On Value, Capital and Energy

Innovation:  Making Information Valuable.  To begin to make sense of this boiled down definition we need to understand the nature of both Information and Value.  Here we will discuss the latter.

In fact, even the question “what is value?” can lead an individual to respond with the subject of their “values”, which are entirely different.  Dictionaries contribute with definitions that are rather circular; along the lines of value is how much something is worth.  For something more fundamental we need to go back to the days of the first classical economists.

In the works of the 19th century political economists the understanding of the nature of value is of major significance.  In 1817 David Ricado embarked On the Principles of Political Economy, and Taxation with an initial chapter “On Value” in which he developed the twin concepts of value in use and value in exchange proposed forty years earlier by Adam Smith.  Fifty years further on Karl Marx also developed these notions by virtue of his extremely detailed analysis in Capital.  What followed has been over one hundred years of controversy that continues to this day.

The subject begins traditionally by comparing the value after capture of a beaver and a deer in some primitive society.  Both have a use-value or utility which for the two animals are qualitative and different.  They also have an exchange value one for the other, whereby the beaver hunter might acquire the utility of the deer and vice versa through some mutual exchange with the deer hunter.  This exchange must depend on the relative value in exchange of the beaver and deer.

Ricado makes a primary assumption here:-

In the early stages of society, the exchangeable value of these commodities, or the rule which determines how much of one shall be given in exchange for another, depends almost exclusively on the comparative quantity of labour expended on each.

So if it takes twice the labour to capture a beaver than a deer, then one beaver will exchange for two deer.  On such considerations Ricardo follows up with a warning:-

That this is really the foundation of the exchangeable value of all things, excepting those which cannot be increased by human industry, is a doctrine of the utmost importance in political economy; for from no source do so many errors, and so much difference of opinion in that science proceed, as from the vague ideas which are attached to the word value.

The rationale here depends on the use value.  Both hunters have need for part of the other’s catch and have a choice to catch for it themselves or undertake a mutual exchange.  The exchange value has no meaning without an ultimate use value, and the proportions of exchange will depend on the relative effort to acquire the item that is needed.  Exchange values must be based on some quantitative relationship and the exchangeable quantity the beaver and the deer have in common is the amount of human labour devoted to their capture.

Innovation in this early state of society might improve the trap to catch the beaver.  In this case the exchange value of the beaver might be reduced to one deer as then the same amount of human labour is needed to capture either animal.

In a more diverse and developed market, Ricardo considers the role of capital to be the embodiment of the labour that was involved in its creation and again this capital, in machinery for example, contributes in an incremental and proportional manner to the total labour required to bring the traded goods to market.  Again innovation, whether it be applied to the product or to the efficiency of the capital in the means of production or distribution, the effect is the same, that is to diminish the total labour required and thereby reduce the exchange value of the product.

If fewer men were required to cultivate the raw cotton, or if fewer sailors were employed in navigating, or shipwrights in constructing the ship, in which it was conveyed to us; if fewer hands were employed in raising the buildings and machinery, or if these, when raised, were rendered more efficient, the stockings would inevitably fall in value, and consequently command less of other things.
……. Economy in the use of labour never fails to reduce the relative value of a commodity, whether the saving be in the labour necessary to the manufacture of the commodity itself, or in that necessary to the formation of the capital, by the aid of which it is produced. 

This is the long term or equilibrium effect of innovation in what has become known as the Labour Theory of Value.  In the long term innovated commodities become more socially accessible.  However, in developed markets there are time-dependent factors that also must be taken into account.  The value derived from a measure of total labour required might be considered a natural value, whereas the market value at any time might deviate around this due to numerous factors concerning the specific properties of the market and the individual preferences it comprises.

The awareness that the labour of different professions in reality contributes value in different degrees is simply accounted for.  This difference is a relatively fixed feature of commodity production and thus different periods of labour duration might be attributed to different skills or intensities of work.  And the fact that different individuals might labour with different intensities is similarly accommodated by taking an average value for a generic labour necessary at a particular time and under specific conditions of production – which Karl Marx refers to as the socially necessary abstract labour[1] and which he considers to be the value of the commodity.

By considering use values and exchange values, Marx identified two forms of transaction.  A transaction typical of the exchange of commodities, such as occurred between the beaver and deer hunters, first requires the intermediate transfer of goods into money.  This is the commodity-money-commodity (C-M-C) transaction through which the use values of the commodities are traded.

