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For class surveying different economic systems, I read a book on Marxism and its core beliefs. As I read, I came to learn that the Marxist view of economics depends heavily on the Labor Theory of Value since Marx believed that the value of a good was determined by the amount of labor.
But, from what I understand, the economic community no longer accepts the Labor Theory of Value due to its inability to explain the Diamond-Water Paradox.
How is it then, that certain economists still adhere to the Marxist view of economics? How do they have Marxism explain the Diamond-Water Paradox?

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  • $\begingroup$ One can be a marxist and reject the labor theory of value. See for example John Roemer's 1982 book "A General Theory of Exploitation and Class". $\endgroup$ – Michael Greinecker Dec 15 '14 at 2:43
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The Labor Theory of Value has been replaced by the theory of Marginal Utility, which was already accepted by Marx time. In fact he acknowledged:

"nothing can have value, without being an object of utility"

-Wikipedia: Marginal Utility - The Marginal Revolution and Marxism

Marginal Utility addresses the diamond - water paradox by explaining that the more of a resource or commodity one has ready access to, the less one needs access to even more. The declining marginal utility means that because water is nearly ubiquitous and easily accessed it has very little "value" per unit to an individual because they know they have access to many many units.

"Modern" analytical Marxists, including John Roemer have built a strong foundation (if somewhat heterodox) based on the theory of marginal utility.

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    $\begingroup$ I think it is good to have one answer like the one from Jason, but maybe other answers should focus on answering another interpretation of the question in the title "How do Marxist economists solve the Diamond-Water Paradox without rejecting the Labor Theory of Value?". I am afraid the answer is "They don't" but I suspect the OP is precisely interested in hearing from anyone who would think that "they do" in one way or another. $\endgroup$ – Martin Van der Linden Nov 19 '14 at 22:29
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    $\begingroup$ @MartinVanderLinden That's precisely it, they don't. They instead further developed the labor theory of value to incorporate marginal utility. I don't think any Marxist that has a serious economic education denies marginal utility and maintains a Labor Theory of Value trapped in the 19th century. $\endgroup$ – rosenjcb Nov 19 '14 at 23:27
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    $\begingroup$ I read Thomas Sowell's book "Marxism" and figured that, since he was a Marxist in his 20s, he would have good insight into Marxism. But, his experience with Marxism only dealt with the "old" version of the LTV. When did the Marxists adopt/expand the LTV to include the theory of marginal utility? $\endgroup$ – Mathematician Nov 20 '14 at 16:59
  • $\begingroup$ "The declining marginal utility means that because water is nearly ubiquitous and easily accessed it has very little "value" per unit to an individual because they know they have access to many many units.": How does marginal utility explain the fact that water has a value (even though very low) and air does not? $\endgroup$ – Giorgio Jun 12 '17 at 18:50
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A Marxian view of the Diamond-Water Paradox would be that diamonds are scarce and expensive BECAUSE they require a lot of labor to produce (at the margin), while water is cheap because it can be produced with relatively little labor (anyone can go down to the river and draw a bucket of water).

