Mandel’s strange argument on value, exchange value and prices

by Jehu

As I showed in the first part of this series, Marx’s argument is that the rate of profit falls because, over time, generally less labor is employed in the production of commodities. The falling rate of profit triggers a crisis during which capital attempts to restore the normal operation of the mode of production.

Among Marx’s findings: Even if an increased quantity of labor is generally employed throughout the ‘economy’, this increase in the total sum of labor is accompanied by a decrease in the labor embodied in each of the individual commodities produced. The result is that, over time, even if more value is created, it is embodied in even more use values, each of which requires less labor to be produced.

How prices work

Marx held that the value of a commodity was expressed in its exchange value. If, over time, the values of commodities are falling, while the total mass of value is increasing, how would this be expressed in the exchange value (prices) of individual commodities?

If the aggregate sum of values increased, we would expect the aggregate sum of exchange values (prices) to increase proportionally. If the values of individual commodities decreased, we would expect that the exchange values (prices) of individual commodities should decrease proportionally.

If this relationship between prices and values did not hold generally, the prices of commodities would tell us nothing about their values. But doesn’t this relation between values and prices lead to a paradox?

If the values of all commodities are generally falling, this implies the value of money, (which is itself only another commodity), should also be falling. Thus, if the value of commodity A is decreasing and the value of commodity money B is decreasing, the exchange value (price) of A in terms of B should be unchanged. No matter an improvement in the productivity of labor and the fall of the values of commodities, prices should more or less remain unchanged.

A caveat: Based on my reasoning above, we would expect prices should be unchanged unless we can offer an theoretically sound reason why the actual exchange values (prices) of commodities, denominated in some unit of money, might fall relative to their actual values.

Why might the exchange value (price) of a commodity denominated in some physical quantity of the money commodity change? This is the first thing Mandel is trying to explain in his essay, but I am not convinced.

The peculiar commodity

In the first section of his essay, Mandel is offers a reason why the exchange value (price) of ordinary commodities will not generally remain constant, but must decline over some period of time. He then uses this argument to explain why the state must devalue its currency to offset this decline.

His argument goes like this: Capitals are under constant pressure to improve the productivity of labor in order to increase their profits. Capitals that can reduce the labor costs relative to their competitors realize additional profits over and above that of their competitors even as they undersell their competition. In the competition to sell their commodities, technically backward capitals must accept lower profits or even sell their commodities at a loss. In this way surplus value is transferred from backward to more advanced capitals – the rate of profit among capitals and branches of industry tends to equalize.

“Through capitalist competition and the equalization of the profit rate, those enterprises and industrial branches in which labor productivity rises above the social average, appropriate a part of the surplus value produced in other enterprises or industrial branches in which work is done below the social average of productivity.”

However, there is an exception to this capitalist competition to sell commodities. According to Mandel, capitals operating in the gold industry literally produce money, a money commodity. Since their product is money, it is immediately exchangeable for all other commodities. Thus, for reasons peculiar to the production of money commodities, capitals producing money commodities don’t actually have to sell their commodities:

“The use of gold as the general equivalent, the fact that the use value of this commodity makes it sought after by all owners of commodities, results in a demand for this commodity which is – up to a certain point – independent of fluctuations in its own cost of production.”

According to Mandel, there is no check on the productivity of labor in the gold and other commodity money industries resulting from the competition to sell their commodities, because they don’t actually sell their commodities. Capitals in this sector simply employ their product to buy other commodities directly with their output. Thus, according to Mandel, for reasons peculiar to the production of money commodities, output in this branch of industry may not increase as fast as it does in the economy generally — leading to a dearth of money during expansions.

Why prices fall

Mandel argues that over time the productivity of labor in commodity money production lags that of the productivity of labor generally; leading to an unexpected result. As the labor time of embodied in commodities decline, their exchange value, measured in some actual quantity of gold, declines still faster. Which is to say, the relative backwardness in the productivity of labor tends to depress prices denominated in physical units of gold during periods of expansion.

“For a monetary system based on a gold standard, this means that the “secular” decline in the value of commodities is strongly accentuated. Let us assume the equation, 1 car equals 2.5 kg. of gold, equals $5,000, equals 500 hours of labor. If the productivity of labor doubles in the automobile industry while remaining constant in the gold industry, this formula becomes 1 car equals 250 hours of labor, equals 1.25 kg. of gold equals $2,500.

We reach a conclusion which at first sight seems paradoxical: a gold standard system condemns prices to drop very sharply as long as the gap continues to increase between relatively stagnant labor productivity in the gold mines and rapid expansion of labor productivity in the rest of industry. What would really paralyze capitalist expansion is not the “low price of gold,” as Rueff and Co. believe, or the “lack of international liquidity,” but the abnormally high value of gold, and the ever lower price in gold for most commodities.”

