1.1.8 exchange value and utility value

Karl Marx adopted from Adam Smith the concept of exchange value and utility value. The difference between Adam Smith and Karl Marx is that the former implicitly corrected his error, see natural price/market price, while Karl Marx believed in that abracadabra until the end of his days.

One can ask oneself if Karl Marx really read Wealth of Nations until the very end or if he only read the first chapters, where Adam Smith exposed this strange theory of the exchange value and utility value he refuted implicitly afterwards. It is hard to understand why Adam Smith told this nonsense at the beginning and refuted it afterwards.

Perhaps, this is because it took him 12 years to write this book and in the course of 12 years, one can change opinion, although it is much better, of course, if someone still knows at the end of the book what he has written at the beginning.

The reason we address the concept of exchange value/value of utility is not that it helps in any way to understand reality. This nonsense was told in East-Germany and other countries with a similar regime for fifty years, and one can wonder how it is possible that nobody realised that it is complete nonsense.

It is to assume that nobody of the teaching stuff ever bothered to read the original work, what is nothing very unusual. Nobody of the academic teaching staff nowadays actually cares what Keynes said, and the original book is never red.

For Adam Smith, it was a big problem that some things have no practical use, diamonds for instance, but a lot of things can be obtained in exchange for them. At the other side, there are some things. Water, for instance, which is very useful, but nothing can be exchanged for them.

The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use;’ the other, ‘value in exchange.’ The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

Book I, Chapter IV

This idea will be radicalised by David Ricardo, who denied any influence of the demand on prices and from David Ricardo it passed to Karl Marx and with Karl Marx the tragedy began.

The exchange value is determined by the labour incorporated in a certain item or in the word of Adam Smith, by the quantity of work someone can by with this item. If someone has, for instance, a knife he can exchange it for four spoons if the same amount of labour is needed to produce one knife as four spoons. That means that the demand doesn't play any role. Even if there are spoons everywhere for free but no knives, following this logic, spoons can be changed for knives.

The only concession made to the demand side is the value of use. Even Karl Marx will accept that something that is completely useless can't be changed for anything, no matter how much work is incorporated in this item.

The problem is that the term value of user knows only two states: useful or useless. This is not enough to explain the real world. People can buy many things with their budget, all of them useful to some degree, but they will buy the things which are the most useful in their specific situation.

The assumed enigma of Adam Smith is that a diamond with no value or use has a bigger exchange value than water. Also, it has no value to the user and can, therefore, be easily resolved. The riddle is based on false assumptions. If someone is crossing the desert and dying of thirst, he will pay any amount of money for water and nothing for a diamond. In a very poor society, nobody will pay anything for a diamond. However, someone who is living on the edge of a lake with fresh water will pay nothing for water, but a lot of money for a diamond if he is in love and wants to make happy someone. The exchange value and the value of use entirely depends on the circumstances.

The whole Marxist theory is based on the assumption that some added value is squeezed out of the workers and added to the capital stock which becomes bigger and bigger in the course of history. This logic is needed in the Marxism because otherwise there are no capitalists and now class struggle.

The term value of exchange suggests that the value is something objective, independent from the demand. That's nonsense. The value of use depends on the demand and if the demand or the preferences changes, accumulated capital can be easily destroyed.

If we disregard for the demand side, there are no market prices and no steering mechanisms leading the productive resources to the optimal use, see natural price/market price and that was the problem of the planned economies of Eastern Europe.

It is often said that the idea that the supply side exclusively determines the price of an item is a general problem of the classic theory. This is actually not true. It is only true for David Ricardo and Karl Marx. Adam Smith implicitly refutes the thesis with his concept of market price and natural price and Jean-Baptiste Say denies that idea explicitly. We have already said that the terms classical theory or neoclassical theory is not useful if there are are big differences in the basic concepts, methodological approach, philosophical background and temper of the authors attributed to these line of thinking, see classic theory and neoclassic theory.

The term value of exchange can be interpreted in different ways and depending on the interpretation of the term; we get a different amount of errors.

The worst interpretation with a maximum of errors is to interpret it as the incorporated labour because in this interpretation the term is simply meaningless. If we have three hours of work in a pie and three hours of work in a computer programme or an app written in c++ or objective c Karl Marx would say, that the value of the pie is the same as the value of the computer programme, but Karl Marx would have problems to find a highly specialised programmer that works three hours and get a pie at the end. Karl Marx is well aware of the problem and "transforms" the work of the programmer in a multiplied work of the baker, but that leads nowhere. The price to pay for different kind of works depends on the supply and demand for the respective work.

