What The Hell America!

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.