This is part two of a three-part series reviewing the economic debate between marginalists and proponents of the labor theory of value. Click here to begin at the introduction and also find the table of contents/bibliography.

Menger still was aware of Marx and wrote briefly on his own criticisms of the LTV, so we will spend the first half of this section evaluating his comments:

There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labor or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command…The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.(Menger 1871, 146)¹

For those unaware, what Menger is referring to is the diamond-water paradox, a basic dilemma most value theories have to account for. Smith describes it as such:

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 any thing; 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. (Smith 1776, 26)²

The LTV’s most basic explanation for this phenomenon is that there is more labor involved in locating and extracting a diamond than there is with water. I’d argue this is an accurate, but still rather simple explanation. Menger’s response to this is that individual variations within the labour-time can completely skew the value. This is a glaring misinterpretation, one which Marx preemptively counters:

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 unskillful 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. (Marx 1867, 29)³

While Marx is referring to the extension of labour-time, we can still apply the same logic in reverse. The fact a diamond is stumbled upon by accident does not reflect on the socially-necessary labour-time as a whole, just like how taking an absurdly long time to weave a coat does not reflect on overall exchange value of coats in general.

Equally untenable is the opinion that the determining factor in the value of goods is the quantity of labor or other means of production that are necessary for their reproduction. A large number of goods cannot be reproduced (antiques, and paintings by old masters, for instance) and thus, in a number of cases, we can observe value but no possibility of reproduction. For this reason, any factor connected with reproduction cannot be the determining principle of value in general. Experience, moreover, shows that the value of the means of production necessary for the reproduction of many goods (old-fashioned clothes and obsolete machines, for instance) is sometimes considerably higher and sometimes lower than the value of the products themselves. (Menger 1871, 147)

Another point Menger raises is on the prices of non-reproducible goods, such as antiques. However, once again Menger misses the point here too. It is precisely because these goods cannot be reproduced, and are not being produced that gives the commodity a different character, and thus a different expression of value.

This isn’t something Marx simply overlooked; he acknowledges that commodities can circulate in different ways, but only one type of circulation is capable of generating capital.

What, however, first and foremost distinguishes the circuit C-M-C from the circuit M-C-M, is the inverted order of succession of the two phases. The simple circulation of commodities begins with a sale and ends with a purchase, while the circulation of money as capital begins with a purchase and ends with a sale. In the one case both the starting-point and the goal are commodities, in the other they are money. In the first form the movement is brought about by the intervention of money, in the second by that of a commodity…

The circuit C-M-C starts with one commodity, and finishes with another, which falls out of circulation and into consumption. Consumption, the satisfaction of wants, in one word, use-value, is its end and aim. The circuit M-C-M, on the contrary, commences with money and ends with money. Its leading motive, and the goal that attracts it, is therefore mere exchange-value. In the simple circulation of commodities, the two extremes of the circuit have the same economic form. They are both commodities, and commodities of equal value. But they are also use-values differing in their qualities, as, for example, corn and clothes…

The circuit C-M-C starts with one commodity, and finishes with another, which falls out of circulation and into consumption. Consumption, the satisfaction of wants, in one word, use-value, is its end and aim. The circuit M-C-M, on the contrary, commences with money and ends with money. Its leading motive, and the goal that attracts it, is therefore mere exchange-value. (Marx 1867, 105-106)

Let us say we’re working with an antique watch. When this watch was initially produced, it was produced through an M-C-M circuit. It was produced with capital, and then sold for money to be put towards capital once more. As a result, the character of circuit also effects the character of its value.