Exchange value can as well be interpreted as the costs generated by producing an item. This is a little bit better because in this case the resources are already evaluated with market prices. We can actually say that 30 bicycles, I talk about high-tech bicycles, costs as much as a mid-range car. (In this case the different kind of workforce is evaluated with different prices for instance.)

However, even interpreted as costs, we can't say that the costs alone determine the market price. If preference changes, it is well possible that the market price for the thirty bicycles together is higher than for the mid-range car, even if the production costs were the same.

This paragraph contains one of the most fatal error in economic thinking. It will take 200 years to eradicate it from earth.

[We repeat. Adam Smith himself implicitly corrected the error. His concept of natural price/market price is incompatible with this concept. However, via David Ricardo this error became the fundamental pillar of Marxism.]

The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money, or with goods, is purchased by labour, as much as what we acquire by the toil of our own body. That money, or those goods, indeed, save us this toil. They contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new products, is precisely equal to the quantity of ’ labour which it can enable them to purchase or command.

Book I, Chapter V

The paragraph contradicts as well the assumption of the three productive factors, labour, capital and land. No, he states that there is only one productive factor, labour: "Labour was the first price, the original purchase-money that was paid for all things."

However, the more basic error is another one: "It was not by gold or by silver, but by labour that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new products is precisely equal to the quantity of ’ labour which it can enable them to purchase or command."

He says that with the labour, incorporated in the goods, people can by something. That means, obviously, that first labour produced something, and then something can be bought with it. Money, gold and silver, is, therefore, the result of labour. This is the fundamental error in thinking.

Actually, with money, we can buy labour, even if the money is not the result of labour. If an entrepreneur takes a loan and employs someone to program an app which yields, at least, the money he invested and allowed him to pay back the credit, the labour is the result of the money and not the other way round. With money idle resources can be activated.

Some people see a similarity between Marxism and Keynesianism because in both systems there is only one productive factor: labour. However, there is a very big difference. In Keynesianism capital, actually money, is not scarce, and if it is not scarce, there is no need to pay a price for it. There is therefore only one productive factor, land is irrelevant and can be neglected, that must be remunerated: labour. Capital, in the sense of non-consumed income of the past, simply doesn't exist.

In the classic theory and Marxism, capital is the result of labour. Capital is accumulated labour, and part of this accumulated labour is not consumed. Relinquishing to consumption is a sacrifice, and this sacrifice is to be compensated. In other words, a price is to be paid for the use of capital, the profit. [In Marxism the problem is never really addressed, but it to presume that the capitalists consume the added value squeezed out from the workers if further investments yield no more profit.]

To put it short: In Keynesianism, an increase of money lowers the interest rates and that leads, AFTERWARDS, to higher employment. In Marxism, labour leads to capital accumulation and the increase of capital to an increase of money.

The concept of accumulated labour is not only a problem because it denies that different kind of labours get different remunerations. (A necessary condition for the working of market economies, otherwise there would be no incentive for an adoption of the qualification.)

It is not only a problem if we consider the relationship between different kind of labours. It is as well a problem if we consider the value or price of labour in an absolute sense. To say that a table contains a certain amount of working hours is useless, if we don't know the price of this working hour and it is hard to see how this price can be fixed abstracting from the demand.

Abstracting from the demand leads to bureaucratic systems, where there is no relationship between performance and remuneration with two consequences. The supply doesn't fit with the demand, and people have no incentive to work because the remuneration is always the same.

That happens for instance with the never discussed "scientific discussion papers" in economics. In this papers, some kind of work is accumulated, but there is no real demand.

The idea that the price or value of an item is determined exclusively by the supply side is incompatible with a market economy and especially with the concept of the natural price/market price. The idea that the value of an item is determined by the supply side, especially in the form that the incorporated workforce determines it, leads to Marxism and the concept of the natural price/market price to its opponent, the neoliberalism. We have therefore the strange situations that two opposite lines of thinking appeal to Wealth of Nations.

En el párrafo siguiente Adam Smith relativiza la suposición que el factor trabajo sea homogéneo, pero esto no resuelve el problema de base del concepto valor útil / valor de cambio.

The next paragraph contains two errors. First he mentions the problem that, but doesn't resolve it and second he believes that the value of a work has something to do with the quality of the labour.

