mobility” are free to move among available employments and as a result will tend to equalize the “advantages and disadvantages” of different employments in all branches of production. The advantages to the wage laborer of employment are primarily, though not exclusively, the money wage from that employment, and the disadvantages are primarily, though not exclusively, the effort required to acquire the skills required for the job and to accomplish the work. Mobility of labor as a result tends to equalize the ratio of labor effort to the money wage across the system of capitalist production.

Because the wage falls short of the money equivalent of the labor effort capitalists extract from their workers, there is a fund of “unpaid labor effort” created in the production process, which is the source of the pool of money surplus value capitalist firms (and other claimants of surplus value such as landlords and intellectual property owners) compete for. But because mobility of labor tends to equalize the ratio of labor effort to the money wage across the system, it also enforces an equivalence between labor effort and money value-added at the level of the system as a whole. As a result, in the aggregate, money value-added is proportional to labor effort, as is the case in the commodity law of exchange: competition among capitalist firms and other claimants to money surplus value redistributes the money surplus value but cannot change its total. This is the capitalist law of exchange. The ratio of money value-added to labor effort is the Monetary Expression of Labor Time.

In the commodity law of exchange, each independent producer is a miniature model of the system as a whole, with a common ratio of money income to labor effort. In the capitalist law of exchange, the money surplus value an individual capitalist firm may appropriate through competition can deviate sharply from the unpaid labor effort that firm extracts in production. The extreme example is landowners, who in Ricardian terms produce nothing and exploit no labor, but participate in the appropriation of money surplus value in the form of land rent.

David Calnitsky

John Clegg

Can you say more about the social transformations involved in the move from the commodity to the capitalist law of exchange?

Duncan Foley

The very success of the division of labor and commodity production in increasing real incomes tends to enlarge the scale of each branch of production. The wealth of individual producers becomes insufficient to finance the means of production required, and at the same time the scale of production dictates larger teams of producers in each production process. As Marx makes much clearer than Smith, these factors tend to lead to the appropriation of the means of production as the property of capitalists who are not the direct producers, while the direct producers (workers) tend to become wage laborers hired by the capitalist proprietor of a firm. This transformation of what Marx calls the social relations of production (whether we think of it as primarily theoretical, or possibly historical) has major consequences for the analysis of the division of labor and commodity production.

In principle, large-scale production might be organized either in the form of a capitalist firm that owns the means of production or through worker cooperatives that would finance large-scale means of production through some type of credit arrangement. If we look at the history of the division of labor, a relatively small sector of worker cooperatives has in fact coexisted with capitalist production. This sector never disappears completely, but also does not exhibit any tendency to grow and displace the dominant capitalist organization of production. Marx seems to have had an ambivalent attitude toward worker cooperatives and focuses his analytical attention on the workings of commodity production organized by capitalist firms.

David Calnitsky

John Clegg

How does this transformation give rise to a new law of exchange?

Duncan Foley

There are two broad sets of consequences of the social relations of production that organize the division of labor through capitalist firms that own the means of production, control the process of production, and hire labor in exchange for wages.

In the commodity law of exchange, where individual producers own or produce their own means of production, the decision to pursue any branch of production depends on the balance of advantages (primarily money income) and disadvantages (primarily labor effort and training) in one branch compared to others. When capitalist firms organize production, however, it is the capitalist owners of the means of production or their agents who decide what branch of the division of labor to pursue, and, as a result, where labor and other resources will be directed. One of Smith’s remarkably far-reaching theoretical insights was that the goal of a capitalist owner of means of production would be the maximization of the profit rate, the ratio of profits to the value of capital tied up in production. This contrasts with the goal of the independent producer in the commodity law of exchange, which is to maximize the ratio of money income to labor effort. Smith argues that the general principle of equalization of advantages and disadvantages in the employment of money as capital financing means of production will lead to the tendency for profit rates to be equal in different branches of production. The logic is exactly the same that Smith uses to analyze the commodity law of exchange system: capitalists will move their capital out of employments with lower than average profit rates and into employments with higher than average profit rates. The result will be a rise in the profit rate in sectors capital is leaving due to diminished competition and a fall in the profit rate in sectors capital is entering due to increased competition, a process tending to equalize profit rates.

The organization of the division of labor through capitalist firms that own the means of production and hire labor in exchange for wages also has important implications for workers. Wage workers are free (in principle and abstractly, as Smith indicates with the phrase “perfect liberty”) to choose their employments, just as the independent producers in the law of commodity exchange are free to choose the branch of production to pursue. Wage workers, moreover, face the same balance of advantages and disadvantages as independent producers: the advantage of any employment is the money wage income it provides, and the prime disadvantage is the labor effort the worker is required to expend to keep the job.

David Calnitsky

John Clegg

How does the mobility of wage labor in the capitalist law of exchange differ from the mobility of independent producers in the commodity law of exchange?

