Is the Marxian labour theory of value correct?
In responses to my recent postings I have encountered scepticism about the validity or relevance of Marxian economics today. So I thought it would be worth explaining a few reasons why he has to be taken very seriously as an economist.
It feels a bit like summarizing Proust in 100 words to say this but, the two most important things that Marx wrote about the economy were that labour is the source of exchange value, and that the incomes of the propertied classes derived from the exploitation of labour.
He was not the first to make these points, they were an established strand of early 19th century thought, but Marx made the points more clearly and with greater cogency than any of his predecessors. Nowadays, these ideas are absent – not only from the economics curriculum but even from Communist Party policy.
Why? Have they been proven wrong?
Well orthodox economists are pretty confident that the labour theory of value has been proven wrong, but if you follow up the literature, their proofs are of a type peculiar to contemporary economics. In most sciences, hypotheses are evaluated by confronting their predictions with empirical data. In economics proof is rather different. It is mathematical proof of the form: Let us assume the following axioms, and then see what must be true about the economy.
Using proofs of this sort, Samuelson for example claimed to have demonstrated that the labour theory value provided no useful information about prices.
The problem with this is that if the axioms are wrong, the proof is worthless. By a judicious choice of axioms one can prove all sorts of things.
They found that the predictions of Marx and before him Ricardo had been spot on. Market prices were actually correlated with labour values to the remarkable degree of 95% or more. That meant that 95% of the variation in the prices of goods is explained by the labour cost of making them.
More strikingly, it was shown that the more capital intensive an industry was, the lower was its rate of profit. This is exactly what one would expect if labour rather than capital was the sole source of value. This explains why railway projects like the Channel Tunnel are almost always unprofitable. They involve a lot of capital but employ little labour on which to make a profit.
Marx had said that : “Very large undertakings, such as railways, on the other hand, which have an unusually high proportion of constant capital, do not yield the average rate of profit, but only a portion of it,“ Those in favour of rail privatisation in other countries take note, they will never be profitable.
Capital itself creates no value.
Once it is realised that the determination of value by labour is a well proven scientific theory, then Marx’s analysis of exploitation follows – with all sorts of disturbing moral consequences for the established order.
It gives moral strength to Unions opposing exploitation and it undermines any claim of capital to a share in the national income.