Quite different are money-commodity-money (M-C-M) transactions.  Here the initial money as capital is invested in materials, wages of labour and capital equipment in order to make commodities for sale.  This sequence starts and ends with money and the motivation of the capitalist to pursue the transaction is to finish with more money.  This net profit from the transaction is what Marx refers to as surplus value and is possible if the labourer is paid less than the value he is able to create through the deployment of his labour.

This is where innovation can acquire its time-dependent benefits.  The natural effect of innovation in increasing the productivity can be immediate, whilst the adjustments of relative value and price take time as the innovation propagates through the market.  For this period of time there is a relative surplus value from trading the commodities.  The market value will remain above the adjusted natural value.  In cases of a monopoly advantage provided by patent protection, for example, this adjustment might take some considerable time during which the relative surplus value effect created by innovation can provide for increased profits, wages or both.

In Capital, Karl Marx considers many consequences of the M-C-M transaction.  For Marx the existence of money is essential for the conversion of actual physical (concrete) labour to become the abstract labour deployed in the creation of value.  Eventually, in a fully developed capitalist market system based on the circulation of capital along with individual freedom and equality, there is a symbiotic relationship between the capitalist and the labourer.

Competition imposes the need for continuous capital accumulation on the capitalist.

Competition makes the immanent laws of capitalist production to be felt by individual capitalists as external coercive laws.  It compels him to keep constantly extending his capital in order to preserve it, but extend it he cannot except by means of progressive accumulation.

This translates into a never ending quest for relative surplus value. Innovation is a primary tool to bring about this increase in labour productivity [2].

On the other hand, survival of labour requires wages that are sufficient to pay for the commodities the labourers need for their reproduction – the “wage goods”.  Innovation here can increase the productivity of labour-power required to produce these wage goods making them relatively more accessible.  Marx also notes that wages may consequently fall enabling further access to relative surplus value for the capitalist.

In summary, whether society pursues a simple exchange of useful commodities or whether this exchange is undertaken to satisfy the demands of a capitalist economy, it is the embedded labour in goods and services that determines their value.

But this pre-eminence of the Labour Theory of Value seems to fundamentally contradict how the modern world operates.

Is not value, like beauty, really is in the eye of the beholder?  Surely it is the prerogative of the consumer to decide what is and what is not valuable.  And for those things that are considered valuable, the price is set by the laws of supply and demand whilst the income and idiosyncrasies of the consumer will determine that value.

Are not the endeavours of labour, like any other service, subject to the same laws of supply and demand?  And this labour-power needs to be of value to its customer, which in this case is the employer who will set remuneration according to this perceived value.

Merging the  prevailing consumer perception of value within a Labour Theory of Value is an essential step to provide an interpretation of value that is relevant for a modern society.  For this we have introduced the concept of a Value Surface.  This Value Surface combines with the classical Labour Theory of Value to form a Labour Theory of Value Creation in which consumers form a perception of value on the basis of the creative endeavours of the innovator.

The classical Labour Theory of Value presents a Value Surface as a flat plane which is held at a value equivalent to the labour deployed in production and distribution.  Onto this may be an additional residual surplus value that should slowly decay over time with the diffusion of innovation through the market.  Apart from these minor time-dependent features, the Value Surface is presented as a static and fixed statement of value for the associated commodities.  The value of the beaver is fixed to two deer!

In the construction of a more realistic Value Surface we should recognise that there will be a variable distribution of the appreciation of value across a population of potential consumers.  Furthermore, a potential energy might be considered retained in an elevated Value Surface.  The source of this energy could then be traced through the Labour Theory of Value back to the endeavours of the labourer as envisaged by the classical economists.  The Value Surface then is like a huge wobbly marquee erected using these energies, which have at their source the energy of labour as a biological phenomenon.

It is interesting to interpret the bioenergetic  transformations that drive the endeavours of the labourer in relation to the socially necessary abstract labour of Marx, which then could be equally replaced by the socially necessary abstract ADP, protein and carbohydrate.  It could take the form of socially necessary abstract sunlight [3].  Of course there are energy losses to heat in the transformations that take sunlight to labour-power, as there most certainly should be in the raising of the Value Surface by human labour.  But as there is no accounting of energy conservation this should not be of concern.

This subject of energy flow into capital and its role in value creation was actually considered 100 years before Karl Marx published Capital.