Duncan Foley

Marx distinguishes between labor power, the capacity to do useful labor for which wage workers are paid wages, and labor effort itself, which is what produces a useful and exchangeable product. The ratio of (externally unobservable) labor effort to money wage income is a measure of the degree of exploitation of workers in any particular employment. According to Smith’s principle of equalization of advantages and disadvantages, labor that is mobile, and thus free in principle to move from one employment to another under capitalist relations of production, will tend to equalize the rate of exploitation in different employments. This leaves considerable freedom for the natural prices of individual commodities to adjust through competition to equalize rates of profit over the branches of production in the division of labor. As I read it, the Marx manuscripts Friedrich Engels published as the first two books of volume three of Capital represent Marx’s reformulation of Smith’s long-period reasoning incorporating his distinction between labor power and labor effort.

Thus the capitalist law of exchange version of the labor theory of value depends on the operation of both of Smith’s long-period principles of equalization through competition and the mobility of capital and labor. The mobility of capital tends to equalize profit rates, while the mobility of labor tends to equalize rates of exploitation. The equalization of the rate of exploitation across the system of capitalist commodity production is the key to the principles of the conservation of labor effort in the value of the net product and the conservation of unpaid productive labor effort in the system-wide monetary surplus value. Attempts to understand Marx’s theory that rely only on the logic of the equalization of the rate of profit inevitably fall short of explaining these principles. John Cogliano has made important contributions to our understanding of Marx’s theory as a development of both sides of Smith’s long-period analysis.

David Calnitsky

John Clegg

This is an interesting feature of your interpretation. Most Marxists emphasize the equalization of the rate of profit, but on your account the equalization of the rate of exploitation is just as important. What are the implications of this second equalizing tendency?

Duncan Foley

Regardless of what relative prices of commodities are, workers face the immediate trade-off of money wage income for labor effort, and their mobility will tend to equalize the ratio of money wage income to labor effort across the productive system. If the degree of exploitation tends to uniformity over all branches of production, then a single degree of exploitation will tend to characterize the system of capitalist commodity production as a whole, just as a single ratio of money to labor effort characterizes the system of commodity production by independent producers governed by the commodity law of exchange.

If we knew this degree of exploitation, we could measure the labor effort in the system as a whole by multiplying the total wage bill by that degree of exploitation, thereby computing an index of the monetary equivalent of the total labor effort. Marx calls the difference between this monetary index of labor effort and the wage bill “surplus value.” In effect, workers receive compensation in the form of the wage for only a fraction of the total labor effort they expend. The uncompensated or “unpaid” labor creates a fund from which capitalists can realize surplus value in various monetary forms as profit, rents, interest, and the other phenomena that are the subject of the rest of the manuscripts comprising the remainder of volume three of Capital. The key conclusion for Marx was that the exploitation of productive labor was the source of monetary surplus value in a capitalist commodity-producing economy.

Another way of putting this is to regard the money value of the net product (equivalent to value-added) as the monetary equivalent of the total productive labor effort: the wage bill is the money equivalent workers receive for the paid fraction of their labor effort, and the difference between the money value of the net product and the wage bill is monetary surplus value to be realized in competition among capitalists and other claimants, such as landowners and owners of intellectual property in various forms as profit, interest, rent, royalties, and the like. This is the starting point of the New Interpretation Gérard Duménil and I independently formulated in the 1970s and published in the early 1980s. Other previous scholars including Joan Robinson, John Eatwell, and Bertram Schefold had formulated similar or equivalent interpretations of Marx’s reasoning already, and I. I. Rubin’s thinking, in my reading, points firmly in this direction.

David Calnitsky

John Clegg

The capitalist law of exchange appears to differ greatly from the commodity law of exchange in these respects. In what sense are they still related?

Duncan Foley

The capitalist law of exchange retains some of the key features of the commodity law of exchange version: the Monetary Expression of Labor Time continues to translate between labor effort and the money value of net output at the level of the system as a whole, and the aggregate surplus value is the monetary equivalent of the unpaid productive labor effort. Furthermore, the system is just as much a system of allocating labor (and other) resources among the branches of production as it is a system for determining long-period natural money prices, and each of the two aspects of the system work only because of the other.

But there is an important difference, in that in the commodity law of exchange system each producer expending labor effort and receiving on average a proportional money income is effectively a scale model of the whole system of commodity production, but the individual capitalist firm may not be a scale model of the whole system of capitalist commodity production. In particular, the part of the aggregate pool of surplus value appropriated by a particular capitalist firm as profit is not necessarily proportional to the unpaid labor effort extracted in the course of that firm’s operation. The extreme case of this is the Ricardian landowner, who hires no labor power at all and contributes nothing to the pool of unpaid labor effort but shares in the pool of money surplus value in the form of rent. The capitalist law of exchange is a generalization of the commodity law of exchange at the level of the system as a whole, but not at the level of the individual capitalist firm.

