File: secC1.html

package info (click to toggle)
anarchism 9.5-1
  • links: PTS
  • area: main
  • in suites: woody
  • size: 12,192 kB
  • ctags: 493
  • sloc: makefile: 40; sh: 8
file content (1034 lines) | stat: -rw-r--r-- 65,801 bytes parent folder | download
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
371
372
373
374
375
376
377
378
379
380
381
382
383
384
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
408
409
410
411
412
413
414
415
416
417
418
419
420
421
422
423
424
425
426
427
428
429
430
431
432
433
434
435
436
437
438
439
440
441
442
443
444
445
446
447
448
449
450
451
452
453
454
455
456
457
458
459
460
461
462
463
464
465
466
467
468
469
470
471
472
473
474
475
476
477
478
479
480
481
482
483
484
485
486
487
488
489
490
491
492
493
494
495
496
497
498
499
500
501
502
503
504
505
506
507
508
509
510
511
512
513
514
515
516
517
518
519
520
521
522
523
524
525
526
527
528
529
530
531
532
533
534
535
536
537
538
539
540
541
542
543
544
545
546
547
548
549
550
551
552
553
554
555
556
557
558
559
560
561
562
563
564
565
566
567
568
569
570
571
572
573
574
575
576
577
578
579
580
581
582
583
584
585
586
587
588
589
590
591
592
593
594
595
596
597
598
599
600
601
602
603
604
605
606
607
608
609
610
611
612
613
614
615
616
617
618
619
620
621
622
623
624
625
626
627
628
629
630
631
632
633
634
635
636
637
638
639
640
641
642
643
644
645
646
647
648
649
650
651
652
653
654
655
656
657
658
659
660
661
662
663
664
665
666
667
668
669
670
671
672
673
674
675
676
677
678
679
680
681
682
683
684
685
686
687
688
689
690
691
692
693
694
695
696
697
698
699
700
701
702
703
704
705
706
707
708
709
710
711
712
713
714
715
716
717
718
719
720
721
722
723
724
725
726
727
728
729
730
731
732
733
734
735
736
737
738
739
740
741
742
743
744
745
746
747
748
749
750
751
752
753
754
755
756
757
758
759
760
761
762
763
764
765
766
767
768
769
770
771
772
773
774
775
776
777
778
779
780
781
782
783
784
785
786
787
788
789
790
791
792
793
794
795
796
797
798
799
800
801
802
803
804
805
806
807
808
809
810
811
812
813
814
815
816
817
818
819
820
821
822
823
824
825
826
827
828
829
830
831
832
833
834
835
836
837
838
839
840
841
842
843
844
845
846
847
848
849
850
851
852
853
854
855
856
857
858
859
860
861
862
863
864
865
866
867
868
869
870
871
872
873
874
875
876
877
878
879
880
881
882
883
884
885
886
887
888
889
890
891
892
893
894
895
896
897
898
899
900
901
902
903
904
905
906
907
908
909
910
911
912
913
914
915
916
917
918
919
920
921
922
923
924
925
926
927
928
929
930
931
932
933
934
935
936
937
938
939
940
941
942
943
944
945
946
947
948
949
950
951
952
953
954
955
956
957
958
959
960
961
962
963
964
965
966
967
968
969
970
971
972
973
974
975
976
977
978
979
980
981
982
983
984
985
986
987
988
989
990
991
992
993
994
995
996
997
998
999
1000
1001
1002
1003
1004
1005
1006
1007
1008
1009
1010
1011
1012
1013
1014
1015
1016
1017
1018
1019
1020
1021
1022
1023
1024
1025
1026
1027
1028
1029
1030
1031
1032
1033
1034
<HTML>
<HEAD>

<TITLE>C.1 What determines price within capitalism?</TITLE>
</HEAD>
<BODY>
<p>

<h1>C.1 What determines price within capitalism?</h1>
<p>
Supporters of capitalism usually agree with what is called the <b>Subjective 
Theory of Value</b> (STV), as explained by most mainstream economic textbooks. 
This system of economics is usually termed "marginalist" economics, for 
reasons which will become clear.
<p>
In a nutshell, the STV states that the price of a commodity is determined
by its marginal utility to the consumer and producer. Marginal utility is
the point, on an individual's scale of satisfaction, at which his/her desire
for a good is satisfied. Hence price is the result of individual, subjective
evaluations within the marketplace. One can easily see why this theory
could be appealing to those interested in individual freedom.
<p>
However, the STV is a myth. Like most myths, it does have a grain of
truth in it. But as an explanation of how to determine the price of a
commodity, it has serious flaws.
<p>
The kernel of truth is that individuals, groups, companies, etc. do
indeed value goods and consume/produce them. The rate of consumption, for
example, is based on the use-value of goods to the users (although whether
some one buys a product is affected by price and income considerations, as 
we will see). Similarly, production is determined by the utility to the producer 
of supplying more goods. The use-value of a good is a highly subjective 
evaluation, and so varies from case to case, depending on the individual's 
taste and needs. As such it has an <b>effect</b> on the price, as will be shown, 
but as the means to <b>determine</b> a product's price it ignores the dynamics 
of a capitalist economy and the production relations that underlie the market. 
In effect, the STV treats all commodities like works of art, and such products 
of human activity (due to their uniqueness) are <b>not</b> a capitalistic commodity in the usual sense of the word (i.e. they cannot be reproduced 
and so labour cannot increase their quantity). Therefore the STV ignores the nature of 
production under capitalism. This is what will be discussed in the following 
sections.
<p>
Of course, modern economists try and portray economics as a "value-free
science." Of course, it rarely dawns on them that they are usually just 
taking existing social structures and the economic dogmas build round them 
for granted and so justifying them. As Kropotkin pointed out: 
<p><blockquote>
<i>"[A]ll the so-called laws and theories of political economy are in reality 
no more than statements of the following nature:
<p><blockquote>
'Granting that there are always in a country a considerable number of people
who cannot subsist a month, or even a fortnight, without accepting the
conditions of work imposed upon them by the State, or offered to them by
those whom the State recognises as owners of land, factories, railways,
etc., then the results will be so and so.'
</blockquote><p>
"So far middle-class political economy has been only an enumeration of
what happens under the just-mentioned conditions -- without distinctly 
stating the conditions themselves. And then, having described <b>the facts</b> 
which arise in our society under these conditions, they represent to us 
these facts as rigid, <b>inevitable economic laws.</b>"</i> [<b>Kropotkin's 
Revolutionary Pamphlets</b>, p. 179]
</blockquote><p>
In other words, economists usually take the political and economic aspects 
of capitalist society (such as property rights, inequality and so on) as 
given and construct their theories around it. Marginalism, in effect, took 
the "political" out of "political economy" by taking capitalist society 
for granted along with its class system, its hierarchies and its inequalities. 