Thus, Mandel introduces a mechanism to explain why fascist states devalue their currencies. At a certain point in its expansion, capitalist production is paralyzed — he is careful to avoid the term ‘crisis’ — not because the rate of profit falls, but because of the “abnormally high value of gold” owing to the lagging productivity of the commodity money branch of industry. The relative backwardness of commodity money production compared to other industries drives down the prices of commodities denominated in physical units of gold and other money commodities.

Quantity theory of currency

The solution for this apparent defect of capitalist production, Mandel argues is currency devaluation. States can maintain stable prices and prevent deflation by increasing the quantity of currency relative to the quantity of gold it represents in circulation.

The quantity theory of money, he argues, is partially applicable to paper money. In a paper money system tied to a commodity money the quantity of paper tokens in circulation constantly fluctuates against the total quantity of gold it represents in circulation. As soon as production and productivity increase relative to productivity of labor in the gold industry, the monetary tokens in circulation can be increased by the state. The rate of increase of the quantity of gold  need not be identical to the rate of increase in the quantity of paper currency. The state, in its function as issuer of the national currency, can artificially increase the supply of currency so as to maintain stable nominal prices:

“The moment one leaves the regime of a gold standard and enters that of paper money, it is necessary to relate the monetary total to the gold total before one can understand the evolution of commodity prices relative to the precious metal. Now the quantity theory of money, which Marx rejected in connection with metallic money, is partially applicable to paper money. Paper money consists of monetary tokens. If a national currency is covered by 1,000 tons of gold and its monetary circulation increases from 35 billion to 50 billion (dollars, francs, etc.), this means that each monetary unit no longer represents 0.03 grams of gold but only 0.02 grams, that is, it has lost a third of its value.

“The expression “price of gold,” which is obviously meaningless under a pure gold standard, takes on an indirect meaning in a paper money system, where it registers fluctuations in the monetary” total and variations in the values of various national currencies in terms of fluctuations of this total. If we disregard the tremendous inflation which has taken place on a universal scale during the past half century, we see that the prices of most commodities [in] terms of gold prices have really declined considerably.

Does this mean that, under a system of paper money tied to the gold standard, every expansion of the monetary total automatically causes an increase in prices? That would be true only if total production and the productivity of labor remained stable. As soon as production and productivity increase, the monetary total can expand considerably without an increase in prices.”

Surprisingly, Mandel, a Marxist, suggests constant devaluation of state issued currency against gold is necessary because capitalist expansions are “paralyzed” by the lagging rate of improvement in the productivity of labor in gold production relative to industry generally.

Is capitalist production paralyzed by the high value of gold?

Nothing in Mandel’s presentation explains why capitalist production should necessarily be paralyzed by the “abnormally high value of gold”. All he has told us is that, as a result of the more rapid improvement of the productivity of labor in industry generally relative to that of the gold industry, a smaller quantity of gold will now buy the same car. The problem with Mandel’s argument is that, by the same token, a smaller quantity of gold now buys all the inputs — labor power, machines and raw materials — that capitals in the auto industry employ to produce surplus value.

In either case, we have the same result: an hour of productive labor in one form is exchanged for an hour of productive labor in another form. Owing to differences in the productivity of labor, the quantities of gold exchanged for commodities has declined, but the exchange of equal quantities of labor value remains the basis of production.

Even if we accept Mandel’s argument that labor improvement in the productivity of labor in the gold industry generally lags other industrial branches, we only arrive at the conclusion that the total quantity of money in circulation relative to quantity of commodities in circulation may tend to fall over time. In addition to less labor required in production of commodities, less money is needed to set in motion the same quantity of labor power, machines and raw material. Mandel seems to be conflating two different phenomenon here. No breakdown of the relation between values and exchange values (prices) takes place. Equal quantities of value are exchanged both before and after the hypothetical increase in the productivity of labor of industry generally relative to gold.

Even if we accept the premise of argument that the rate of improvement in the productivity of labor in gold production lags that of industry as a whole, all this means is that the values of commodities is expressed in fewer physical units of gold. The exchange value paid for the car is still equal to its value both before and after the change in relative productivities of labor between gold production and industry generally and the value of the car is still expressed in its equivalent exchange value. There has been no change in the relation between the value of the car and its exchange value (price); rather, the value embedded in the car has decreased relative to the value embodied in some given unit of gold.

Breakdown and Currency crises

The argument Mandel makes here to explain why the state deliberately devalues the national currency does not stand up to scrutiny. All Mandel has accomplished here is to substitute the term, “the abnormally high value of gold”, for the more familiar political-economy term, “the high value of wages”, as an explanation for capitalist crises.

However, just before he turns to the crisis as it was unfolding in the 1960s, Mandel makes this curious comment:

“The value of paper money in gold and its value in purchasing power are therefore not necessarily identical. They can evolve in opposite directions.”

With this comment Mandel unknowingly points us in the right direction. We are, of course, talking about the breakdown of exchange value, of money. This breakdown is not expressed in the relation between value and exchange value, but as a breakdown in the relationship between exchange values and prices; a breakdown of the relation between money and its symbolic representative in circulation, currency.

I will look at this next.