David Calnitsky

John Clegg

What role does competition play in the capitalist law of exchange?

Duncan Foley

The capitalist law of exchange is compatible not only with the principle of profit rate equalization through competition, but also with other patterns of distribution through competition, such as land rents and intellectual property incomes. Marx’s theory explains the origin of system-wide surplus value in system-wide exploitation of labor separately from the exploitation of labor in individual capitalist firms. Marx refers to this separation in saying that competition is the mechanism through which the imperatives of the capitalist system are imposed on the individual capitalists. I think what he means by this is that while it is in the competitive interest of each capitalist firm to exploit its labor as much as it can by increasing the intensity of labor effort and reducing money wage compensation, two competitive effects put limits to the individual firm’s exploitation of labor.

Other capitalist firms will adopt the same methods to the degree that they can, thereby lowering their costs and lowering the price of the produced commodity, thereby reducing the returns to excess exploitation toward the system-wide average. At the same time, workers will tend to move from firms imposing a higher rate of exploitation toward other firms to the degree they can, limiting the access of firms imposing higher than average rates of exploitation to labor power. These competitive forces tend to shift the extra surplus value potentially appropriated in the individual firm into the pool of system-wide surplus value.

From this point of view, every individual capitalist firm, like a landowner who appropriates surplus value without exploiting labor at all, is a free rider on the capitalist system as a whole. Even the largest individual capitalist firms see the system-wide pool of surplus value as effectively infinite in relation to their profits. In a global economy with a net product of over $100 trillion per year, the pool of surplus value is likely to be on the order of $50 trillion per year, while no capitalist firm has profits of even $1 trillion per year. There are powerful incentives for individual capitalists to seek methods to increase the exploitation of their own workers, but in the end their efforts primarily bolster the system-wide pool of surplus value. Marx explains these points in his discussions of absolute and relative surplus value in volume one of Capital.

The fact that surplus value has its source in the exploitation of productive labor is unlikely to make much difference to individual capitalist firms, although it can become important at the level of large regional or national economies where economic policies are contested. Marx’s theory of value envisions the competition of individual capitalist firms in ways that are not so different from what he called “vulgar economics,” though as Anwar Shaikh has emphasized, Marx steers clear of the fantasies of “pure” or “perfect” competition that sanitize the often brutal reality of competition by looking at it only as a benign process of social resource allocation.

The system-wide character of capitalist exploitation suited Marx’s own political position, which was the advocacy of system-wide change of social relations of production through revolutionary action led by proletarian parties, very well. Because Marx thought the problems of class society could ultimately be resolved only by thoroughgoing system-wide change and because he thought that centralized political institutions were adequate to manage a system-wide change, he saw no problems in an analysis that located exploitation primarily at the level of the system as a whole. The implications of his discoveries for those of us living with a very different view of the available real alternative systems of organization of social production are less comforting.

David Calnitsky

John Clegg

We’d like to turn soon to the question of revolution and alternatives to capitalism, but first we’d like to return to some of the issues with the labor theory of value. Since the capitalist law of exchange has more moving parts, there would seem to be more ways reality might violate the assumptions of the law. How does one apply the law to the real world?

Duncan Foley

As Marx explains in the very helpful introduction to the Grundrisse, applying theoretical concepts to real-world problems often raises seemingly insuperable problems. Some of these problems arise because people perceive the world in terms that are inconsistent with the classical political-economic approach: for example, for many people individual human differences seem essential to understanding social outcomes like wealth and class. In these cases, there is not much to be said except to wonder what genuine alternative explanations are available. In many cases, however, the problems concern what Marx called the “level of abstraction.”

What Marx means by the concept of level of abstraction is subtle. An example may help. Smith’s and Marx’s theories of value assume mobility of labor (which tends to equalize the rate of exploitation). But in the real world, despite fairly widespread legal and institutional guarantees of freedom of movement of workers from one job to another, there are clearly many significant obstacles to the free movement of labor. Within national economies, there may be licensing and certification requirements for some professions; labor unions or professional societies may impose requirements of apprenticeship or educational level; some ethnic groups may effectively discriminate against others in ways that limit free mobility of labor; gender and racial discrimination can have similar effects. In the global economy, transportation costs and immigration restrictions limit free mobility of labor and very likely prevent the equalization of rates of exploitation. In the face of these glaring empirical discrepancies with the assumptions of the Smith-Marx theory, many people decide that the theory is a pure abstraction with little relevance to concrete social reality.

