What is Money? Part Two: Value and Social Relations

money people circle

In the second part of his series looking at the role of money within capitalist society, Adam Booth explores the questions of value, alienation, and profit in order to develop a more in-depth understanding about the nature of money.

Part 1 | Part 2 | Part 3 | Part 4 | Part 5

The labor theory of value

So what is money? Is it primarily a universal commodity, or is it above all a system of credits and debts? In the final analysis, the answer is both: money’s dual role as a means of exchange and as a unit of account are two sides of the same coin, so to speak.

What unites this dual nature of money—what both connects the examples of the fei, the Exchequer tallies, and ancient coinage, and separates these cases from the primitive communism or Mesopotamian top-down planned economies described earlier—is, fundamentally, its role as a measure—or representation—of value. The more pertinent question that arises from this, therefore, is: what is value?

As discussed earlier, the origins of money lie in the development of commodity production and exchange; commodities being those products that are made for a market. Marx begins in Capital by grappling with this question, explaining that commodities have two aspects to them. On the one hand all commodities are use values—things that have a utility in society; on the other hand, such commodities must have an exchange value—a quantitative relationship to other commodities (generally just referred to as the value of a commodity).

At the same time, Marx noted, there is clearly a divorce between these dual properties of a commodity; the former does not condition the latter—that is, the usefulness of a product bears little relation to its exchange value. For example, a pen may be useful, and a car may be useful too; but clearly the average car is worth many thousand (normal) pens. Diamonds, meanwhile, are considered highly valuable, and yet they have very little actual social use.

The riddle that the classical economists, such as Smith and Ricardo, sought to solve—and the point of departure for Marx in his analysis of the capitalist system—was: what determined the ratio of exchange between different commodities? Why would a certain amount of one particular commodity be traded for a certain amount of any other commodity? In other words, what is the source of value?

In order to address this question, Marx first asked: what is the only thing that all commodities have in common? What aspect of a commodity exists that is both universal and comparable? What quality unites all the plethora of commodities that are produced for the market, with their multitude of uses, properties, and physical characteristics? The answer that Marx arrived at was labor.

All commodities, in the final analysis, are products of labor; and it is labor, ultimately, that is the source of all value. The exchange value (or simply value), then, Marx explained, is expressed by the relative quantity of labor contained within different commodities—both in terms of the “living” labor added by the producer and the “dead” labor congealed within the raw materials and tools used in the process of production.

Marx, however, was not the first to assert that labor was the source of value. Such an idea had been raised by the classical economists (and even by those in ancient times). Marx developed this “labor theory of value,” however, by looking at the question not from the standpoint of the individual laborer, but of labor in the abstract—of society’s labor in general:

With the disappearance of the useful character of the products of labor, the useful character of the kinds of labor embodied in them also disappears; this in turn entails the disappearance of the different concrete forms of labor. They can no longer be distinguished, but are all together reduced to the same kind of labor, human labor in the abstract (Marx, op. cit., 128).

The question of value, according to Marx, is not about the labor expended by the individual producer. Under capitalism, where commodity production and exchange is dominant and universal, commodities are not simply exchanged between individuals, but are bought and sold on the market. The producers and consumers frequently never—and, in fact, rarely ever—meet. As such, the individual character of any commodity is lost; instead, it simply becomes one example of a multitude of similar use values.

In turn, the individual character of the labor contained within each commodity is lost. Buyers in the market do not care about the labor expended to produce any individual commodity, but only about the quantity of labor that is needed to produce such-and-such a commodity in general, on average. Sellers in the market—a truly global market today—must, therefore, compete against the average level of skill, technology, and organization found in their industry. It is this fact that forces companies to compete by investing in new machinery and methods in order to increase productivity and thus sell their products below the general average of their competitors.

The value of commodities, therefore, is not determined by examining the labor expended within an individual commodity, but only by looking at the labor required to produce a given, relatively homogeneous, commodity in general. In this sense, Marx explained that the value of a commodity was not simply due to labor, as the classical economists had concluded, but due to socially necessary labor time: “the labor time required to produce any use value under the conditions of production normal for a given society and with the average degree of skill and intensity of labor prevalent in that society” (Marx, op. cit., 129).