By concentrating on individual choices they abstracted from the social system 
within which such choices are made and what influences them. Indeed, the STV 
was built upon abstracting individuals from their social surroundings and 
generating economic "laws" applicable for all individuals, in all societies, 
for all times This results in all concrete instances, 
no matter how historically different, being treated as expressions 
of the same universal concept. Thus, in neo-classical economics, 
wage-labour becomes labour, capital becomes the means of production, 
the labour process becomes a production function, acquisitive behaviour 
becomes human nature. In this way the uniqueness of contemporary 
society, namely its basis in wage labour, is ignored (<i>"The period 
through which we are passing . . . is distinguished by a special 
characteristic -- WAGES."</i> [Proudhon, <b>System of Economical
Contradictions</b>, p. 199]) and what is specific to capitalism 
is universalised and made applicable for all time. Such a perspective 
cannot help being ideological rather than scientific. By trying to 
create a theory applicable  for all time (and so, apparently, value 
free) they just hide the fact their  theory justifies the inequalities 
of capitalism. As Edward Herman points out:
<p><blockquote>
     <i>"Back in 1849, the British economist Nassau Senior chided those
     defending trade unions and minimum wage regulations for expounding
     an 'economics of the poor.' The idea that he and his establishment
     confreres were putting forth an 'economics of the rich' never
     occurred to him; he thought of himself as a scientist and
     spokesperson of true principles. This self-deception pervaded
     mainstream economics up to the time of the Keynesian Revolution 
     of the 1930s. Keynesian economics, though quickly tamed into an
     instrument of service to the capitalist state, was disturbing in
     its stress on the inherent instability of capitalism, the tendency
     toward chronic unemployment, and the need for substantial
     government intervention to maintain viability. With the resurgent
     capitalism of the past 50 years, Keynesian ideas, and their
     implicit call for intervention, have been under incessant attack,
     and, in the intellectual counterrevolution led by the Chicago
     School, the traditional laissez-faire ('let-the-fur-fly')
     economics of the rich has been reestablished as the core of
     mainstream economics."</i> [<b>The Economics of the Rich</b>]
</blockquote><p>
Herman goes on to ask <i>"[w]hy do the economists serve the rich?"</i> and
argues that <i>"[f]or one thing, the leading economists are among the rich, 
and others seek advancement to similar heights. Chicago School economist 
Gary Becker was on to something when he argued that economic motives 
explain a lot of actions frequently attributed to other forces. He of 
course never applied this idea to economics as a profession . . ."</i> 
[<b>Ibid.</b>] There are a great many well paying think tanks, research posts, 
consultancies and so on that create an <i>"'effective demand' that should 
elicit an appropriate supply resource."</i> [<b>Ibid.</b>] 
<p>
The introduction of marginalism and its acceptance as "orthodoxy" served, 
and serves in the present, to divert serious attention from the most 
critical questions facing working people (for example, what goes on 
in production, how authority relations impact on society and in the 
workplace). Rather than looking to how things are produced, the conflicts 
generated in the production process and the generation/division of surplus, 
marginalism took what was produced as given, as well as the capitalist 
workplace, the division of labour and authority relations and so on.
<p>
Theories can pursue truth or serve vested interests. In the later capacity 
they will incorporate only concepts suited to attaining the results desired. 
An economic theory, for example, may highlight profits, quantities of output, 
amount of investment, and prices, and leave out class struggle, alienation, 
hierarchy and bargaining power. Then the theory will serve capitalists, and, 
since capitalists pay economists' wages and endow their universities, 
economists and their students who comply, will benefit as well.
<p>
General equilibrium analysis and marginalism is made to order for
the ruling class. Marginalism ignores the question of production and
concentrates on exchange. It argues that any attempt by working people
to improve their position in society (by, for example, unions) is
counter-productive, it preaches that "in the long run" everyone will
be better off and so present day problems are irrelevant (and any
attempt to fix them counterproductive) and, of course, the capitalists
are entitled to their profits, interest payments and rent. The utility
of such a theory is obvious. An economic theory that justifies 
inequality, "proves" that profits, rent and interest are not exploitative 
and argues that the economically powerful be given  free reign will have 
more use-value ("utility") to the ruling class than those that do not. 
In the market place of ideas, it is these which will satisfy the demand 
and become intellectually "respectable." 
<p>
Of course, not all supporters of capitalist economics are rich (although
most desire to become so). Many do believe its claims that capitalism 
is based upon freedom and that the profits, interest and rent represent
"rewards" for services provided rather than resulting from the exploitation 
generated by hierarchical workplaces and social inequality. However, before 
tackling the question of profits, interest and rent we must first discuss 
why the STV is wrong.
<p>
<a name="secc11"><h2>C.1.1 So what is wrong with this theory?</h2>
<p>
The first problem in using marginal utility to determine price is that it
leads to circular reasoning. Prices are supposed to measure the "marginal
utility" of the commodity, yet consumers need to know the price <b>first</b> in
order to evaluate how best to maximise their satisfaction. Hence subjective 
value theory <i>"obviously rest[s] on circular reasoning. Although it tries to 
explain prices, prices [are] necessary to explain marginal utility."</i> [Paul 
Mattick, <b>Economics, Politics and the Age of Inflation</b>, p.58] In the 
end, as Jevons (one of the founders of marginalism) acknowledged, the
price of a commodity is the only test we have of the utility of the
commodity to the producer. Given that marginality utility was meant 
to explain those prices, the failure of the theory could not be more
striking.
<p>
Secondly, consider the definition of equilibrium price. Equilibrium price
is the price for which the quantity demanded is precisely equal to the
quantity supplied. At such a price there is no incentive for either
demanders or suppliers to alter their behaviour.
<p>
Why does this happen? The subjective theory cannot really explain why 
<b>this</b> price is the equilibrium price, as opposed to any other. This is 
because the STV ignores that an objective measure is required upon which 
to base "subjective" evaluations within the market. The consumer, when 
shopping, requires prices in order to allocate their money to best 
maximise their "utility" (and, of course, the consumer faces prices 
on the market, the very thing marginal utility theory was meant to
explain!). And how does a company know it is making a profit unless it 
compares the market price with the production costs of the commodity it 
produces? As Proudhon put it, <i>"[i]f supply and demand alone determine 
value, how can we tell what is an excess and what is a sufficiency? If 
neither cost, nor market price, nor wages can be mathematically determined, 
how is it possible to conceive of a surplus, a profit?"</i> [<b>System 
of Economical Contradictions</b>, p. 114] This objective measure 
can only be the actual processes of 
production within capitalism, production which is for profit. The 
implications of this are important when discovering what determines 
price within capitalism, as will be discussed in the next section 
(<a href="secC1.html#secc12">C.1.2 - So what does determine price?</a>). 
<p>
The early marginalists were aware of this problem and argued that price 
reflected the utility at the "margin" (Jevons, one of the founders of the
marginalist school, argued that the <i>"final degree of utility determines 
value"</i>); but what determined the position of the margin itself? This is 
fixed by the available supply (<i>"Supply determines final degree of utility"</i>
 -- Jevons); but what determines the level of supply? (<i>"Cost of production
determines supply"</i> -- Jevons). In other words, price is dependent on marginal 
utility, which is dependent on supply, which is dependent on the cost of 
production. In other words, ultimately on an <b>objective</b> measure (supply or
cost of production) rather than subjective evaluations! This is unsurprising 
because before you can consume ("subjectively value") something on the market, 
it has to be produced. It is the process of production that rearranges matter 
and energy from less useful to more useful (to us) forms. Which brings us 
straight back to production and the social relations which exist within a 
given society -- and the political dangers of defining (exchange) value 
in terms of labour (see <a href="secC1.html#secc12">next section</a>). Afterall, the individual does not 
just face a given supply on the market, they also face prices, including 
the costs associated with production and profit taking.
