The LTOV including rent answers critics

The Labour Theory of Value (LTOV) has not had a good press from neoclassical economists.

"However, Ricardo was troubled with some deviations in prices from proportionality with the labor required to produce them. For example, he said "I cannot get over the difficulty of the wine, which is kept in the cellar for three or four years [i.e., while constantly increasing in exchange value], or that of the oak tree, which perhaps originally had not 2 shillings expended on it in the way of labour, and yet comes to be worth £100."   [Wikipedia].

As we shall see, the solution to this mystery is the combination of socially-necessary labour time and rent.

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Q. What is value theory in Marxism?

A. Marx distinguished three kinds of value. Firstly value itself, the amount of (socially necessary) labour time which went into the production of an object; secondly the exchange value of the produced object when it was exchanged in a market transaction for another object (which could be the universal commodity money); thirdly and qualitatively, the use value which as its name implies was the utility of the object to a person.

Q. Tell me more about value per se

A. Take a wooden box made by a carpenter by hand. Plainly a lazy, incompetent carpenter would take longer to make the box but that extra labour time could not increase its value. A given society knitted together by market transactions would soon arrive at the notion of the average period of time (hours, say) which a box like that would take to produce. That time is the socially necessary labour time. If productivity improved, the value would go down, not up.

Q. And exchange value?

A. An object which is exchanged in a market transaction is called a commodity. A commodity will typically exchange in barter for another object which took something like an equivalent time to produce (otherwise someone is getting a free ride .. and eventually more people will move into producing that commodity and compete). In any kind of competitive and established market a commodity typically exchanges for the money commodity, which makes transactions so much more fluid. The exchange value of a commodity is then its equivalent in money, which in a very simple model would be almost the same concept as its price.

The idea is that in a competitive market of freely working producers the market price will tend to oscillate - due to vagaries of supply and demand in the first instance - around the value.

It's a first, simple model.

Q. And use value?

A. This is not measured in hours or currency units. It's not a quantitative attribute. It instead registers the qualitative fact that anything socially produced has to have utility for someone, otherwise why did the producer bother. The non-trivial idea is that objects can be produced, say for the use value  of household consumption, which have a value (because they took a certain amount of time to do or make) but don't have an exchange value because they were never traded.

Q. So here's a scenario. A tropical island. The guys are doing hunting and fishing and some hard-scrabble cutivating so there's an economy and a currency of sorts. 

And then this big guy monopolises the one set of banana trees and extorts payment for bananas. How does that work in terms of value?

A. Good example. Bananas have a use value, obviously, otherwise everyone would just ignore the big guy. By hypothesis, bananas make themselves. No-one has to labour (by assumption) so the value of a banana is zero. Likewise the exchange value of a banana is also zero - as no labour is incorporated in it.

Q. But the big guy is able to charge. He makes money doesn't he?

A. So this is a case where price and exchange value differ. The big guy is extracting a rent due to his monopolising a scarce resource. We see the same with landowners, who also charge rent to access land which they have perhaps done nothing at all to improve.

If the big guy wasn't there, the bananas would be a 'windfall' and it would be first-come first-served, absent a state structure to ration and allocate (like the land runs in the nineteenth century USA).

Note that value theory can't predict how big the rent (ie the market price) will be. Who knows how much people will value a banana over other traded objects. How much disposable income they will have to allocate to bananas.

Here's the important bit. Some commodities mix aspects of value creation and rent, often when a natural process is involved such as in forestry or wine maturing. The ability of the landowner or wine-make to monopolise the resource while nature does its work allows the extraction of a rent.

This addresses Ricardo's difficulty mentioned at the top of this piece.

Q. Rent vs exchange value - a distinction without a difference?

A. No. Exchange value results from value creation; rents are simply value appropriation.

Suppose we had a guy who guards bananas (which grow themselves), a guy who guards oranges (which grow themselves), a guy who guards a bay with super-abundant fish stocks (which collect and beach themselves). Let's assume they barter. What are the right ratios for exchange?

Marx would say that all three products are not commodities, they have no value. The prices are rents - set by force majeure and need.

Assuming all three parties require all three products then if each is in local abundance the price will be zero. Each is wasting their time trying to monopolise their resource. It's like the air guys. Chill!

If the products are not in abundance only force will decide. The most aggressive guy will set whatever barter ratio he can enforce, then the next most aggressive. However, the underserved guys will eventually die of starvation, making this self-defeating. Hoarding and rationing may postpone the fateful day.

In microeconomic terms, the supply cannot be changed since it is constrained by nature (it makes itself) so the supply curve is vertical. In the absence of substitutes the demand curve is vertical too: to survive you do need a certain level of resources.

If the two vertical lines coincide we have an equilibrium (of sufficiency). If the supply line is to the right  everyone lives and some produce will rot. If it's to the left the guys will become increasingly malnourished and eventually will die.

Take a look at the diagram at the top of the post.

This simple model is also relevant to the owners of entirely robotic factories under total automation, but that's for a future post..