In a relatively undeveloped market economy, there may be a degree of flexibility over the amount of one commodity exchanged for another in any individual, isolated act of exchange. The different quantities of labor time congealed within the particular commodities are seemingly random, and in this sense, as indicated above, the value of a commodity appears accidental. As commodity exchange becomes generalized, however, each act of exchange loses its individual character, and the various “accidental” values—i.e., labor times—seen in these concrete acts average out and a general, objective value—i.e., socially necessary labor time—arises. The act of exchange, meanwhile, is the only proof of the social necessity of any given labor.

The general form of value arrives, therefore, historically at the point when the process of commodity production and exchange has become so universal that the relative values—that is, congealed labor times—of commodities now present themselves, not as accidents, but as objective facts to buyers and sellers on the market.

We see, therefore, how the law of value—like any law in nature, history, and society—is not something timeless that is imposed from without, but something dialectical that emerges from the interactions within. Necessity expresses itself through accident. In the case of the law of value, this law only arises and asserts itself at the historical point where commodity production and exchange is generalized.

Money, in turn, is the ultimate expression of this generalization of the law of value; the logical conclusion of the development of commodity production and exchange, which requires a universal yard stick—a standard measure—against which the value of all other commodities can be expressed.

Where commodity production and exchange have not taken hold in society, therefore, the concept of value is meaningless and, in turn, there is no social need for money. For example, as Felix Martin notes, “the immense sophistication of Mesopotamia’s bureaucratic, command economy had no need of any universal concept of economic value . . . It therefore did not develop the first component of money: a unit of abstract, universally applicable economic value.” (Martin, op. cit., 59).

The simple commodity form is therefore the germ of the money form (Marx, op. cit., 163).

Social relations and alienation

The important point that Marx emphasized is that value—and therefore money also, in the form of prices—is ultimately a social relation: a relation between the labor of different individuals that, under a system of generalized commodity production and exchange, expresses itself as a relationship between things. “It is nothing but the definite social relation between men themselves which assumes here, for them, the fantastic form of a relation between things” (Marx, op. cit., 165).

Money, therefore, is not a thing, but a set of relations. The monetary system, in turn, is neither merely the cash and coins in circulation, nor the numbers in an accountant’s books, but a system of social relations; an expression of the distribution of the wealth—produced by labor—within society. An individual’s monetary wealth, meanwhile, is simply a claim to an aliquot portion of this social wealth.

These social and economic relations are ultimately backed up by legal—that is, property—relations, which in the final analysis means the backing of the force of the state: “special bodies of armed men” (to use Lenin’s expression), which—within class society—act to defend the sanctity of private property relations. Although, as Graeber notes, “This does not mean that the state necessarily creates money . . . The state merely enforces the agreement and dictates the legal terms” (Graeber, op. cit. 54).

As the use of money spreads, then, social relationships are increasingly transformed into monetary and financial relationships. In the words of Engels, quoted earlier, money acts as the “corrosive acid,” breaking apart all existing societal bonds. Commenting on the emergence of money in ancient Greece, Felix Martin echoes Engels, explaining how,

. . . with the invention of coinage, a dream technology for recording and transferring monetary obligations from one person to another was born . . . The result was a further acceleration in the pace of monetization. Everywhere, traditional social obligations were transformed into financial relationships . . . It is difficult to overstate the social and cultural impact of this first, revolution experience of monetization . . . money would be the universal solvent that could dissolve all traditional obligations (Martin, op. cit., 61–63).

With the development and generalization of the money form, the divorce between use value and exchange value becomes ever wider. Those involved within the money system of commodity production and exchange become increasingly alienated from their labor. The things they produce are not useful to them, but simply for others. All needs, as mentioned earlier, become relegated to the need for money—that universal equivalent that can be exchanged for all other commodities in order to satisfy every need imaginable.

As discussed earlier, within primitive communities, where production is a communal process, such alienation does not exist and commodity production is initially limited to those objects that are exchanged at the fringes of society with other communities. But the dynamics and laws of commodity production and exchange have a logic of their own that, once started, unravel and impose themselves throughout society. As Marx notes, “as soon as products have become commodities in the external relations of a community, they also, by reaction, become commodities in the internal life of the community” (Marx, op.cit., 182).