<p>
As the whole aim of marginalism was to abstract away from production (where
power relations are clear) and concentrate on exchange (where power works 
indirectly), it is unsurprising that early marginal utility value theory 
was quickly abandoned. The continued discussion of "utility" in economics 
textbooks is primarily heuristic. First the neo-classical economists used 
measurable (cardinal) "utility" (i.e. that utility was the same for all)
but that caused political problems (as cardinal utility implied that the 
"utility" of an extra dollar to a poor person was clearly greater than the 
loss of one dollar to a rich man and this obviously justified redistribution 
polities). When this was recognised (along with the obvious fact that
cardinal utility was impossible in practice) utility became "ordinal"
(i.e. utility was an individual thing and so could not be measured). Then 
even ordinal utility was abandoned as cross-personal utilities were not comparable and so objective prices could be derived from it (which was 
Adam Smith's argument and which lead him to develop a <b>labour</b> theory 
of value rather than one based on utility, or use value). With the 
abandonment of "ordinal" utility, mainstream economics gave up even 
thinking about individual preferences in those terms. This means that 
modern economics does not have a value theory at all -- and without a 
value theory, the claim that the workings of capitalism will benefit all 
or its outcome will realise individual preferences has no rational 
foundation.
<p>
Thus utility theory was gradually deprived of all its bite and reduced
from cardinal to ordinal utility and from ordinal utility to 'revealed 
preference.' This retreat from cardinal utility (patently dreamland) 
to ordinal utility (distinction without a difference) to "revealed 
preferences" (the naked tautology -- consumers maximise total utility 
as "revealed" in the structures of spending or, consumers maximise what 
they maximise) was but one of the many retreats made among the marginalists 
as their contrived core assumptions were exposed to simple but penetrating 
questions.
<p>
While ignoring "utility" theory of value, most mainstream economics
accept the notions of "perfect competition" and (Walrasian) "general 
equilibrium" which were part and parcel of it. Marginalism attempted to 
show, in the words of Paul Ormerod, <i>"that under certain assumptions the 
free market system would lead to an allocation of a given set of resources 
which was in a very particular and restricted sense optimal from the point
of view of every individual and company in the economy."</i> [<b>The Death
of Economics</b>, p. 45] This was what Walrasian general equilibrium proved.
However, the assumptions required prove to be somewhat unrealistic (to 
understate the point). As Ormerod points out:
<p><blockquote>
<i>"[i]t cannot be emphasised too strongly that . . . the competitive 
model is far removed from being a reasonable representation of Western
economies in practice. . . [It is] a travesty of reality. The world
does not consist, for example, of an enormous number of small firms,
none of which has any degree of control over the market . . . The
theory introduced by the marginal revolution was based upon a series
of postulates about human behaviour and the workings of the economy.
It was very much an experiment in pure thought, with little empirical
rationalisation of the assumptions."</i> 
</blockquote><p>
Indeed, <i>"the weight of evidence"</i> is <i>"against the validity of the model 
of competitive general equilibrium as a plausible representation of
reality."</i> [<b>Op. Cit.</b>, p. 48, p. 62] For example, oligopoly and imperfect competition have been abstracted from so that the theory does not allow 
one to answer interesting questions which turn on the asymmetry of 
information and bargaining power among economic agents, whether due 
to size, or organisation, or social stigmas, or whatever else. In the 
real world, oligopoly is common place and asymmetry of information and 
bargaining power the norm. To abstract from these means to present an 
economic vision at odds with the reality people face and, therefore, 
can only propose solutions which harm those with weaker bargaining 
positions and without information. In addition, the model is set in a 
timeless environment, with people and companies working in a world 
where they have perfect knowledge and information about the state of 
the market. A world without a future and so with no uncertainty (any 
attempt to include time, and so uncertainty, ensures that the model 
ceases to be of value). Thus model cannot easily or usefully account 
for the reality that economic agents do not actually know such things 
as future prices, future availability of goods, changes in production 
techniques or in markets to occur in the future, etc. Instead, to 
achieve its results -- proofs about equilibrium conditions -- the model 
assumes that actors have perfect knowledge at least of the probabilities 
of all possible outcomes for the economy. The opposite is the case in 
reality. 
<p>
In this timeless, perfect world, "free market" capitalism will prove
itself an efficient method of allocating resources and all markets will 
clear. In part at least, General Equilibrium Theory is an abstract answer 
to an abstract and important question: Can an economy relying only on 
price signals for market information be orderly? The answer of general 
equilibrium is clear and definitive -- one can describe such an economy 
with these properties. However, no actual economy has been described and,
given the assumptions involved, no such economy could ever exist. An 
theoretical question has been answered involving some amount of 
intellectual achievement, but it is a answer which has no bearing to
reality. And this is often termed the "high theory" of equilibrium. 
Obviously most economists must treat the real world as a special case.
<p>
Thus General Equilibrium theory analyses an economic state which 
there is no reason to suppose will ever, or have ever, come about.
It is, therefore, an abstraction which has no discernible applicability 
or relevance to the world as it is. To argue that it can give insights
into the real world is ridiculous. As mainstream economic theory begins 
with axioms and assumptions and uses a deductivist methodology to
arrive at conclusions, its usefulness in discovering how the world 
works is limited. Firstly, as we note in <a href="secF1.html#secf13">
section F.1.3</a>, the deductive
method is <b>pre-scientific</b> in nature. Secondly, the axioms and
assumptions can be considered fictitious (as they have negligible 
empirical relevance) and the conclusions of deductivist models can 
only really have relevance to the structure of those models as the 
models themselves bear no relation to economic reality. 
While it is true that there are certain 
imaginary intellectual problems for which the general equilibrium model
is well designed to provide precise answers (if anything really could), 
in practice this means the same as saying that if one insists on analysing 
a problem which has no real world equivalent or solution, it may be 
appropriate to use a model which has no real-world application. Models 
derived to provide answers to imaginary problems will be unsuitable for 
resolving practical, real-world economic problems or even providing a
useful insight into how capitalism works and develops. In the words
of noted left-wing economist Nicholas Kaldor, <i>"equilibrium theory
has reached the stage where the pure theorist has successfully
(though perhaps inadvertently) demonstrated that the main implications
of this theory cannot possibly hold in reality, but has not yet
managed to pass his message down the line to the textbook writer
and to the classroom."</i> Little wonder, then, that his <i>"basic objection
to the theory of general equilibrium is not that it is abstract -- 
all theory is abstract and must necessarily be so since there can
be no analysis without abstraction -- but that it starts from the
wrong kind of abstraction, and therefore gives a misleading
'paradigm' . . . of the world as it is; it gives a misleading
impression of the nature and the manner of operation of economic
forces."</i> [<b>The Essential Kaldor</b>, p. 377 and p. 399]
<p>
There is a more realistic neo-classical notion of equilibrium called "partial" 
equilibrium theory (developed by Alfred Marshall). "Time" is included via 
Alfred Marshall's notion of equilibrium existing in various runs. The most 
important of Marshall's concepts are "short run" and "long run" equilibrium. 
However, this is just comparing one static (ideal) state with another.