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    $\begingroup$ I don't really follow your argument. Let's say you can snap your fingers and both buckets will appear before you, but you can only choose one. In this scenario, we have eliminated the amount of labor and other problems associated with getting it to us, but we would still choose the water. $\endgroup$ – Mathematician Nov 20 '14 at 16:44
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    $\begingroup$ @Mathematician The Labour Theory of Value is supposed to hold in equilibrium in a capitalist economy with free movement of capital and labour across sectors. In a thirsty world labour and capital would move away from producing diamonds and towards producing water until either the production of diamonds stopped altogether (in which case it ceases to be a commodity) or the supply of diamond equals its demand at the LTV prices. There are problems with the LTV (for eg. the Transformation Problem) but the diamond-water paradox is not one of them. $\endgroup$ – Jyotirmoy Bhattacharya Nov 21 '14 at 14:24
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    $\begingroup$ @JyotirmoyBhattacharya How can you say that the LTV holds in an ideal free market economy? Sure, people would start producing water in a thirsty world, but people demand it because of Marginal Utility, not the labor that went into it. $\endgroup$ – Mathematician Nov 21 '14 at 19:21
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    $\begingroup$ @Mathematician In my view LTV is not about the 'metaphysical' source of value. Even Marx says that a commodity that has no use will not have a value in exchange. Rather the LTV is a theory of prices which says that under certain conditions production coefficients and the rate of exploitation are enough to determine all equilibrium prices. This runs up against the transformation problem among other things. So I think it is best to take the LTV as a definition of 'labour value' and then ask whether 'labour value' so defined is an economically useful concept. $\endgroup$ – Jyotirmoy Bhattacharya Nov 22 '14 at 4:01
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    $\begingroup$ The LTV failed to explain behaviour because an additional brick made with three fingers (and more effort) does not satisfy any more wants than a brick made with five fingers (and less effort), and nobody behaves consistently so as to choose the first one over the latter one: behaviourally it has no more value. As for Marx, in the last volume of Das Kapital, he argued that value is determined by the minimum labor required to produce a thing, because socialism requires an objective, not a subjective labor theory, for government planning of productive work to be meaningful and possible. $\endgroup$ – user218 Nov 24 '14 at 10:09
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There is a lot of misunderstanding here. First, LTV only operates in capitalist societies. In capitalist society, production is guided by the market, without anyone coordinating between the various branches of production from above. Wealth takes the form of commodities, which have different prices relative to each other. For marginal utility, prices do not reflect anything real. For LTV, prices are an approximation of value, or the value "added" to a commodity with labor-power. Why labor-power? A capitalist brings together two things to make commodity production possible: means of production (technology, machinery, etc) and labor-power (workers). Yet, if a capitalist ONLY buys means of production, no commodities are produced, i.e., no new value is produced. But with labor-power, a capitalist does not simply buy a room full of bodies, he buys labor-power, the ability to produce. He pays the workers a wage and keeps the difference (the commodities produced): this is why labor-power is the only source of value in a capitalist society. A capitalist averages out his labor costs (so even if worker A works slightly faster than worker B, every car that comes off the line is still worth $15,000). Outputs are always worth more than the inputs (a chair is worth more than raw wood), and labor-power is the only way to explain this surplus. Even machinery needs laborers and repairs, etc. The prices of commodities therefore reflect the total of amount of society's labor that goes into producing them: a car costs 20,000 times a can of beans because more labor went into producing it (it had a higher cost of production for the capitalist). LTV is meant to explain the system of commodity production.

(As a side note, the water and diamonds "paradox" points more to the limitations of marginal utility. We cannot say for sure that someone will take water over diamonds, even if dying of thirst. What if they take the diamonds, to leave as an inheritance? What if they take the diamond because they are miserable and want to die? What if a religious belief in crystal healing convinces them that diamonds will save their life? There is no way for marginal utility to sufficiently answer the question either).

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I really don't see any paradox in here.

1) Marx clearly separates the (exchange) value of a commodity from its use-value. Of course for an item to contain value, it needs to have at least a substantial use-value, but the later is not a measure of its exchange value. In simple words, we might assume that water has indeed much more use-value than diamonds, but that doesn't necessarily mean it will have more (exchange) value.

2) So, what gives this value to diamonds, if not their use-value?

According to Marx:

A use value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it. How, then, is the magnitude of this value to be measured?

Plainly, by the quantity of the value-creating substance, the labour, contained in the article. The quantity of labour, however, is measured by its duration, and labour time in its turn finds its standard in weeks, days, and hours.

3) And what happens if I am thirsty in the dessert?

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.

So, according to Marx, it's the AVERAGE labour power of the society and what the society thinks is SOCIALLY NECESSARY that truly determines the exchange value of an item. Thus, if you go to Mars, probably water will cost more than diamonds, or if you travel back to 1960 a personal computer would cost more than your house.