In other words, as soon as the products of labor are externally traded, thus putting the relative labor times of said products in comparison to one another, the same comparison necessarily begins between the products of labor internal to a community, products which were previously not exchanged between private individuals, but instead produced as part of the common good. The laws of commodities thus begin to assert themselves within society and the separation between use value and exchange value is established.

In the course of time, therefore, at least some part of the products must be produced intentionally for the purpose of exchange. From that moment the distinction between the usefulness of things for direct consumption and their usefulness in exchange becomes firmly established. Their use value becomes distinguished from their exchange value (Marx, op.cit., 182).

Marx’s analysis of the development of money, therefore, is based on an understanding of the development of the commodity, as outlined above. As commodity production and exchange becomes increasingly generalized, we see the general form of value emerge. Each individual producer wishes to exchange their particular product with the multitude of products found on the market.

As this system becomes universal, there grows a social need for a measure of value—for a universal equivalent and a unit of account that can act as a yardstick, against which the value of all other commodities can be compared. It is this universal equivalent or unit of account that forms the basis for money.

The concept of money, then, is the ultimate form of the alienation of the producer from his/her labor. No longer do we see production for direct consumption; nor are commodities produced as exchange values for the owner, to be simply traded directly for other commodities that are use values for the receiver. Now, instead, the producer demands money in exchange for his products—money that represents the most abstract and universal form of labor, devoid of any use value for the owner, save that of its ability to universally represent the value of his own labor.

Money necessarily crystallizes out of the process of exchange, in which different products of labor are in fact equated with each other, and thus converted into commodities. The historical broadening and deepening of the phenomenon of exchange develops the opposition between use value and value which is latent in the nature of the commodity. The need to give an external expression to this opposition for the purposes of commercial intercourse produces the drive towards an independent form of value, which finds neither rest nor peace until an independent form has been achieved by the differentiation of commodities into commodities and money. At the same time, then, as the transformation of the products of labor into commodities is accomplished, one particular commodity is transformed into money (Marx, op.cit., 181).

The enigma of profit

At a certain point, this growing alienation—tied to the separation of use value from exchange value—leads to a qualitative transformation. Initially, the circuit of commodity production and exchange is that of C-M-C: commodities (C) are produced, sold for money (M), and the money is then used to allow the purchase of other commodities (C).

Later on, however, this circuit turns into its opposite—that of M-C-M: we begin with money, which is used to buy commodities, in the hope of selling these on. This development of this M-C-M circuit is associated with the rise of the merchant class, as described by Engels in the earlier passage—“a class which no longer concerns itself with production, but only with the exchange of the products.”

Of course, in reality, it is not an M-C-M circuit, but an M-C-M’ circuit, where M’ represents a sum of money greater than the initial money outlay. The aim of the merchant, in other words, is simply to make money through the act of exchange. The accumulation of money becomes the sole raison d’être of the system, the fulfillment of society’s needs a mere afterthought.

At the same time, as Engels also explains, arise the usurers—the money lenders and financiers who seek to cut out the hassle of buying and selling altogether, hoping to make money from money: M-M’.

While both merchants and usurers played (and continue to play) a necessary role within the market system, in that they facilitated the expansion of trade and the uninterrupted continuity of commodity circulation, these social groups were (and are) nevertheless at the same time incredibly parasitic. Ultimately, neither the merchant nor the money lender produces any new value through their own actions. Instead, their profits merely represent a transfer of wealth—a slice of the value produced elsewhere, in real production.

The enigma of profit’s origins within capitalism was a problem that had baffled and thwarted the classical economists, who maintained that profit was obtained in the process of exchange, like that of the merchant, by “buying cheap and selling dear.” But, as Marx pointed out, while such an act might allow one individual to swindle another, it could not explain how profit was derived for society as a whole. For in a generalized system of commodity production and exchange, we are all buyers and sellers. Even the capitalists are both sellers and buyers: of course they sell a product, but they must first buy in raw materials, invest in machinery, and pay out wages to workers. In other words, what is gained by “cheating” with one hand will simply be lost later with the other. One man’s loss is another’s gain and vice-versa.