Marshall treated markets "one at a time" (hence the expression "partial 
equilibrium") with "all other things being equal" -- the assumption being 
that the rest of the economy is unchanged! This theory confuses the 
comparison of possible alternative equilibrium positions with the analysis 
of a process taking place through time, i.e. historical events are introduced 
into a timeless picture. In other words, time as the real world knows it 
does not exist. In the real world, any adjustment takes a certain time to 
complete and events may occur that alter equilibrium. The very process of
moving has an effect upon the destination and so there is no such thing
as a position of long-run equilibrium which exists independently of the
course which the economy is following. Marshall's assumptions of "one
market at a time" and "all other things equal" ensure that the concept
of time is as foreign to "partial" equilibrium as it is to "general"
equilibrium. 
<p>
So much of mainstream economics is based upon theories which have little 
or no relation to reality. The aim of marginality utility theory was to 
show that capitalism was efficient and that everyone benefits from it 
(it maximises utility, in the limited sense imposed by what is available
on the market, of course). This was what perfect competition was said to 
prove. But perfect competition is impossible. And as perfect competition 
is itself an assumption of marginal utility, we might expect the theory 
to have been abandoned at this point. Instead, the contradiction was 
swept under the carpet.
<p>
In addition, like most religions, neo-classical economics cannot be
scientifically tested. This is because the perfect competition
model makes no falsifiable predictions whatsoever. As Martin Hollis
and Edward Nell argue:
<p><blockquote>
<i>"Indeed the whole idea of testing the marginal analysis is absurd. For 
what could a test reveal? Negative results show only that the market is 
defective. Various interpretations can be given . . . But one interpretation 
is not possible -- that the marginal analysis has been refuted. . . . To 
generalise the point, marginalist statements to the effect that, if the 
assumptions of Positive micro-economics hold, then so-and-so will happen, 
are tautologies and their consequences are simply logical deductions from 
their protases. . . the model is untestable."</i> [<b>Rational Economic Man</b>, 
p. 34]
</blockquote><p>
In other words, if a prediction of marginalist economics does not hold
all we can draw from the test is that perfect competition was not in
existence. The theory cannot be disproven, no matter now much evidence
is gathered against it. In addition, there are other useful techniques 
which can be used in defending the neo-classical ideology from empirical
evidence. For example, neo-classical economics maintains that production
is marked by diminishing returns to scale. Any empirical evidence that
suggests otherwise can be dismissed simply because, obviously, the scale
is not large enough -- <b>eventually</b> returns will decrease with size. 
Similarly, the term "in the long run" can work wonders for the ideology.
For if the claimed good results of a given policy do not materialise 
for anyone bar the ruling class, then, rather than blame the ideology, 
the time scale can be the culprit (in the long run, things will turn out 
for the best -- unfortunately for the majority, the long run has not arrived 
yet, but it will; until then you will have to make sacrifices for your future 
gains...). Obviously with such an "analysis" anything can be proven.
<p>
Little wonder Nicholas Kaldor argued that:
<p><blockquote><i>
"The Walrasian [i.e. general] equilibrium theory is a highly developed
intellectual system, much refined and elaborated by mathematical economists
since World War II -- an intellectual experiment . . . But it does not
constitute a scientific hypothesis, like Einstein's theory of relativity
or Newton's law of gravitation, in that its basic assumptions are
axiomatic and not empirical, and no specific methods have been put
forward by which the validity or relevance of its results could be
tested. The assumptions make assertions about reality in their
implications, but these are not founded on direct observation,
and, in the opinion of practitioners of the theory at any rate,
they cannot be contradicted by observation or experiment."</i> 
[<b>Op. Cit.</b>,
p. 416]
</blockquote><p>
Marginalism, however, in spite of these slight problems, did serve
a valuable ideological function. It removed the appearance of exploitation 
from the system, justifies giving business leaders the "freedom" to 
operate as they liked and portrayed a world of harmony between the 
owners of factors. Hence its general acceptance within economics. In 
other words, it justified the mentality of "what is profitable is right"
and removed politics and ethics from the field of economics. Moreover,
the theory of "perfect competition" (regardless of its impossibility)
allowed economists to portray capitalism as optimal, efficient and the
satisfier of individual desires. And this is important, for without the 
assumption of equilibrium, market transactions need not benefit all. Indeed, 
it may lead to the tyranny of the fortunate over the unfortunate, with the 
majority facing a series of dismal choices between the lessor of a group 
of evils. Of course, <b>with</b> the assumption of equilibrium, reality must 
be ignored. So capitalist economics is between a rock and a hard place.
<p>
All in all, the world assumed by neo-classical economics is not the one 
we actually live in, and so applying that theory is both misleading and 
(usually) disastrous (at least to the "have-nots").
<p>
Some pro-"free market" capitalist economists (such as those in the right-wing 
"Austrian school") reject the notion of equilibrium completely and embrace a 
dynamic model of capitalism. While being far more realistic than mainstream 
neo-classical theory, this method abandons the possibility of demonstrating 
that the market outcome is in any sense a realisation of the individual 
preferences of whose interaction it is an expression. It has no way of 
establishing the supposedly stabilising character of entrepreneurial 
activity or its alleged socially beneficial character. Indeed, entrepreneurial 
activity tends to disrupt markets (particularly labour markets) <b>away</b> 
from equilibrium (i.e. the full use of available resources) rather than
towards it. In other words, the dynamic process could lead to a divergence
rather than a convergence of behaviour and so to increased unemployment,
a reduction in the <b>quality</b> of available choices available from which 
to maximise your "utility" and so on. A dynamic system need not be
self-correcting, particularly in the labour market, nor show any sign 
of self-equilibrium (i.e. be subject to the business cycle). Ironically 
enough, economists of this school often maintain that while equilibrium 
cannot be reached the labour market will experience full employment under 
"free market" or "pure" capitalism. That this condition is one of equilibrium 
does not seem to cause them much concern. Thus we find von Hayek, for
example, arguing that the <i>"cause of unemployment . . . is a deviation
of prices and wages from their equilibrium position which would establish
itself with a free market and stable money"</i> and that <i>"the deviation of
existing prices from that equilibrium position . . . is the cause of the
impossibility of selling part of the labour supply."</i> 
[<b>New Studies</b>, p. 201]
Therefore, we see the usual embrace of equilibrium theory to defend
capitalism against the evils it creates even by those who claim to know
better. Perhaps this is a case of political expediency, allowing the
ideological supporters of free market capitalism to attack the notion
of equilibrium when it clearly clashes with reality but being able
to return to it when attacking, say, trade unions, welfare programmes 
and other schemes which aim to aid working class people against the
ravages of the capitalist market?
<p>
These supporters of capitalism stress "freedom" -- the freedom of individuals 
to make their own decisions. And who can deny that individuals, when free to 
choose, will pick the option they consider best for themselves? However, 
what this praise for individual freedom ignores is that capitalism often 
reduces choice to picking the lesser of two (or more) evils due to the 
inequalities it creates (hence our reference to the <b>quality</b> of the 
decisions available to us). The worker who agrees to work in a sweatshop 
does "maximise" her "utility" by so doing -- afterall, this option is 
better than starving to death --  but only an ideologue blinded by 
capitalist economics will think that she is free or that her decision 
is made under economic compulsion. In other words, this idealisation of 
freedom through the market completely ignores the fact that this freedom
can be, to a large number of people, very limited in scope. Moreover, the 
freedom associated with capitalism, as far as the labour market goes, becomes 
little more than the freedom to pick your master. All in all, this defence 
of capitalism ignores the existence of economic inequality (and so power) 
which infringes the freedom and opportunities of others (for a fuller 
discussion of this, see <a href="secF3.html#secf31">section F.3.1</a>). 
