(This educational material has been prepared as part of the course “The Political Economy of Capitalism”)
12. The Law of Value.
The law of value is the economic law of commodity production. Like any economic law, it is objective and does not depend on the will and consciousness of people. According to the law of value, the production and exchange of goods is carried out according to the socially necessary labor input.
The effect of this law of value manifests itself through the mechanism of prices. Value controls the movement of prices. As the value of a commodity rises, so does its price. If the value of a commodity decreases, then its price decreases.
The price of any commodity is determined by the cost of its production and the cost of gold. If 30 m of cloth contains the same amount of socially necessary labor as 1 g of gold, then this amount of gold will be the price of 30 m of cloth. If the productivity of labor in the textile industry increases by a factor of 3, then, with the price of gold unchanged, the price of cloth will decrease by a factor of 3 and for 1 g of gold it will be possible to buy 90 m of cloth.
It should be taken into account that the price of goods is greatly influenced by the supply and demand. If the demand for the commodity is high and little is produced, it will be sold at a price that is higher than its value. Conversely, if there is insufficient demand for the commodity, the price may fall below value.
But does this mean that deviations in the prices of goods from their value violate the law of value? No, it does not. When products are produced by private producers, the law of value cannot manifest itself other than through price fluctuations. The value of commodities is the axis around which the prices of commodities fluctuate. Over a long period of production of a commodity its price coincides, on average, with its value.
What are the functions of the law of value?
First, the law of value in commodity production acts as a regulator of production and exchange of goods.
It is well-known that in any society it is necessary to account for and distribute social labor in various branches of production in accordance with social needs. In a commodity economy based on private property, the commodity producer, as a rule, does not know in advance how much of this or that commodity is required, where, in which branch of production there is a surplus and where there is a shortage. All this becomes known only after the goods have already been produced and placed on the market for sale.
How is the public interest in the development of this or that branch of production satisfied? What force makes commodity producers, producing goods in their purely private interests, satisfy the public interest?
This force, acting spontaneously, behind the backs of commodity producers, is the law of value.
Let us demonstrate this with an example. Suppose society produces too many shoes and not enough fabrics. Since, in this case, the price of shoes will be below value, shoemakers will not be able to recoup their labor input. The production of fabrics, on the other hand, will become profitable, since their prices will exceed their value. But this situation cannot continue indefinitely. Gradually, the unprofitable shoe industry will shrink, and, accordingly, shoe prices will begin to rise, and production in the profitable industry – the production of fabrics – will expand. Thus, driven by the law of value, a redistribution of social labor will happen. This will continue until more fabrics are produced than are needed – because none of the producers know exactly how much is required. This will inevitably lead to a gradual fall in fabric prices. Then, having found out that fabric production has now become unprofitable, manufacturers will rush to produce shoes, which are in short supply, and now fabric production will decrease and shoe production will increase. The process of redistribution of labor will go in the opposite direction.
This is what happens in any industry under commodity production.
As we see, under conditions of anarchy of production and fierce competition, the production and exchange of goods are determined not by chance, but by rather natural processes. Although commodity producers seek benefit only for themselves, indirectly their actions do lead to the satisfaction of social need. This is because both the production and exchange of goods are based on socially necessary labor input. It is the objective expression of the law of value. It is because of this that commodity producers produce those goods that society needs.
Secondly, the law of value drives the spontaneous development of productive forces in the commodity economy. It is known that the individual cost of labor is not the same for different commodity producers. The winners are those who have better machinery and a higher level of organization of production, which ensure a lower individual value of the commodity.
Let us demonstrate this with an example. Let us assume that there are three groups of producers of shoes in society.
The individual value of a pair of shoes for the first group, which uses improved machinery, is $6, for the second group it is $8, and for the third group it is $10. The public value, let us say, is $8. The first group will gain an additional income of $2 on each pair of shoes, and the third group will lose the same amount. The first group, having a great advantage over the others, will be able to increase the size of production. So the public value of a pair of shoes could fall to $6. In this case, the producers of goods of the second and third groups will either go completely bankrupt or will be forced to introduce improved techniques. This kind of thing takes place under commodity production all the time. Thus, the operation of the law of value leads to the spontaneous development of the productive forces of commodity production, to the improvement of production.
Does this mean that the law of value, as the regulator of commodity production, as the engine of productive forces, brings order and regularity to the economic life of a society based on private property?
No, it does not. Under conditions of the domination of private property, anarchy of production and competitive struggle, the effect of the law of value manifests itself in another way: price fluctuations indicate that some goods are produced in a quantity higher than the interests of society require, while others are produced in too small a quantity. This forces commodity producers to reduce or expand production in order to restore the disturbed equilibrium.
But this equilibrium is achieved only for a short time and is inevitably broken.
Third, the law of value has a decisive influence on the development of capitalist production relations. In competition, the commodity producers who have a lower individual value of the commodity win and those whose individual costs are higher than the social value lose. They go bankrupt and are deprived of the means of production. Thus, under the influence of the law of value, capitalist relations of production are born and develop.
The effect of the law of value is manifested, on the one hand, in the fact that the spontaneous growth of commodity and money relations leads to the gradual destruction of the subsistence economy, turning it into a commodity and money economy; on the other hand, a profound social process of stratification of commodity producers takes place, and the simple commodity economy begins to turn into a capitalist economy.
V. Lenin in his works “The Development of Capitalism in Russia”, “On the So-Called Market Question”, “The Handicraft Census of 1894-95 in Perm Gubernia and General Problems of “Handicraft” Industry.'”, etc., using vast factual data, showed how under the influence of the law of value the natural peasant economy of tsarist Russia was gradually decaying, turning into commodity-money economy, how wealthy peasantry turned into merchants, small and large factories and factory owners, while the vast majority of peasants became poor, were ruined and were forced to seek earnings on the side, working for the wealthy kulaks or in factories and plants in the city.
On the basis of Marx’s doctrine of commodity production, the law of value and on the basis of numerous data on the development of the peasant economy and various small-scale industries, Lenin formulated an extremely important thesis that “small-scale production gives birth to capitalism and the bourgeoisie constantly, daily, hourly, spontaneously and on a mass scale”.
The social process of stratification of small commodity producers is characteristic of any country where commodity production based on private ownership of the means of production is widely developed.