Empirical evidence for the proposition that production based on exchange value has collapsed

by Jehu

Whether production based on exchange value has broken down is subject to rather formidable objections from almost all Marxist theorists. So far as I can tell, not a single Marxist today thinks such an event could happen, much less that it has already happened.

Fair enough. I will prove they are wrong.

Warning: This post is even more tedious and unreadable than usual.

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The theoretical objections to the idea of the possibility of capitalist breakdown from various quarters among Marxists academics is not uniform, however. It can be broken down into two types. The first group, in my opinion, is very easy to dismiss. The prevailing view among those in this group — let’s call them radical Keynesians — is that value, exchange value and surplus value do not exist. The prices of commodities and the profits of capital are in no way determined by the labor values or socially necessary labor time required to produce those commodities. In my opinion, there is no convincing this group, among whom very likely belong the overwhelming majority of Marxist academics today, including the Endnotes collective. These folks are not Marxists as that term is used scientifically, i.e., they do not subscribe to Marx’s labor theory of value. I will ignore all of their objections in this post.

The second group, however, poses a different problem. These folks allegedly accept Marx’s categories of value, exchange value and surplus value. But the view among the overwhelming majority of those who accept this thesis is that, while Marx’s categories actually exist, production based on these categories does not break down. If the first group rejects the notion that the prices of commodities are determined by their values, the second group thinks the determination of the prices of commodities by value remains unchanged over the entire life of the mode of production — the relation does not breakdown.

In my opinion, both groups are wrong. Marx clearly believed that the prices of commodities are determined by their socially necessary labor time, but he also believed that technical changes in the production of material wealth would eventually lead to the breakdown of the relation between value and price. He called this event the breakdown of production based on exchange value. The collapse or breakdown of production based on exchange value would occur because the production of surplus value (the expenditure of surplus labor time) is the sole aim of capitalist production.

The prima facie case for the breakdown of production based on exchange value must begin with a large, unexpected and widespread changes in the prices of commodities that cannot be explained by like changes in the socially necessary labor time required for production of commodities. In the best case scenario, the socially necessary labor time required for production of commodities would be inverse to the change in currency prices of those commodities, i.e., the prices of commodities would rise even as their values fell.

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To demonstrate that production based on exchange value has broken down since 1971, I will introduce a counterfactual measure of the values of commodities. This is necessary because the relation between currency prices and commodity money that serves as the standard of those prices may and often do vary from one another for any number of reason. It is not always clear whether these fluctuations are due to changes in the quantity of currency in circulation or changes in the value of commodities in circulation or something else altogether.

To isolate this sort of ambiguity in the historical data, I will introduce a second commodity money that has long served as money in history, silver. By introducing silver into the discussion I have now created a monetary ménage à trois, a three-sided relation between three monetary objects, where the relation between any two of the objects may allow us to isolate and understand the behavior of the third.

Below, I present the value represented by dollars (commonly called the “dollar price”) of these two historical money commodities (gold and silver) from 1833 to 1971:

CHART 1 – Gold and Silver prices 1833-1970

 

As can be seen, while both commodities have served in history as money, they often do not agree on the standard of dollar-denominated currency prices and generally move independently of one another. Prices, stated in physical units of silver may and often do disagree with those same prices stated in physical units of gold. In my opinion, this is not a concern; rather, since we seldom find both commodities serving as money together, one of these money commodities can and often does serve as a natural counterfactual for prices where the price standard is the other.

Further, aside from their function as monies, the industrial and commercial markets for gold and silver share very little in common. In the short-term. influences in one market or the other may have little or nothing to do with the actual labor time employed in their production. This is why currencies seldom are tied to both commodities at once — it is notoriously difficult for governments to manage a currency tied to two different price standards.

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Below, the relation between the two money commodities, silver and gold is further stated in the form of the historical gold/silver ratio.

CHART 2 – gold-silver ratio

According to Investopedia,

“The gold/silver ratio describes how many ounces of silver it takes to purchase one ounce of gold. Investors use the fluctuating ratio to ascertain the relative value of silver compared to gold, thus determining the optimal time to purchase one metal over the other.”

The gold/silver ratio is important, because if one of the two money commodities is being employed by the state as the price standard for its currency, the “price” (so to speak) of the commodity is legally fixed in currency price terms. In this case, the movement in currency price of the other commodity can, within certain limits, indirectly signal whether too much or too little currency is in circulation.