Social inequalities can ensure 
that people end up "wanting what they get" rather than "getting what they 
want" simply because they have to adjust their expectations and behaviour 
to fit into the patterns determined by concentrations of economic power. 
This is particularly the case within the labour market, where sellers of 
labour power are usually at a disadvantage when compared to buyers due 
to the existence of unemployment (see sections <a href="secB4.html#secb43">B.4.3</a>, <a href="secC7.html">C.7</a> and 
<a href="secF10.html#secf102">F.10.2</a>).
<p>
Which brings us to another problem associated with marginalism, namely 
the distribution of resources within society. Market demand is usually 
discussed in terms of tastes, not in the distribution of purchasing power
required to satisfy those tastes. So, as a method of determining price, 
marginal utility ignores the differences in purchasing power between 
individuals and assumes the legal fiction that corporations are individual 
persons (income distribution is taken as a given). Those who have a lot of 
money will be able to maximise their satisfactions far easier than those 
who have little. Also, of course, they can out-bid those with less money. 
If, as many right-"Libertarians" say, capitalism is "one dollar, one vote," 
it is obvious whose values are going to be reflected most strongly in the 
market. This is why orthodox economists make the convenient assumption of 
a 'given distribution of income' when they try to show the best allocation 
of resources is the market based one. 
<p>
In other words, under capitalism, it is not "utility" as such that is 
maximised, rather it is "effective" utility (usually called "effective 
demand") -- namely utility that is backed up with money. The capitalist 
market places (or rather, the owning class in such a system places) value 
(i.e. prices) on things according to the effective demand for them. 
"Effective demand" is people's desires weighted by their ability to pay. 
So, the market counts the desires of affluent people as more important 
than the desires of destitute people. And so capitalism skews consumption 
away from satisfying the "utility" of those most in need and into satisfying 
the needs of the wealthy few first. This does not mean that the needs of 
the many will not be meet (usually, but not always, they are to some 
degree), it means that for any given resource those with money can 
out-bid those with less -- regardless of the human cost. As the pro-free 
market capitalism economist Von Hayek argued the <i>"[s]pontaneous order produced 
by the market does not ensure that what general opinion regards as more 
important needs are always met before the less important ones."</i> [<b>The 
Essential Hayek</b>, p. 258] Which is just a polite way of referring to the 
process by which millionaires build a new mansion while thousands are 
homeless or live in slums, feed luxury food to their pets will humans 
go hungry or when agribusiness grow cash crops for foreign markets while 
the landless starve to death (see also <a href="secI4.html#seci45">section I.4.5</a>). Needless to say,
marginalist economics justifies this market power and its results. 
<p>
In summary, neo-classical economics shows the viability of an unreal 
system and this is translated into assertions about the world that we 
live in until most people just accept that reality reflects the model
(rather than vice versa, as it should but does not in neo-classical
theory). Moreover, and even worse, policy decisions will be enacted
based on a model which has no bearing in reality -- with disastrous
results (for example, the rise and fall of Monetarism -- see 
<a href="secC8.html">section
C.8</a>). In addition, it justifies (when not ignoring) hierarchical 
structures and massive inequalities in wealth and bargaining power
in society, which make a mockery of individual freedom. (see 
<a href="secF3.html#secf31">section
F.3.1</a> for details). It serves the interests of those with power and
wealth in modern society as well as the aims of a soul-destroying, 
world-polluting commercial system by deprecating the importance of 
aesthetic, humane and, indeed, human factors in economic decision 
making. Indeed, the mere suggestion that people should be placed
before (never mind instead of) profits would produce a fit. Starting
from a false premise, marginalism ends up negating its own stated
ideals -- rather than being the economics of individual freedom
it becomes the means of justifying restrictions and negations of
that freedom.
<p>
So, if the STV is flawed, what does determine prices? Obviously, in the
short term, prices are heavily influenced by supply and demand. If demand
exceeds supply, the price rises and vice versa. This truism, however, does
not answer the question. The answer lies in production and in the social
relationships generated there. This is discussed in the <a href="secC1.html#secc12">next section</a>.
<p>
<a name="secc12"><h2>C.1.2 So what does determine price?</h2>
<p>
The key to understanding prices lies in understanding that production
under capitalism has as its <i>"only aim . . . to increase the profits of the 
capitalist."</i> [Peter Kropotkin, <b>Kropotkin's Revolutionary Pamphlets</b>, p. 55] 
In other words, profit is the driving force of capitalism. Once this fact 
and its implications are understood, the determination of price is simple 
and the dynamics of the capitalist system made clearer. The price of a 
capitalist commodity will tend towards its <i><b>production price</b></i> 
in a free 
market, production price being the sum of production costs plus average 
profit rates (the average profit rate, we should note, depends upon the 
ease of entry into the market, see below).
<p>
Consumers, when shopping, are confronted by given prices and a 
given supply. The price determines the demand, based on the 
use-value of the product to the consumer and his/her financial 
situation. If supply exceeds demand, supply is reduced (either by 
firms reducing production or by firms closing and capital moving 
to other, more profitable, markets) until an average <b><i>rate of 
profit</b></i> 
is generated (although we must stress that investment decisions are 
difficult to reverse and this means mobility can be reduced, causing 
adjustment problems -- such as unemployment -- within the economy). 
The <i><b>rate of profit</i></b> is the amount of profit divided by 
the total
capital invested (i.e. constant capital -- means of production --
and variable capital -- wages and slavery). If the given price 
generates above-average profits (and so profit rate), then capital 
will try to move from profit-poor areas into this profit-rich area, 
increasing supply and competition and so reducing the price until 
an average rate of profit is again produced (we stress <b>try to</b> as 
many markets have extensive barriers to entry which limit the mobility 
of capital and so allow big business to reap higher profit rates -- 
see <a href="secC4.html">section C.4</a>). So, if the 
price results in demand exceeding supply, this causes a short term price 
increase and these extra profits indicate to other capitalists to move 
into this market. The supply of the commodity will tend to stabilise at 
whatever level of the commodity is demanded at the price which produces 
average profit rates (this level being dependent on the <i>"degree of 
monopoly"</i> within a market -- see <a href="secC5.html">section C.5</a>). 
This profit level means that 
suppliers have no incentive to move capital into or out of that market. Any 
change from this level in the long term depends on changes on the production 
price of the good (lower production prices meaning higher profits, indicating 
to other capitalists that the market could be profitable for new investment).