In simple circulation, C-M-C, the value of commodities attained at the most a form independent of their use-values, i.e., the form of money; but that same value now in the circulation M-C-M, or the circulation of capital, suddenly presents itself as an independent substance, endowed with a motion of its own, passing through a life-process of its own, in which money and commodities are mere forms which it assumes and casts off in turn. Nay, more: instead of simply representing the relations of commodities, it enters now, so to say, into private relations with itself. It differentiates itself as original value from itself as surplus-value; as the father differentiates himself from himself qua the son, yet both are one and of one age: for only by the surplus-value of £10 does the £100 originally advanced become capital, and so soon as this takes place, so soon as the son, and by the son, the father, is begotten, so soon does their difference vanish, and they again become one, £110.

Value therefore now becomes value in process, money in process, and, as such, capital. It comes out of circulation, enters into it again, preserves and multiplies itself within its circuit, comes back out of it with expanded bulk, and begins the same round ever afresh. (Marx 1867, 107-108)

Assuming the watch (purely considered in the form of an antique) has no labor expended on it, we see that it can only exist in the C-M-C circuit. One sells the watch, but the watch cannot be reproduced. Once the money is put towards the purchase of another commodity, the cycle terminates: this is not a capitalist relation, and it is to be expected the value holds a different character.

If one wishes to make a business that sells antiques, there must be at least some level of labor involved (discovery, restoration, delivery, etc.). It is only this labor that is able to give said antique a character that can exist within an M-C-M circuit.

2.1. The Meaning of Money

Menger dedicates a good portion of the book to the elephant in the room here: the existence of money. If we were talking purely in terms of a barter, then sure, Menger could stop with that passage alone. However, this is not the case, as money exists as visible evidence of some objective relation between goods.

“To express the exchange value of a particular good, it is evidently sufficient to state the quantity of another known commodity that is regarded as its equivalent. From this it can be seen that all kinds of goods that can be objects of trade are measured, so to speak, against one another, and that any one of them can serve as a yardstick for all the others.” Similar thoughts have been expressed by almost all other economists who come, like Turgot in the course of his famous essay on the origin and distribution of national wealth, to the conclusion that money, among all possible “measures of exchange value,” is the most suitable and hence also the most common.

The only defect of this measure is said to lie in the fact that the value of money is not fixed, but changeable, and that money therefore provides a reliable measure of “exchange value” for any given moment but not for different points in time. In my discussion of price theory, however, I have shown that equivalents of goods in the objective sense of the term cannot be observed anywhere in the economy of men (p. 193), and that the entire theory that presents money as the “measure of the exchange value” of goods disintegrates into nothingness, since the basis of the theory is a fiction, an error. (Menger 1871, 274)

Menger reconciles this with his previous claim by stating that money is not a measure of exchange value, but rather instead an approximation for the exchange-value of a commodity for a given moment. However, there is still a few things this fails to answer:

Under conditions of developed trade, the only commodity in which all others can be evaluated without roundabout procedures is money. Wherever barter in the narrow sense of the term disappears, and only sums of money (for the most part) actually appear as prices of the various commodities, a reliable basis for valuation in any but monetary terms is lacking. The valuation of grain or wool, for example, is relatively simple in terms of money. But the valuation of wool in terms of grain, or of grain in terms of wool, involves greater difficulties, if for no other reason than because a direct exchange of these two goods never takes place, or only in the rarest exceptional cases, with the result that the foundation for such a valuation, the respective effective prices, is wanting. A valuation of this kind is therefore usually only possible on the basis of a computation involving, as a prerequisite, the prior valuation of the two goods in terms of money. (Menger 1871, 275)

How does disproving a quantitative equality between goods necessarily disprove money’s role as a measure of value? The function itself still stands as a relation, it does not require that there is some sort of transcendent number each good is assigned, the only thing that is necessary is qualitative equality.

The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money. It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time. (Marx 1867, 67)

And then that brings us to the question of, what value is money representing? Yes, the value of money cannot be expressed by itself, but money is merely a representation of a relation; there’s something else which has to link these goods. Before we can delve into the quantitative equivalence Menger seems preoccupied with, we first have to make sure a relation can exist.