It may very well happen, for instance, that dollars are pegged to gold in order to maintain a fixed standard of prices, but the state might force too many dollars (or too few dollars) into circulation to meet the requirements of exchange. The general rule is this: If the state forces too many gold-backed dollars into circulation, the amount of dollars representing an ounce of silver (the so-called “price of silver”) will rise even when the amount of dollars representing an ounce of gold remains fixed by law. If too few dollars are forced into circulation, the opposite happens: the amount of dollars representing an ounce of silver will fall.

(Of course, there are also other adjustments in prices that take place, but I will leave those aside, since they do not add anything to this discussion at the moment.)

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And here is a longer view of the relationship between the two historical money commodities that brings us up to 1999:

CHART 3 – Gold and Silver prices 1833-1999

As can be seen in the above chart, sometime around 1971, the amount of dollars representing an ounce of gold (the so-called “price of gold”) jumped off the charts. At the same time, the amount of dollars representing an ounce of silver began to spiral to atmospheric levels as well. Whatever affected the so-called “price of gold” had a similar effect on the so-called “price of silver”. The two historical money commodities reacted to changes in the global monetary system roughly the same way and at roughly the same time. The abrupt jump in the amount of dollars representing an ounce of both money commodities occurred in the months after the Bretton Woods system collapsed and the global monetary system was plunged into complete disorder.

The impact of the collapse of Bretton Woods on the two commodity monies was far greater, by at least an order of magnitude, than the historical differences in the price standard between the two commodities; which is to say, while the two money commodities still suggest different standards of prices denominated in dollars, this difference is almost completely washed out of the empirical data by the collapse in the value represented by the dollar in either money.

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The third leg of this monetary triangle is the state issued currency in this case, the US dollar. In a money regime where the currency is fixed to one or the other money commodity, changes in the amount of currency in circulation that exceeds or falls short of the needs of commodity circulation will be expressed in a definite divergence between paper currency prices and commodity money prices. However, in a money-regime where the currency is permitted to float against the standard of price, and where, for whatever reason, the commodity money does not circulate as currency itself, it may be impossible to tell whether long-term changes in prices result from too much (or too little) currency in circulation or from some other cause.

Even under these circumstances, however, the amount of dollars representing an ounce of gold and silver, taken together, can provide us with a lot of useful information. By and large, changes in the amount of dollars representing an ounce of gold and silver, to the extent they trend together in the same direction over some period of time, may indicate changes in the quantity of currency in circulation above or below the requirements of circulation of commodities, as shown in the chart below.

CHART 4 – Gold and Silver prices 1970-1999

The above chart shows the data on the amount of dollars representing an ounce of gold and silver from the first chart. In this case, however, I focus on the period from 1970 to 1999. The chart shows that whatever caused gold “price” to jump after the collapse of Bretton Woods also cause silver “price” to jump with it. From 1833 to 1970, the two commodity monies moved independent of one another. But after 1971, the two commodity monies moved almost perfectly in tandem.

This is because the collapse of Bretton Woods in 1971 severed the link not just between the dollar and gold, but also between the values of commodities in general and their prices denominated in dollars. The collapse of Bretton Woods brought about the final end of production based on exchange value.

While I can’t be 110% sure this is what happened in 1971 — the data to which I have access is not precise enough for that — no one I have read has offered a plausible alternative to my argument. Not one Marxist theorist has explained why the prices of commodities — including both gold and silver — suddenly and without warning began spiraling upward after 1971. No one has even tried to explain the explosion of secular hyper-inflation we experienced in the 1970s.

Yet, by and large, they all agree this movement “proves” Marx’s theory is wrong.

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I can confirm my prima facie conclusion that production based on exchange value broke down in the 1970s by looking at the movement in prices of ordinary commodities after 1971. In this case, I have chosen three commodities because of their almost ubiquitous role in the production and exchange of value in the American economy: houses, oil and labor power.

For each commodity, I will present two charts below. The first chart is the historical prices of the commodity denominated in dollars from 1970 to 1999. The second chart presents that same price information expressed in units of gold and silver for the same period. In each case, it will be obvious that the prices of each commodity, denominated in dollars, no longer have any relation to their labor values, expressed both in units of gold and silver.