<p>
As can be seen, this theory (often called the <b><i>Labour Theory of 
Value</i></b> -- 
or LTV for short) does not deny that consumers subjectively evaluate goods 
and that this evaluation can have a short term effect on price (which 
determines supply and demand). Many right-"libertarian" and mainstream 
economists assert that the labour theory of value removes demand from the 
determination of price. A favourite example is that of the "mud pie" 
-- if it takes the same labour as an apple  pie to make, they ask,
surely it has the same value (price)? These assertions are incorrect 
as the LTV bases itself on supply and demand and seeks to explain the 
dynamics of prices and so recognises (indeed bases itself on the 
fact) that individuals make their own decisions based upon their 
subjective needs (in the words of Proudhon, <i>"utility is the necessary 
condition for exchange."</i> [<b>System of Economical Contradictions</b>, 
p. 77]). What the LTV seeks to explain is price (i.e. <i><b>exchange</b></i> 
value) -- 
and a good can only have an exchange value if others desire it (i.e. has a 
use value for them and they seek to <b><i>exchange</b></i> money or goods
for it). Thus the example of the "mud pie" is a classic 
straw man argument -- the "mud pie" does not have an exchange value as it has 
no use value to others and is not subject to exchange. In other words, 
if a commodity cannot be exchanged, it cannot have an 
<b><i>exchange</i></b> value (and so price). As Proudhon argued, 
<i>"nothing is exchangeable if it be 
not useful."</i> [<b>Op. Cit.</b>, p. 85]
<p>
The LTV is based upon the insight that without labour nothing would be 
produced and you have to produce something before you can exchange it 
(or you can steal it, as in the case of land). As the utility (i.e. use
value) of a commodity cannot be measured, labour is the basis of (exchange) 
value. The LTV bases itself on the objective needs of production and
recognises the key role labour plays (directly and indirectly) in the 
creation of commodities. However, this does not mean that value exists 
independently of demand. Far from it -- as noted, in order to have an 
exchange value, a good must be desired by someone other than its maker 
(or the capitalist who employs the maker), it must have a use-value for 
them (in other words, it is subjectively valued by them). Therefore 
workers produce that which has (use) value, as determined by the demand, 
and the costs of production involved in creating these use-values help 
determine the price (its exchange value) along with profit levels.
<p>
Therefore the LTV includes the element of truth of "subjective" theory while 
destroying its myths. For, in the end, the STV just states that <i>"prices are 
determined marginal utility; marginal utility is measured by prices. Prices
. . . are nothing more or less than prices. Marginalists, having begun their 
search in the field of subjectivity, proceeded to walk in a circle."</i> [Allan 
Engler, <b>Apostles of Greed</b>, p. 27] The LTV, on the other hand, bases itself on the objective
fact of production and the costs (ultimately expressed in labour
time) ensuing in it (<i>"The absolute value of a thing, then, is its 
cost in time and expense."</i> [Proudhon, <b>What is Property?</b>, p. 145]).
The variations in supply and demand (i.e. market prices) oscillate 
round this "absolute value" (i.e. production price) and so it is the 
cost of production of a commodity which ultimately 
regulates its price, not supply and demand (which only temporarily
affects its market price).
<p>
While the STV is handy for describing the price of works of art (and we
should note that the LTV can also provide an explanation for this), there 
is little point having an economic theory which ignores the nature of the 
vast majority of economic activity in society. What the labour theory of 
value explains is what is beneath supply and demand, what actually 
determines price under capitalism. It recognises the objectivity given 
price and supply which face a consumer and indicates how consumption 
("subjective evaluations") affect their movements. It explains why a 
certain commodity sells at a certain price and not another -- something 
which the subjective theory cannot really do. Why should a supplier 
"alter their behaviour" in the market if it is based purely on "subjective 
evaluations"? There has to be an objective indication that guides their 
actions and this is found in the reality of capitalist production. To
re-quote Proudhon, <i>"[i]f supply and demand alone determine value, how can 
we tell what is an excess and what is a sufficiency? If neither cost, 
nor market price, nor wages can be mathematically determined, how is 
it possible to conceive of a surplus, a profit?"</i> [<b>System of Economical
Contradictions</b>, p. 114] Therefore, <i>"[t]o say . . . that supply and 
demand is the law of exchange is to say that supply and demand is the 
law of supply and demand; it is not an explanation of the general 
practice, but a declaration of its absurdity."</i> [<b>Op. Cit.</b>, 
p. 91] Thus 
the labour theory of value more accurately reflects reality: namely, that 
for a normal commodity, prices as well as supply exist before subjective 
evaluations can take place and that capitalism is based on the production 
of profit rather than abstractly satisfying consumer needs.
<p>
It could be argued that this <i>"prices of production"</i> theory is close to the
neo-classical "partial equilibrium" theory. In some ways this is true. 
Marshall basically synthesised this theory from the marginal utility
theory and the older "cost of production" theory which J.S. Mill derived
from the LTV. However, the differences are important. First, the LTV does
not get into the circular reasoning associated with attempts to derive
utility from price we have indicated above. Second, it argues that rent,
profit and interest are the unpaid labour of workers rather than being
the "rewards" to owners for being owners. Thirdly, it is a <b>dynamic</b> 
system in which the prices of production can and do change as economic
decisions are made. Fourthly, it can easily reject the idea of "perfect
competition" and give an account of an economy marked by barriers to
entry and difficult to reverse investment decisions. And, lastly, labour
markets need not clear in the long run. Given that modern  economics has 
given up trying to measure utility, it means that in practice (if not 
in rhetoric) the neo-classical model has rejected the marginal utility 
theory of value part of the synthesis and returned, basically, to the 
classical (LTV) approach -- but with important differences which gut 
the earlier version of its critical edge and dynamic nature.
<p>
Needless to say, the LTV does not ignore naturally occurring objects like 
gems, wild foods, and water. Nature is a vast source of use-values which
humanity must utilise in order to produce other, different, use-values. 
If you like, the earth is the mother and labour the father of wealth. Its 
sometimes claimed that the labour theory of value implies that naturally 
occurring objects should have no price, since it takes no labour to produce 
them. This, however, is false. For example, gemstones are valuable because 
it takes a huge amount of labour to find them.  If they were easy to find, 
like sand, they would be cheap. Similarly, wild foods and water have value 
according to how much labour is needed to find, collect, and process them
in a given area (for example water in arid places is more "valuable"
than water near a lake). 
<p>  
The same logic applies to other naturally occurring objects.  If it
takes virtually no effort to obtain them -- like air -- then they will 
have little or no exchange value. However, the more effort it takes to 
find, collect, purify, or otherwise process them for use, the more exchange
value they will have relative to other goods (i.e. their production prices
are higher, leading to a higher market price). 
<p>
The attempt to ignore production implied in the STV comes from a desire to 
hide the exploitative nature of capitalism. By concentrating upon the 
"subjective" evaluations of individuals, those individuals are abstracted 
away from real economic activity (i.e. production) so the source of profits 
and power in the economy can be ignored. Section C.2 (<a href="secC2.html">Where do profits come 
from?</a>) indicates why exploitation of labour in production is the source of 
profits, not activity in the market.
<p>
Of course, the pro-capitalist will argue that the labour theory of value 
is not universally accepted within mainstream economics. How true; but 
this hardly suggests that the theory is wrong. Afterall, it would have 
been easy to "prove" that democratic theory was "wrong" in Nazi Germany 
simply because it was not universally accepted by most lecturers and 
political leaders at the time. Under capitalism, more and more things
are turned into commodities -- including economic theories and jobs 
for economists. Given a choice between a theory which argues that
profits, interest and rent are unpaid labour (i.e. exploitation) 
or one that argues they are all valid "rewards" for service, which
one do you think the wealthy will back in terms of funding?