In order to discover how the elementary expression of the value of a commodity lies hidden in the value relation of two commodities, we must, in the first place, consider the latter entirely apart from its quantitative aspect. The usual mode of procedure is generally the reverse, and in the value relation nothing is seen but the proportion between definite quantities of two different sorts of commodities that are considered equal to each other. It is apt to be forgotten that the magnitudes of different things can be compared quantitatively, only when those magnitudes are expressed in terms of the same unit. It is only as expressions of such a unit that they are of the same denomination, and therefore commensurable. (Marx 1867, 35)

The emphasis on objective relations is more than just a semantic dispute: once we acknowledge said objectivity, value can no longer exist as a subjective phenomenon, but rather instead a relative one.

Whether 20 yards of linen = 1 coat or = 20 coats or = x coats – that is, whether a given quantity of linen is worth few or many coats, every such statement implies that the linen and coats, as magnitudes of value, are expressions of the same unit, things of the same kind. Linen = coat is the basis of the equation. But the two commodities whose identity of quality is thus assumed, do not play the same part.

It is only the value of the linen that is expressed. And how? By its reference to the coat as its equivalent, as something that can be exchanged for it. In this relation the coat is the mode of existence of value, is value embodied, for only as such is it the same as the linen. On the other hand, the linen’s own value comes to the front, receives independent expression, for it is only as being value that it is comparable with the coat as a thing of equal value, or exchangeable with the coat. (Marx 1867, 35)

When dealing in relative terms, everything that is brought into the relation becomes related to everything else, whether directly or indirectly. When Menger points out that grain and wool cannot be related due to there never being a direct relation, he neglects the transitive properties of said relations. Wool is related to grain, but it is through an intermediary (in this case, money) that they become indirectly related.

The linen, by virtue of the form of its value, now stands in a social relation, no longer with only one other kind of commodity, but with the whole world of commodities. As a commodity, it is a citizen of that world. At the same time, the interminable series of value equations implies, that as regards the value of a commodity, it is a matter of indifference under what particular form, or kind, of use value it appears. In the first form, 20 yds of linen = 1 coat, it might, for ought that otherwise appears, be pure accident, that these two commodities are exchangeable in definite quantities. In the second form, on the contrary, we perceive at once the background that determines, and is essentially different from, this accidental appearance. The value of the linen remains unaltered in magnitude, whether expressed in coats, coffee, or iron, or in numberless different commodities, the property of as many different owners. The accidental relation between two individual commodity-owners disappears. It becomes plain, that it is not the exchange of commodities which regulates the magnitude of their value; but, on the contrary, that it is the magnitude of their value which controls their exchange proportions. (Marx 1867, 42)

Despite him insisiting in the aforementioned quote (Menger 146) nature/measure of value being entirely subjective, we see himself admit that it is primarily relative. This is incredibly important because assuming relativity as opposed to subjectivity leaves us with a completely different understanding of how economics can and should be approached.

Wherever men live, and whatever level of civilization they occupy, we can observe how economizing individuals weigh the relative importance of satisfaction of their various needs in general, how they weigh especially the relative importance of the separate acts leading to the more or less complete satisfaction of each need, and how they are finally guided by the results of this comparison into activities directed tothe fullest possible satisfaction of their needs. (Menger 1871, 128)

When we ask ourselves what this objective relation is, the same relation that money represents, this “relative theory of value” finally becomes the “labour theory of value”.

If then, we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour. But even the product of labour itself has undergone a change in our hands. If we make abstraction from its use value, we make abstraction at the same time from the material elements and shapes that make the product a use value; we see in it no longer a table, a house, yarn, or any other useful thing. Its existence as a material thing is put out of sight. Neither can it any longer be regarded as the product of the labour of the joiner, the mason, the spinner, or of any other definite kind of productive labour. Along with the useful qualities of the products themselves, we put out of sight both the useful character of the various kinds of labour embodied in them, and the concrete forms of that labour; there is nothing left but what is common to them all; all are reduced to one and the same sort of labour, human labour in the abstract. (Marx 1867, 28)

The one thing that ties together all commodities is the fact that they all employ some level of human labour. This common characteristic acts as the true equivalent by which the exchange-value of all commodities are realized. Taking all of this into account, we can answer to Menger’s challenge here:

In my discussion of price theory, however, I have shown that equivalents of goods in the objective sense of the term cannot be observed anywhere in the economy of men (p. 193), and that the entire theory that presents money as the “measure of the exchange value” of goods disintegrates into nothingness, since the basis of the theory is a fiction, an error.