But though labour be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated. It is often difficult to ascertain the proportion between two different quantities of labour. The time spent in two different sorts of work will not always alone determine this proportion. The different degrees of hardship endured, and of ingenuity exercised, must likewise be taken into account. There may be more labour in an hour’s hard work, than in two hours easy business; or in an hour’s application to a trade which it cost ten years labour to learn, than in a month’s industry, at an ordinary and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity. In exchanging, indeed, the different productions of different sorts of labour for one another, some allowance is commonly made for both. It is adjusted, however, not by any accurate measure, but by the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life.

Book I, Chapter V

Adam Smith realised that there are different kind of works. However, his assumptions that the remuneration of a certain type of work has to do with the hardship, qualification etc. is erroneous. The remuneration of work depends exclusively on the demand for this kind of work. There are many people out there highly qualified that are unemployed or earn little money because there is no demand for their work. Very unpleasant, dirty and boring work, which should be well paid following the logic of Adam Smith, is paid very bad.

We can say that there is a tendency that highly qualified jobs are well paid because they are scarce in relationship to demand, but we can't determine the remuneration of certain type of work by itself.

If he says that the remuneration depends on the bargaining of the market, he implicitly accepts the impact of the demand side on the remuneration.

If we take into account that Adam Smith accepts implicitely that the remuneration depend on the demand, this affirmation is stunning.

Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.

Book I, Chapter V

In other words, he returns to the extreme version of this concept. The value of a commodity depends exclusively on the labour incorporated, and the value of this labour never varies in time and space. The money earned with this commodity corresponds and is proportional to the labour incorporated in this commodity.

In the version of David Ricardo and Karl Marx, the wages never exceeds the substantial level. If this were true, the value of labour would be indeed something never varying in time and space. (If we abstract from the fact that the price for the basic needs changes in time and space.) However, in this case, we would have a problem with the Ricardian and Marxist idea, that the value of labour is an average value. The substantial level is the same for everybody.

Es ist also nur das Quantum gesellschaftlich notwendiger Arbeit oder die zur Herstellung eines Gebrauchswerts gesellschaftlich notwendige Arbeitszeit, welche seine Wertgröße bestimmt. Die einzelne Ware gilt hier überhaupt als Durchschnittsexemplar ihrer Art. Waren, worin gleich große Arbeitsquanta enthalten sind oder die in derselben Arbeitszeit hergestellt werden können, haben daher dieselbe Wertgröße. Der Wert einer Ware verhält sich zum Wert jeder andren Ware wie die zur Produktion der einen notwendige Arbeitszeit zu der für die Produktion der anderen notwendigen Arbeitszeit. "Als Werte sind alle Waren nur bestimmte Maße festgeronnener Arbeitszeit."

Karl Marx, Das Kapital, 1 Buch, 1 Abschnitt, 1 Kapitel

We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary or the labour-time socially necessary for its production. Each individual commodity, in this connexion, is to be considered as an average sample of its class. Commodities, therefore, in which equal quantities of labour are embodied, or which can be produced at the same time, have the same value. The value of one commodity is to the value of any other, as the labour-time necessary for the production of the one is to that necessary for the production of the other. “As values, all commodities are only definite masses of congealed labour time.

This paragraph contains a big part of the tragedy of the following 200 years. A market economy is not interested in any kind of averages. If a hairdresser earns 20 dollars an hour and a heart surgeon 380, the average is 200 dollars. If the hairdresser got paid 200 dollars an hour, we would have many hairdressers, but few heart surgeons. Nobody will undergo a training of 20 years if he gets at the end, the same wage someone gets with a training of two years.

We don't find anything in the three thick books of Karl Marx that gives a hint how to steer the productive resources, but it is obvious that he doesn't believe in the price mechanism of market economies. An average price doesn't express scarcity and is not an incentive for adaptations to a change in the underlying economic structures.

Karl Marx tried hard on 100 pages (!!) to prove that the value of a commodity depends on the labour materialised in this commodity. For the Marxism, it is of crucial importance to abstract from the demand. If the value of a commodity depended on the demand, the motor that propels history would be missing.

Karl Marx adopted from Adam Smith what he liked and didn't take into account everything that didn't agree with his theory. If he had taken into account the concept of the natural price/market price he would have reached a completely different result.

The best thing to do would be to forget everything related to capital. The Ricardian and the Marxist version is the most misleading concept of this kind, but actually the basic error is the idea that capital, is the condition for investment, see interest rates.

The concept that capital is accumulated labour is only an extreme version of the more general idea that regards capital, considered as non-consumed income of the past, as a condition for investment.

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1.1.8 exchange value and utility value

The theory of added value of labour in the works of Adam Smith, David Ricardo and Karl Marx