<p>
This was the case with the labour theory of value. From the time of Adam 
Smith onwards, radicals had used the LTV to critique capitalism. The
classical economists (Adam Smith and David Ricardo and their followers
like J.S. Mill) argued that, in the long run, commodities exchanged
in proportion to the labour used to produce them. Thus commodity exchange
benefited all parties as they received an equivalent amount of labour
as they had expended. However, this left the nature and source of capitalist
profits subject to debate, debate which soon spread to the working class. 
Long before Karl Marx (the person most associated with the LTV) wrote his 
(in)famous work <b>Capital</b>, Ricardian Socialists like Robert Owen and William 
Thompson and anarchists like Proudhon were using the LTV to present a 
critique of capitalism, exposing it as being based upon exploitation (the 
worker did not, in fact, receive in wages the equivalent of the value she 
produced and so capitalism was <b>not</b> based on the exchange of equivalents). 
In the United States, Henry George was using it to attack the private ownership 
of land. When marginalist economics came along, it was quickly seized upon 
as a way of undercutting radical influence. Indeed, followers of Henry 
George argue that neo-classical economics was developed primarily to counter 
act his ideas and influence (see <b>The Corruption of Economics</b> by Mason 
Gaffney and Fred Harrison). 
<p>
Thus, as noted above, marginalist economics was seized upon, regardless
of its merits as a science, simply because it took the political out of
political economy. With the rise of the socialist movement and the 
critiques of Owen, Thompson, Proudhon and many others, the labour theory
of value was considered too political and dangerous. Capitalism could no 
longer be seen as being based on the exchange of equivalent labour. Rather, 
it should seen as being based on exchange of equivalent utility. But, as 
indicated (in the <a href="secC1.html#secc11">last section</a>) the notion of equivalent utility was quickly 
dropped while the superstructure built upon it became the basis of capitalist 
economics. And without a theory of value, capitalist economics cannot prove 
that capitalism will result in harmony, the satisfaction of individual 
needs, justice in exchange or the efficient allocation of resources.
<p>
One last point. We must stress that not all anarchists support the LTV.
Kropotkin, for example, did not agree with it. He considered socialist
use of the LTV as taking <i>"the metaphysical definitions of the academical
economists"</i> to critique capitalism using its own definitions and so, like
capitalist economics, it was not scientific [<b>Evolution and Environment</b>,
p. 92]. However, his rejection of the LTV did not imply that Kropotkin did 
not consider capitalism as exploitative. Far from it. Like every anarchist,
Kropotkin attacked the <i>"appropriation of the produce of human labour
by the owners of capital,"</i> seeing its roots in the fact that 
<i>"millions
of men [and women] have literally nothing to live upon, unless they
sell their labour force and their intelligence at a price that will
make the net profit of the capitalist and 'surplus value' possible."</i>
[<b>Op. Cit.</b>, p. 106] We discuss profits in more detail in 
section C.2 (<a href="secC2.html">Where do profits come from?</a>). 
<p>
Kropotkin's rejection of the LTV is based on the fact that, within 
capitalism, <i>"[v]alue in exchange and the necessary labour are 
<b>not proportional to each other</b>"</i> and so <i>"Labour is 
<b>not the measure of 
Value.</b>"</i> [<b>Op. Cit.</b>, p. 91] Which is, of course, true under capitalism. 
As Proudhon (and Marx) argued, under capitalism (due to existence
of capitalist profit, rent and interest) prices could not be 
proportional to the average labour required to produce a commodity
(<i>"Wherever labour has not been socialised, -- that is, wherever value 
is not  synthetically determined, -- there is irregularity and 
dishonesty in exchange."</i> [Proudhon, <b>Op. Cit.</b>, p. 128]) Only when
the rate of profit is zero could prices directly reflect labour
values (which is, of course, what Proudhon and Tucker desired
-- <i>"Socialism . . . extends its ["that llabour is the true measure
of price"] function to the description of society as it should be, 
and the discovery of the means of making it what it should be."</i>
[Tucker, <b>The Individualist Anarchists</b>, p. 79]). Therefore,
Kropotkin is correct to state that <i>"[u]nder the capitalist
system, value in exchange is measured <b>no more</b> by the amount
of necessary labour."</i> [<b>Op. Cit.</b>, p. 91] 
<p>
However, this does not mean that the LTV is irrelevant to analysing 
the capitalist economy. Rather, it argues that under capitalism labour 
is, essentially, the <b>regulator</b> of price, <b>not</b> its measure. 
<i>"The idea 
that has been entertained hitherto of the measure of value,"</i> 
argued Proudhon, <i>"then, is inexact; the object of our inquiry 
is not the standard of value, as has been said so often and so 
foolishly, but the law which regulates the proportions of the 
various products to the social wealth; for upon the knowledge of 
this law depends the rise and fall of prices."</i> [<b>System of 
Economical Contradictions</b>, p. 94] So Kropotkin's 
argument does not undermine the LTV as such. Stripped of the 
metaphysical baggage 
which many (particularly Marxists) have placed on the LTV (and
correctly attacked as unscientific by Kropotkin), it is essentially 
an methodological tool, a means of investigating the key aspects of 
capitalism -- namely wage labour and the conflicts associated with 
it at the point of production -- at a high level of abstraction. 
Thus it is a <b>explanatory</b> tool and value an explanatory category, 
a means of understanding the dynamics of capitalism. 
<p>
Therefore, rather than being the crude idea that "exchange value" 
equals prices the LTV is primarily a means of analysis. This can 
be seen by our use of "production prices" rather than (exchange)
value in our description of how the theory works. The LTV
focuses analysis onto the production process and thus correctly
points our investigations of how capitalism works to what
goes on in production, to the relations of authority in the
capitalist workplace, the struggle between the power of the
boss and the liberty of the workers, the struggle over who
controls the production process and how the surplus produced
by workers is divided (i.e. how much remains in the hands
of those who produced it and how much is appropriated by
capitalists). Therefore, the claim that prices deviate from values
and so the LTV is outdated indicates a confusion between the 
explanatory role of the LTV and the actual world of prices and 
profits. The LTV reminds us that production comes before and so 
underlies exchange and what happens at the point of production 
directly influences what happens in exchange. Decreasing the 
direct and indirect labour time required for production will 
decrease the cost price of a commodity and so reduce its 
production price. Thus the rise and fall of prices and profits is
the result of changes in value relations (i.e. in the objective
labour costs of production -- labour-time value) and so the
use of the LTV as an explanatory tool is valid.
<p>
In other words, the labour theory of value is simply a good heuristic 
analysis device which gives an insight into how prices are formed 
rather than the prices as such. In practice, production prices are 
dependent on wages and these <b>reflect</b> labour-time values rather 
than <b>are</b> labour-time values.