*Edit (Thanks to luchonacho for the comments): Scarcity is given as an example here, not to suggest that people desire something more because it is scarce, but to focus on the fact that an item will require more labor work to produce BECAUSE it is scarce. Check comments for more info. *

PS. As a hint when reading Marx, I would suggest to look more on the overall picture, society related and not what happens to the individual case. Most of his concepts, especially as you go towards Book III, discuss the class and society as a whole relations, which by default consists of an average of all individuals. Think of it like macro-economics ;)

Source: Karl Marx's Capital Vol.I page 29

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  • $\begingroup$ Welcome to Econ SE! I think you are confusing the concept of [labour time] "socially necessary". For Marx, according to your quote, it is about the time needed to produce an article under normal conditions, given the average skill. You are yet to prove that diamonds require more socially necessary time than water. It seems to me that you are using "socially necessary" as a subjectivist, i.e. as how much society desires such good, given scarcity. Your example of Mars seems to be suggesting that water is scarce there, hence more valuable (subjectivist again), and not more complex to produce. $\endgroup$ – luchonacho Jul 6 '17 at 13:21
  • $\begingroup$ @luchonacho Hello! Yes, by being scarce it is logical that you need to embed more labor power to find it, extract it and bring it to the consumer. The water and the diamonds, assuming no extra processing/purification is added, are natural resources, they contain no exchange value. What you actually pay is the "service" --> that they are brought to you from far-away. And that's why diamonds require more social time than water, because of that scarcity. $\endgroup$ – koita_pisw_sou Jul 6 '17 at 13:33
  • $\begingroup$ Ok, clear. Well, to me, that is central to the argument, but it is not explicit in your answer. I suggest you add it, and perhaps give some form of prominence to it, maybe in a TL;DR type in the front. $\endgroup$ – luchonacho Jul 6 '17 at 13:37
  • $\begingroup$ Yet another attempt using "economic reasoning" with human cognitive issues. $\endgroup$ – mootmoot Jul 6 '17 at 16:11
  • $\begingroup$ @mootmoot, can you elaborate more on that? $\endgroup$ – koita_pisw_sou Jul 7 '17 at 6:05
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It's amusing to me that everyone gets taught that the LTV was all Marx. Here is Adam smith resolving that paradox for you:

From wikipedia:

Value "in use" is the usefulness of this commodity, its utility. A classical paradox often comes up when considering this type of value. In the words of Adam Smith:

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 anything; scarce anything 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 (Wealth of Nations Book 1, chapter IV).

Value "in exchange" is the relative proportion with which this commodity exchanges for another commodity (in other words, its price in the case of money). It is relative to labor as explained by Adam Smith:

The value of any commodity, [...] to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities (Wealth of Nations Book 1, chapter V).

Value (without qualification) is the labor embodied in a commodity under a given structure of production. Marx defined the value of the commodity by the third definition. In his terms, value is the 'socially necessary abstract labor' embodied in a commodity. To David Ricardo and other classical economists, this definition serves as a measure of "real cost", "absolute value", or a "measure of value" invariable under changes in distribution and technology.[4]

Ricardo, other classical economists and Marx began their expositions with the assumption that value in exchange was equal to or proportional to this labor value. They thought this was a good assumption from which to explore the dynamics of development in capitalist societies. Other supporters of the labor theory of value used the word "value" in the second sense to represent "exchange value"

Diamond has exchange value = to whatever amount of labour people are willing to trade for it. Water has use value.

But since they lived well before the advent of nuclear power they never had that ah ha moment that it should really be an energy balance that gets used to determine values. Frederick Soddy, who won a Nobel for Chemistry discovering radioactive decay, did some very interesting work in economics that started to incorporate Energy Balances along with his way ahead of his time understanding of how Money works, as he called to move to fiat. And was completely ignored by the mainstream of Econ (some things never change).

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It's easy to solve this "paradox". For value of any product is determined by amount of labour spent on it. For water, it's naturally available in abundance. U can just go to river and drink it. No one is going to question u about it because there's no human labour involved in it. But then try not to pay bills (if u recieve one) for municipality or any official water supply. U will be questioned. Because there's labour added in construction of pipelines through which it flowd, cost of storage in lakes, purification etc. Now compare it to diamonds. Diamonds are scarce, secondly it requires machinary, post processing after extracting it and to find places where u can get it. For this reason they are expensive. It ultimately proves only this thing that utility is not going to determine prices. As Marx himself said and even so called vulgar marginalists must agree that "If we could succeed at a small expenditure of labour, in converting carbon into diamonds, their value might fall below that of bricks". So answer to this "paradox" Is given by Marx itself and it perfectly fits in problem. There r many answers which can actually counter many arguments of marginalists, even argument of supply and demand, but it seems like so called "marxist economists" Haven't studied capital itself. There lies victory of vulgaris!

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