Median home price versus value: Here is the chart for the median prices of a home in the United States between 1970 and 1999 stated first in US dollars and again in ounces of gold and silver:

CHARTS 5a-b – Median home price, currency versus commodity money 1970-1999

In the above two charts, the first presents us with a familiar upward slope in the median price of homes from 1970 to 1999. The median dollars price of a home appreciated year over year 1989 to 1992 and then recommenced its steady upward appreciation. The situation is completely different in the second chart. In that chart, the median exchange value, denominated either in units of gold or silver, plunges dramatically from 1970 (gold) and 1971 (silver) until it bottoms out in 1979 (gold) and 1980 (silver).

While the two money commodities disagree on when the collapse of homes values began, they leave no doubt that a dramatic collapse of homes values occurred in the 1970s. The collapse of median home values occurred despite steadily rising dollar currency prices. The inflation of median home prices from 1970 to 1980, denominated in dollars, bore absolutely no relation to the median exchange values of those homes, expressed either in physical units of gold or silver.

Price of a barrel of oil versus its value: Here is the chart for the price of a barrel of oil between 1970 and 1999 stated first in US dollars and again in ounces of gold and silver:

CHARTS 6a-b – Barrel of oil, currency versus commodity money 1970-1999

In the above two charts, the data is far more ambiguous than the first case. The dollar currency price of a barrel of oil swings wildly — appreciating dramatically after 1972, then generally falling from 1980 to 1999. In both gold and silver terms, we see evidence of wild swings that make any definite conclusion difficult, if not impossible. I think this can be explained by the rise of the oil cartel, the Organization of the Petroleum Exporting Countries) (OPEC), which won higher dollar prices for its resources. The resultant swings in the price of a barrel of oil was likely more than enough to overcome any changes in the exchange value of the commodity over that period.

Despite the ambiguity of the data, I feel it necessary to include it here because the relation between the price and exchange value of a commodity whose use is as ubiquitous in the economy as oil cannot be left out of this discussion.

Average daily wage in dollars versus its value: Here is the chart for average hourly earnings between 1970 and 1999 stated first in US dollars and again in ounces of gold and silver:

CHARTS 7a-b – Average hourly earnings, currency versus commodity money 1970-1999

The above two charts, like those of the median home price (charts 5a-b) presents us with a familiar upward slope in the average hourly earnings of a worker from 1970 to 1999. Wages, denominated in dollars, likewise appreciated year over year. The situation is completely different in the second chart. In that chart, the average daily wage, denominated either in units of gold or silver, plunges dramatically from 1970 (gold) and 1971 (silver) until it bottoms out in 1979 (gold) and 1980 (silver). As in the case of median home prices, it then begins to climb until 1999.

While the two money commodities disagree on when the value of the average daily wage began, they leave no doubt that a dramatic collapse of wages occurred in the 1970s. The collapse of the value of labor power occurred despite steadily rising dollar currency prices. The inflation of the of wages from 1970 to 1980, denominated in dollars, bore absolutely no relation to the actual exchange values of wages, expressed either in physical units of gold or silver.

I think these three examples should raise a question about whether prices of commodities today bear any relation to the socially necessary labor time required for their production. If a more complete study of the prices of commodities indicate that prices are no longer determined by sociallly necessary labor time, this likely confirms Marx’s prediction regarding the collapse of production based on exchange value.

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Finally, let me add one more chart: United States Gross Domestic Product from 1920 to 2011:

CHART 8 – United States GDP in US dollars (nominal)

Here is a chart of US GDP on a much longer scale that the three commodities above — from 1920-2010. As you can see, there is familiar smooth upward slope of GDP measured in dollars. The slope abruptly reverses beginning around 2008, the outbreak of the great financial crisis.

CHART 9 – United States GDP in billions of ounces of Gold (nominal)

Here is US GDP from 1920-2010, but this time expressed in billion of ounces of gold. The picture of the economy over the last 118 years is decidedly different. In the this case, the Great Depression is visible. A contraction phase is clearly evident; running from about 1929 to 1934. A second, larger depression appears on the chart running from 1971 to 1981. Finally, there is evidence of a third depression beginning around 2001 and lasting at least until 2010 — the end of the data-set.

Again, the conclusion is obvious: there is no relation between aggregate measures of dollar prices of commodities measures and the labor values of those commodities. It would appear that the socially necessary labor time required for the production of commodities fails to explain the prices of commodities either at the level of individual commodities and at the level of the economy as a whole.

There is only one of two conclusions possible based on the empirical evidence I have offered here: either value does not exist, as argued by the radical Keynesians who try to pass themselves off as Marxists, or a breakdown of production based on exchange value has occurred, as Marx predicted.

As I will show next, the case for communization can only be sustained based on the second conclusion.