Suppose then that some inexplicable privilege allows the seller to sell his commodities above their value, to sell what is worth 100 for 110, therefore with a nominal price increase of 10 percent. In this case the seller pockets a surplus value of 10. But after he has sold he becomes a buyer. A third owner of commodities now comes to him as seller, and he too, for his part, enjoys the privilege of selling his commodities 10 percent too dear. Our friend gained 10 as a seller only to lose it again as a buyer. In fact the net result is that all owners of commodities sell their goods to each other at 10 percent above their value, which is exactly the same as if they sold them at their true value. A universal and nominal price increase of this kind has the same effect as if the values of commodities had been expressed for example in silver instead of in gold. The money names or prices of the commodities would rise, but the relations between their values would remain unchanged (Marx, op.cit., 263).

The value in circulation has not increased by one iota; all that has changed is its distribution between A and B. What appears on one side as a loss of value appears on the other side as surplus value; what appears on one side as a minus appears on the other side as a plus . . . The capitalist class of a given country, taken as a whole, cannot defraud itself (Marx, op.cit., 265–66).

If not from the act of exchange and in the sphere of circulation, where then does profit come from? Our capitalist must begin with money, purchase commodities at their true cost, sell his product at a fair price, and yet end up with more money that he started with. “[O]ur friend the money owner,” therefore, “must be lucky enough to find within the sphere of circulation, on the market, a commodity whose use value possesses the peculiar property of being a source of value, whose actual consumption is therefore itself an objectification of labor, hence a creation of value” (Marx, op.cit., 270).

In other words, there must be a commodity that the capitalist can buy that itself is able to create value. And as Marx explains, “the possessor of money does find such a special commodity on the market: the capacity for labor, in other words labor power” (Ibid).

This labor power—the “capacity for labor”—is normally expressed in terms of employment for a given period of time. For example, workers are employed on contracts that specify a number of hours per week or weeks per year that they are due to work for the capitalist. How efficiently or how hard they work in this time—that is, how much they actually produce in a given week or year—is then a question for the capitalist to optimize separately. The capitalist pays for the worker’s time; it is then up to the capitalist to utilize this time as effectively as possible in order to produce as much as possible.

The qualitative leap forward by Marx, therefore, was to see that workers themselves are not only the buyers of commodities, but are also the sellers of a very special commodity: their labor power—their ability to work. What the capitalist buys from the worker, therefore, is not his/her actual labor, i.e., the products of his/her work, but his/her ability or capacity to work.

Like all other commodities, Marx explained, “The value of labor power is determined, as in the case of every other commodity, by the labor time necessary for the production, and consequently also the reproduction, of this specific article . . . in other words, the value of labor power is the value of the means of subsistence necessary for the maintenance of its owner” (Marx, op.cit., 274).

In monetary terms, the price of labor power is represented by the wages paid to the working class. This wage, therefore, must be able to cover the necessary expenditure for worker to maintain himself/herself, including food, shelter, clothing, healthcare, education. Furthermore, Marx emphasizes that the value of labor power must cover not only the expenditure of the individual worker, but also his/her family, and indeed the continued existence of the working class a whole.

The social wage necessary, therefore, is not simply that required for the bare minimal subsistence of the working class, but is that of a given social and historical situation, varying from country to country and from epoch to epoch. The working class, through a history of class struggle, has raised the expectation of what an average wage—and thus an average standard of living—should be. The value of labor power, therefore, is ultimately determined by a class struggle between the working class and the capitalist class; a struggle for higher wages on the side of the workers, and greater profits on the side of the capitalists.

The key to the capitalists’ profits lies in the ability of the workers to create more value in the course of the day than they are paid back in the form of wages. For example, while the working day may be eight hours, it might take only half the day—four hours—for workers to produce commodities with a value equivalent to their wages. In other words, the remaining four hours of the workers’ labor, from the perspective of the capitalists—are effectively “free,” and the products created in this period constitute surplus value.

The source of the capitalists’ profits then, lies not in exchange or circulation, but in production. Profits are obtained from this surplus value—the unpaid labor of the working class. The remaining surplus value, meanwhile, is divided up—in the form of rent and interest—between the various parasites that thrive off of the wealth created in real production: the landlords, usurers, and financiers.

It is the pursuit of profit, in turn, that acts as the motor force within capitalist society, with the competition to sell cheaper, capture markets, and increase profits driving investment into new technologies, in order to increase productivity. With the crash of 2008 and the years of crisis and worldwide economic stagnation that have followed, however, it is clear that this engine has stalled.

Continue to Part 3 . . .


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