Around 1755 François Quesnay and his fellow Physiocrats stood at the origin of modern economic thinking.  Quesnay was then the first consulting physician to Louis XV and outside of his medical work at Versailles he was leader of the Physiocrats who opposed the repressive mercantile system with a radical idea that wealth and value arises only from the stock of  land, that rural agricultural communities were the source of value and the downstream artisan labour of the cities was technically unproductive, reworking the earlier founded wealth derived from the land, and merely consuming the resources supplied by rural communities [4].  What France needed to revive its flagging economic fortunes was stated in 14 maxims and summarised by laissez faire, laissez passer – free trade.

To illustrate the economic mechanisms in play, Quesnay produced a Tableau Économique in three versions between 1758 and 1763.  Along with its 22 notes of explanation, the Tableau was a dangerous document in pre-revolutionary Paris and it stirred a variety of different opinions.  The early French economist Mirabeau considered the Tableau to accompany the printing press and money as one of the world’s three greatest inventions.  To the philosopher J-J Rousseau it was the product of an odious, if legal, despotism [5].

 

Quesnay_TableauFigure 2.8:  3rd Edition of Tableau Économique  of François Quesnay (1763) In the Tableau Économique, the Third Edition which is shown adjacent, there are three columns.  The Tableau charts how the money flows through the economy of the farmer, the landowner and the industrialists who then produce the goods consumed by the landowner and the farmer.There is a continual flow of money between those working the land (left), those owning the land (centre) and those producing and distributing the commodities, lodging, clothing, etc. of industry (right).  Half the receipts of industry on the right are returned back to the land as payment for raw materials and other products of the land.  The other half is sterile being consumed unproductively.

Excess consumption by the unproductive right column was considered to deplete the capital that was needed for investment in future agricultural production.  “Hence it is seen that excess of decorative luxury may very promptly ruin by magnificence an opulent state.”

As a practicing physician Quesnay had developed the systematic analysis of expenditure, work, profit and consumption that was summarised in the Tableau Économique as an analogy to William Harvey’s principles on the circulation of blood that had become known a century earlier.  More generally and in harmony with the mechanical and physical advances that had recently emerged during the Enlightenment, the Physiocrats considered that an economy worked on a circular flow of money that operated on mathematical principles.

Adam Smith had cause to visit Paris in 1765 employed as personal tutor of Henry Scott, the young 3rd Duke of Buccleuch.  Quesnay met with Smith on a number of occasions and the ideas they shared impressed Smith such that he considered dedicating to Quesnay his An Inquiry into the Nature and Causes of the Wealth of Nations had not the latter died two-years before its publication [6].  In this book Smith identified industrial production as a source of national wealth and considered dangerous the view that economic phenomena are suitable for a mechanistic analysis and rather are entities resolved through social relationships.  Smith thus adhered to the views of his friend and mentor the Scottish philosopher David Hume that the credibility of systems of philosophy should be illustrated with examples drawn from common life and history.  David Ricardo and Karl Marx later followed and strengthened the fundamentally social interpretation of their works of political economy.

It is interesting to consider how an awareness of bioenergetics and the associated energy transformations that drive human labour might have illuminated the early conversations and speculations between MM Quesnay and Smith on the origins of economic phenomena.

The Tableau Économique is a document of its time.  It is a revolutionary document that stands at the very origin of contemporary society.  Because of this we should leave the final words of this section to François Quesnay on the harmony between this society and the natural world in which it is founded [7].

L’ordre naturel est essential des Sociétés Politiques ….. l’étude et la démonstration DES LOIS DE LA NATURE relatives à la subsistance, et la multiplication du genre humain.  L’observation universelle de ces lois est l’intérêt commun et général de tous les hommes.  La connaissance universelle de ces lois est donc le préliminaire indispensable, et le moyen nécessaire du bonheur de tous.

 

Notes:

[1] That is: “in a given state of society, under certain social average conditions or production, with a given social average intensity, and average skill of the labour employed.”

[2] Unbridled innovation can lead to instabilities and various checks to innovation, such as the need to achieve returns on existing fixed capital investment, monopoly protection of technology and chronic labour surpluses can act to limit changes brought by innovation to be reasonable for the applied capital.  Also the level of exploitation is limited by the need to retain the consumer behaviour of the working class, in order to provide a market for the commodities of the capitalists.

[3] Accounting also for additional nuclear power that is not received from the sun.

[4] These ideas were first published in Diderot’s Encyclopédie in 1756 and 1757

[5] An interesting collection of many divergent opinions on the ideas of the Physiocrats can be found at the beginning of The Physiocrats by Henry Higgs, Macmillan and Co 1897

[6] As recorded on page 624 of Dictionnaire de l’économie politique by Charles Coquelin

[7] Ephémérides du citoyen, No. 11 page 13 1769

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