When a hundred weight of wool of given quality is sold in a particular transaction on a wool market for 103 florins, it is often found that transactions are taking place at higher and at lower prices on the same market and at the same time, at 104, 103 ½, and at 102 and 102½ florins, for example. Often too, while the buyers on the market declare themselves ready to “take” at 101 florins, the sellers simultaneously declare that they are willing to “offer” only at 105 florins. What, in such a case, is the “exchange value” of wool? Or, to state the same question in an inverse fashion, what quantity of wool is the"exchange value" of 100 florins, for example?

But a particular quantity of wool and a particular quantity of money(or any other commodity) that can mutually be exchanged for each other—that are equivalents in the objective sense of the term—can nowhere be observed for they do not exist. There can thus be no question of a measure of these equivalents (a measure of “exchange value”). (Menger 1871, 273)

There are a few things he does which may throw us off here:

• When Marx refers to money as a “measure of value”, he does not mean “price = exchange value”. Instead what it refers to is that price is an expression of exchange value. We’ll detail this distinction later.

• Menger gives us definite numbers here, but there still is not nearly enough information to make a quantitative judgement, despite the question goading the reader into attempting such.

• The questions and information given are already written in a fashion restricted to Menger’s economic framework. Both the scope and the factors he implies govern exchange value are all very much lined up in a fashion that is compatible with his theory.

Regardless, let us attempt to answer his questions to the best of our ability.

1. What has not changed is that the exchange-value of a commodity is governed by the amount of labour embodied within it, and this applies applies to the wool just as much as it does anything else.

   1. The buyers and sellers may have differing prices, but eventually they must come to an agreement. The variation in prices for each exchange don’t necessarily disprove the relation itself, as surplus value is flexible.

   2. Notice how the negotiated price only goes so far; flexible as surplus value is, if it approaches zero, the reproduction of such a commodity would be unsustainable. Because of this, the price is primarily governed by the forces of production, not consumption.

   3. Taking a step back, we should ask ourselves the following: why are both the sellers and the buyers entering with the expectation of a price around 100 florins? It’s because the exchange value is most likely reflected somewhere around that ballpark. The gravitation of price has to come back to some common factor, which is the labour embodied within each quantity of wool.

2. The exchange value of 100 florins cannot be expressed in terms of itself without falling into tautology. It is the equivalent in this scenario.

3. Just because the quantitative expression of value does not remain constant across all scenarios does not mean said value does not exist.

Following further research, I found that this point was actually echoed by Ernest Mandel⁴ in his rebuttal to Bohm-Bawerk’s critique⁵ of Marxian value theory:

The special nature of the neoclassical school is further emphasised by the fact that it was for a long time unable to determine the marginal value of capital goods. In the end it managed to do this only by introducing, with Böhm-Bawerk, the notion of a “roundaboutness” of production which becomes more and more intensified as capital goods increasingly enter into the process. a “roundaboutness” which has to be “paid for”. It is, moreover, unable to explain how, from the clash of millions of different individual “needs” there emerge not only uniform prices, but prices which remain stable over long periods, even under perfect conditions of free competition. Rather than an explanation of constants, and of the basic evolution of economic life, the “marginal” technique provides at best an explanation of ephemeral, short-term variations. It is significant that in Walras’s fundamental work he starts from the example of sellers and buyers “inclined to go in for bidding”, that is, to stock-exchange speculators.