Part 3: Pushing On A String? – The puzzle of the composite commodity in neoclassical theory

by Jehu

Lump of labour fallacy: In economics, the lump of labour fallacy … is the contention that the amount of work available to labourers is fixed. It is considered a fallacy by most economists, who hold that the amount of work is not static.


In part 2 of this series, I showed why fascist state management of the mode of production is indirect, rather than direct, i.e., why the state seeks to manage the process through its control over money, rather than directly imposing its control over the process of production. This method of management perfectly expresses the way in which crises actually unfold empirically within the mode of production. The first obvious symptoms of crisis are in exchange: unsold commodities, rising unemployment, credit contraction and a fall in GDP. It follows that any attempt to end a crisis will begin with these symptoms, rather than the underlying overaccumulation of capital.

Moreover, this method of approach reflects the problem from the standpoint of capital itself, where the problem, empirically, is not overproduction, but the ‘absence of demand’ for what has already been produced. For capital, the mode of exchange operates as an impediment to the realization of the surplus value already created. By necessity, therefore, the effort of management of the mode of production is directed at overcoming what capital sees as the ‘defects’ of the mode of exchange.

However much we can ridicule the simpletons for taking the result of the process of production for its cause, this much is clear: Between 1933 and 2008, nominal GDP experienced no year over year contraction — that is 75 years of unbroken nominal growth. To give this fact a historical perspective, in the 75 years prior to 1933, the US experienced at least 20 economic dislocations of various types, including depressions and panics. There is no question that fascist state economic management, for all of its silly assumptions, has been an unparalleled success so far as bourgeois economists are concerned. For most of that period, the only contraction in nominal GDP the US experienced were engineered by Washington deliberately to slow nominal growth of money in circulation, of employment and of GDP.

By way of comparison, consider that the Soviet Union experienced about 70 years of unbroken growth employing direct management of production. gorbachevFor all of the success of the Soviet mode of production in this regards, however, year 71 was a motherfucker — the Soviet centralized production system collapsed and the Union quickly broke up. Success along these lines clearly does not in any way guarantee against collapse. In the Soviet Union in 1991 and in the United States in 2008, it was as though 70 years of development was suddenly expressed in a single massive movement of society.

What explains the 75 year ‘success’ of fascist state management? Clearly, success of fascist state management does not in the least depend on the simpletons having an accurate understanding of how the mode of production works. As a matter of fact, I would suggest an alternative explanation that many may find bizarre: the simpletons succeeded because they have an inaccurate understanding of how the mode of production works — an understanding that, although empirically derived from the viewpoint of capital, in which the problem is not one of overproduction but of exchange relations, nevertheless is determined by production relations, not by exchange relations.

Since, in their conception of the mode of production, value does not exist, the simpletons manage the mode of production as if there is no material connection between it and the mode of exchange. Which is to say, they manage the mode of production as if prices can be determined independently of socially necessary labor time required for the production of commodities. As John Weeks explains in his paper, “The theoretical and empirical credibility of commodity money”, in the thinking of the simpletons, the product of social labor is a mass of commodities whose prices can only be determined in terms of physical units:

“The neoclassical ‘price level’ … has no empirical counterpart. It is a purely theoretical construction that cannot be measured. Ignoring for the moment the difficulty of defining [the quantity of money in circulation], the simple form in equation 2 [i.e., P = vM*/Y] requires a physical measure of output which exists only in the case of an economy with one product. … the price level cannot be defined because the prices of commodities cannot be separated from their quantity weights.”

Another way to state this conception of the mode of production, in perhaps less obscure terms, is that for the simpletons the only essential useful quality of a commodity is its price. The specific properties of any commodity — e.g., a ton of iron, a ream of paper or an average day’s labor power — is obliterated and replaced by units of currency, i.e., by the value form itself. Which is to say, what counts for the capitalist production process is not the use value of the commodity per se, but the use value of its value. We are, in other words, once again examining the problem from the point of view of capitalist relations of production, where what counts for it is not the use value of commodities, but the use value of their values.

Note something highly significant here: The conception of use value has undergone a conversion. For the bourgeois simpleton what matters is not the actual material properties of the commodity — a ton of iron, a ream of paper or an average day’s labor power — but the usefulness of the abstract homogenous labor embodied in the commodities. In the actual process of capitalist production, the specific use values of commodities play no role whatsoever. We are, therefore, through the eyes of the bourgeois simpleton, transported into the interior of the capitalist circulation process itself. Here the circuit we encounter is not C-M-C, but its inversion, M-C-M’, i.e., not the sporadic movement of commodities, subject to all the starts and stops of modern industry, (of production, exchange, consumption and reproduction), but the continuous (uninterrupted) movement of abstract homogenous social labor.

This movement itself imposes on bourgeois simpletons a conception of the process of production, in which production itself must be understood as a single undifferentiated act of abstract homogenous labor, where all the manifold use values produced by society are reduced to the production of a single essential use value, the so-called “composite commodity”. Which is to say, the whole of the social process of production is reduced to the production and consumption of a single commodity: labor power. Says Weeks:

“The standard approach in the neoclassical quantity-based monetary framework is to assume that the hypothetical economy has only one product … While the assumption of a single, composite commodity may seem absurd (which it is for most purposes), it is essential in the neoclassical monetary theory.”