Another stumbling block is that the Smith-Marx framework often has sharp conclusions that are not in agreement with what the person using it wanted to find out to begin with. For example, because of the long-period focus on, well, the long period, it predicts that many forms of policy intervention in the economy will have small or no effects in the long run, because they will be eroded by gradual but inexorable adjustments of behavior to restore natural prices. Within Marx’s framework, attempts to raise after-tax wage incomes by taxing surplus value will be offset by lower pretax wages, since Marx’s theory is that worker’s after-tax wages settle at a historically and socially determined subsistence level. This implication is unsettling to many on the Left who are heavily invested in redistribution as a goal of policy.

Marx addresses these concerns straightforwardly in the introduction to the Grundrisse. He argues that the understanding of social phenomena consists of reconstructing them as the intersection or layering of many determinations. In this process, the fundamental abstractions, if they reflect the human institutions and behavior underlying the phenomenon, continue to be relevant as the ground on which further, more concrete, determinations rest.

For Marx, the equalization of the rate of exploitation is a fundamental tendency of a capitalist commodity-producing system, even if it is frustrated by legal and practical obstacles to the completely free mobility of labor. We see this in flows of migration in response to persistent differences in rates of exploitation among regional economies and black markets in human trafficking. Similarly, the equalization of the rate of exploitation over time in an economy with free mobility of labor is not instantaneous: at any moment some employments will have higher rates of exploitation than others, reflecting deviations of market money wages from natural wages. But again, the underlying tendency in this case expresses itself in specific further phenomena: strikes against low-wage employers, the emergence of educational institutions that hope to provide entry to high-wage employments for their students, and the like.

David Calnitsky

John Clegg

Most people associate the term “exploitation” with low or declining living standards, and for that reason it is sometimes seen as a key driver of revolution. But exploitation in the Marxian sense is compatible with relatively high and rising living standards. Is there indeed a gap between the technical and lay usage of the word? If so, can they have the same moral implications?

Duncan Foley

The word “exploitation” in ordinary language has two somewhat different connotations. Between human beings, “exploitation” connotes an unequal and unfair appropriation of something that belongs to one person by another. In Marx’s theory, the capitalists as a class exploit workers in this sense by appropriating unpaid labor time in the form of money surplus value including profit, rents, and interest. We also speak of “exploiting” natural resources, such as deposits of ores, which generally involves investing in order to access the resource and mobilize it for social use. Capitalism also exploits labor in this sense, which sometimes involves investment in workers’ capabilities through public education, public health and sanitation, and social welfare safety nets.

Over much of the history of capitalist development, wages have risen roughly at the same rate as labor productivity, keeping the rate of exploitation roughly constant. In this type of “trajectory a la Marx” as Gérard Duménil and Dominique Lévy have called it, the fruits of economic development are at least shared between workers and capitalists, despite capitalists appropriating unpaid labor, and the standard of living of workers improves roughly in line with their productivity. The disruption of this pattern of distribution in the neoliberal period starting in the 1980s in most advanced capitalist economies has exacerbated the growth of inequality and destabilized the political consensus between capital and labor on which the burst of prosperity after World War II rested.

The point where the “moral” and the “instrumental” connotations of the word “exploitation” come into conflict seems to me to be the same as the point at which revolutionaries need to explain their plans for organizing a social division of labor without exploitation. Is it through worker cooperatives interacting in markets, through some kind of central planning under democratic political control, or a system, like the “open source” movement in computer programming, that depends on the voluntary participation of producers in production and the free distribution of the product?

David Calnitsky

John Clegg

This interview has raised as many questions as it has answered. But now that we have clarified your reconstruction of Marx’s theory of value, we’d like to return to the question with which we began: Why do you think these core features of Marx’s theory have proved so controversial?

Duncan Foley

As we discussed earlier, many commentators on Marx, including, for example, Eugen von Böhm-Bawerk, John Bates Clark, Paul Samuelson, and others, set out to prove that his theory of exploitation is incorrect. In general, these critiques rest either on a rejection of one of the premises of the Smith-Marx long-period theory (for example, Böhm-Bawerk rejects the assumption of the ultimate fungibility of social labor, and J. B. Clark implicitly adds a full-employment assumption to support the marginalist theory of distribution) or on a misunderstanding of the questions that Marx thought the theory of value could address (for example, Samuelson misses the point that the question is the origin of surplus value at the level of the system as a whole and sees it as a fallacious theory of equilibrium pricing of commodities).

On the other hand, various defenders of Marx’s position have differed sharply and even violently among themselves. Some, like Rosa Luxemburg, want to demonstrate the logical inconsistency of capitalist exploitation, which is not Marx’s point. Isaac Ilyich Rubin ultimately paid with his life for his fidelity to Marx’s theory of commodity production and the concept of abstract labor fungible among branches of production. The heat arises because Marx’s theory does hold together and constitutes a troubling and devastating criticism of capitalist social relations without putting forward a framework for supplanting it. There is real political power in Marx’s discourse, as the ability of the Soviets to deploy Marxist language in Orwellian fashion as one of the main props of their power demonstrated.