<p>
Thus Kropotkin was right -- up to a point. His critique of the LTV
is correct for those versions of it which state that "equilibrium"
price equals the (exchange) value of a good. He was correct to 
note that under capitalism this rarely happens. Which means that
our use of the LTV is simply that of an explanatory tool, a means
of looking at the key aspect of capitalism -- namely the production
process which creates things which have use value for others and
are then exchanged. Production comes first and so we must first 
start there to understand the dynamics of capitalism. Not to do
so, as the STV does, will lead your analysis into a dead end
and will ignore the fundamental aspect of capitalism -- wage
labour, the authority structures in production and the exploitation
of labour such oppression generates.
<p>
Indeed, Kropotkin's argument is reflected the "prices of production" 
perspective outlined above as we concentrate of <b>prices</b> rather 
than "values." We reject the metaphysical abstractions often 
associated with the LTV and rather concentrate on real phenomenon,
such as prices, profits, class struggle and so on. Such a perspective
helps ground our critique of capitalism in what happens in the
real world rather than in the realms of abstraction. As we argue
in <a href="secH3.html#sech32">section H.3.2</a>, Marx's 
concentration on <b>value</b> (i.e. the 
abstract level of analysis) made him ignore the role of class
struggle in capitalism and its affect on profits (with bad
results for his theory and the movement he inspired).
<p>
<a name="secc13"><h2>C.1.3 What else affects price levels?</h2>
<p>
As indicated in the <a href="secC1.html#secc12">last section</a>, 
the price of a capitalist commodity is, 
in the long term, equal to its production price, which in turn determines 
supply and demand. If demand or supply changes, which of course they can 
and do as consumers' values change and new means of production are created
and old ones end, these will have a short-term effect on prices, but the 
average production price is the price around which a capitalist commodity 
sells. Thus it is the cost of production which ultimately regulates
the price of commodities. In other words, <i>"market relations are 
governed by the
production relations."</i> [Paul Mattick, <b>Economic Crisis and Crisis Theory</b>, p. 51] As Proudhon put it:
<p><blockquote><i>
"Thus value varies, and the law of value is unchangeable, further, if 
value is susceptible of variation, it is because it is governed by a law 
whose principle is essentially inconstant, -- namely, labour measured by 
time."</i> [<b>Op. Cit.</b>, p. 100]
</blockquote>
<p>
However, the amount of time and effort spent in producing a particular 
commodity is not the essential factor in determining its price in the 
market. What counts is the costs (including the amount of work time) 
that it takes <b>on average</b> to produce that type of commodity, when the 
work is performed with average intensity, with typically used tools and 
average skill levels. Commodity production that falls below such standards, 
e.g. using obsolete technology or less-than-average intensity of work, 
will not allow the seller to raise the price of the commodity to 
compensate for its inefficient production, because its price is 
determined in the market by average conditions (and thus average 
costs) of production, plus the average profit levels required to meet
the average rate of profit on the invested capital. On the other 
hand, using production methods that are <b>more</b> efficient than average -- 
i.e.. which allow more commodities to be produced with <b>less labour</b> -- 
will allow the seller to reap more profits and/or lower the price 
below average, and thus capture more market share, which will 
eventually force other producers to adopt the same technology in 
order to survive, and so lower the market production price of that 
type of commodity. In this way, advances that reduce labour time 
translate into reduced exchange value (and so price), thus showing 
the regulating function of labour time (and indicating the usefulness 
of the LTV as a methodological tool).
<p>
Similarly, the LTV also provides an explanation of why common resources in 
one area become more valuable in others (for example, the price of water to
a person in a desert would be far higher than to someone next to a river). 
In the short term, the owner of water in the desert can charge a vast amount
to those who want it simply because it is rare and the amount of labour
required to find an alternative source would be high (we will ignore the
ethics of charging high prices to people in need for the moment, as does
marginalist economics which portrays such situations -- which most people
would intuitively class as  exploitative -- as "fair exchange"). But if 
such excess profits could be maintained for long periods, then they would
tempt others to increase competition. If a steady demand for water existed 
in that region then competition would drive down the price of water to 
around to the average price required to make it available (which explains
why capitalists desire to reduce competition via the use of copyright
laws, patents and so on -- see <a href="secB3.html#secb32">section B.3.2</a> -- as well as increasing
company size, market share and power -- see <a href="secC4.html">section C.4</a>).
<p>
To summarise, as the production cost for a commodity is a given, only
can indicate whether a given product is "valued" enough by consumers 
to warrant increased production. This means that <i>"capital moves from
relatively stagnating into rapidly developing industries. . . . The extra
profit, in excess of the average profit, won at a given price level
disappears again, however, with the influx of capital from profit-poor
into profit-rich industries,"</i> so increasing supply and reducing prices,
and thus profits. [Paul Mattick, <b>Op. Cit.</b>, p. 49]
<p>
This process of capital investment, and its resulting competition, is the
means by which markets prices tend towards production prices in a given
market. Profit and the realities of the production process are the keys
to understanding prices and how they affect (and are affected by) supply
and demand.
<p>
Lastly, we must stress that to state that market price tends toward production 
is <b>not</b> 
to suggest that capitalism is at equilibrium. Far from it. Capitalism is 
always unstable, since <i>"growing out of capitalist competition, to heighten 
exploitation, . . . the relations of production... [are] in a state of 
perpetual transformation, which manifests itself in changing relative prices 
of goods on the market. Therefore the market is continuously in disequilibrium, 
although with different degrees of severity, thus giving rise, by its 
occasional approach to an equilibrium state, to the illusion of a tendency 
toward equilibrium."</i> [Paul Mattick, <b>Op. Cit.</b>, p. 51]
<p>
Therefore, innovation due to class struggle, competition, or the creation 
of new markets, has an important effect on market prices. This is because 
innovation changes the production costs of a commodity or creates new, 
profit-rich markets. While equilibrium may not be reached in practice, this 
does not change the fact that price determines demand, since consumers face 
prices as (usually) an already given objective value when they shop and make 
decisions based on these prices in order to satisfy their subjective needs.
Thus the LTV recognises that capitalism is a system existing in time,
with an uncertain future (a future influenced by many factors, including
class struggle) and, by its very nature, dynamic. In addition, unlike 
neo-classical "long run equilibrium" prices, the LTV does not claim 
that labour markets will clear or that a change within one market will
have no effect on others. Indeed, the labour market may see extensive 
unemployment as this helps maintain profit levels by maintaining discipline 
-- via fear of the sack -- in the workplacee (see <a href="secC7.html">section C.7</a>). Neither does 
it maintain that capitalism will be stable. As the history of "actually 
existing" capitalism shows, unemployment is always with us and the business 
cycle exists (in neo-classical economics such things cannot happen as the 
theory assumes that all markets clear and that slumps are impossible).
<p>
Moreover, the LTV indicates the source of this instability -- namely
the <i>"contradictory idea of value, so clearly exhibited by the 
inevitable distinction between useful value and value in exchange."</i>
[Proudhon, <b>Op. Cit.</b>, p. 84] This is particularly the case with
labour, as the exchange value of labour (its cost, i.e. wages)
is different than its use value (i.e. what it actually produces
during a working day). As we argue in the <a href="secC2.html">
next section</a>, this 
difference between the use value of labour (its product) and 
its exchange value (its wage) is the source of capitalist profit 
(we will indicate in <a href="secC7.html">section C.7</a> 
how this distinction influences 
the business cycle -- i.e. instability in the economy).
<p>
</BODY>
</HTML>