Since the mode of production is being managed through exchange relations, not directly in the form of a centralized plan of production, management cannot be effected through discrete, detailed, interventions into the process of production. There is considerable lag and overlapping influences between millions of individual acts of social labor and the expression of these acts in actual exchange relations — a lag involving perhaps months or even years. However, as Weeks notes, if the process of production is conceived in its most abstract form as the continuous production of a single undifferentiated commodity, the problem is considerably simplified:

“The observed sum of transactions involves many commodities and many prices, and some of these commodities are inputs into other commodities. Over any discrete time period a commodity is likely to reappear subsumed within the price of another. This complication is eliminated by assuming there to be only one commodity.”

The bourgeois simpleton is thus forced to recognize, despite all protests to the contrary, the social character of the mode of production. This recognition appears not in the direct fashion, but in the theoretical reduction of the whole of commodity production to a single commodity capable of making real capital out of capital, labor power.

We have, therefore, two essential features of the mode of production being managed as it appears in the conception of the bourgeois simpletons:

First: Value does not exist — there are prices for the bourgeois simpleton, but no values.  But, in reality, value is nothing more than the socially necessary labor time required for the production of a commodity; while price is the expression of value, an expression of the socially necessary labor time required for production of a commodity, in the material form of money. The distinction between value and price here is exceptionally significant: value is what is produced in the act of labor. While price is how this value is expressed in a later transaction. Since for the simpletons value does not exist, the socially necessary labor time of society has no material limit and the price of the product of labor can, in theory at least, be whatever is necessary for the capitalist to make a profit.

The problem with this view before 1933 was that the link between value and price was established through the commodity serving as money. The money commodity, since it has value like any other commodity, acted as an automatic regulator maintaining the relationship between values and prices. However once commodity money was removed from circulation during the Great Depression and replaced with state issued inconvertible fiat, the relation between values and prices was permanently severed.

But not only was the relation between values and prices severed: The material limit on the labor time of society that is inherent in the law of value — that labor time that creates value had to be socially necessary labor time — was done away with as well. In this regard, there is a very interesting discussion of the relationship between labor time, value and price in the book by Howard Nicholas, “Marx’s Theory of Price and its Modern Rivals”. In his discussion he argues values embody what has been produced, while prices express what must be reproduced to replace what has been consumed. Which is to say, commodity money prices played an essential (and, moreover, irreplaceable) role in determining how much labor time should be spent on the production of goods:

“Since the fundamental purpose of prices is to facilitate the reproduction of commodities in the context of the reproduction of the economic system as a whole, the magnitude of price should be linked to the conditions governing the production of commodities. Accordingly, for Marx, the major determinants of the magnitudes of reproduction prices of commodities in all commodity production systems are the relative magnitudes of their values. From the definition of value given above, this means that, for Marx, the magnitudes of reproduction prices in the simple circulation of commodities are primarily determined by the direct and indirect labour time that needs to be expended to produce various commodities in the context of a balanced reproduction of the system.”

While value determines how much time can be spent on production of a commodity, commodity money prices determined how much time should be spent reproducing the commodity to replace what has been consumed by society. When prices fell, less labor time was spent on production of the commodity; when they rose, more time was spent. Thus prices played a vital role in regulating the labor time of society based on the value of commodities. Based on Nicholas’ argument, I argue the deflation experienced in the Great Depression was NOT a defect, but a signal that labor time had exceeded the material needs of society for labor. Prices were falling precisely because, given development of the productive forces, the need for labor had diminished as predicted by Engels.

The bourgeois simpletons, on the other hand, examined the credit contraction during the Great Depression and decided, in the words of Bernanke, that gold had become “massively non-neutral” — i.e., they concluded the defect was not in the extension of hours beyond its materially necessary limit, but with money relations and exchange.

According to Ben Bernanke and Harold James,

“The gold standard-based explanation of the Depression … is in most respects compelling. The length and depth of the deflation during the late 1920s and early 1930s strongly suggest a monetary origin, and the close correspondence (across both space and time) between deflation and nations’ adherence to the gold standard shows the power of that system to transmit contractionary monetary shocks. There is also a high correlation in the data between deflation (falling prices) and depression (falling output), as the previous authors have noted…”

What does it mean for gold to become massively non-neutral? It means money (in this case gold) refused to circulate as capital as the owners of gold could find no profitable use for it. They did what any sane person would do in this circumstance: they put it in a vault and waited until investment conditions improved. (You can do this with gold because it does not perish and its purchasing power does not depreciate.) Four years later, 1933, profitable investment conditions still had not arrived and GDP continued to contract. If prices were falling that meant profits and the employment of labor power was continuing to collapse as well.

Capital, however, is predicated on profit, the expansion of the employment of labor power and the constant increase in material wealth in the form of commodities. For gold to become “massively non-neutral” meant that it was incompatible with these aims, i.e., with capitalist relations of production themselves. Capital had, in other words, encountered its historical limits as a mode of production, a material limit beyond which it cannot venture.

Second: In the bourgeois conception of the mode of production, as described by Weeks, there is only one commodity, the so-called “composite commodity”, to which all actual commodities are reduced. I have argued above  this composite commodity is none other than labor power. It follows from this that the price considered most important in the mode of production, as seen in through the eyes of the bourgeois economist, is the price of this commodity, the wages paid in exchange for labor power. Consequently, the essential problem presented by the current crisis is not how prices in general can be inflated, (that is, how the value represented by the currency can be depreciated), but how the price of this peculiar commodity, labor power, which alone among all commodities can make real capital out of capital, can be increased.

This is the problem I will turn to next.