Exchange value
Encyclopedia
In political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
and especially Marxian economics
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. The other three aspects are use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
, value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
and price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
.
Thus, a commodity has:
- a valueValue (economics)An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
- a use-value (or utilityUtilityIn economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
) - an exchange value
- a pricePrice-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
(it could be an actual selling price or an imputed ideal priceReal prices and ideal pricesReal prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour , and computed prices which are not actually charged or paid in market trade, although they may facilitate trade...
)
These four concepts have a very long history in human thought, from Aristotle
Aristotle
Aristotle was a Greek philosopher and polymath, a student of Plato and teacher of Alexander the Great. His writings cover many subjects, including physics, metaphysics, poetry, theater, music, logic, rhetoric, linguistics, politics, government, ethics, biology, and zoology...
to David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
, becoming ever more clearly distinguished as the development of commercial trade progressed. This entry focuses on Marx's summation of the results of economic thought about exchange-value.
Exchange value and price according to Marx
Strictly speaking, the exchange value of a commodity is for Marx not identical to its price, but represents rather what (quantity of) other commodities it will exchange for, if traded.Exchange-value does not need to be expressed in money-prices necessarily (for example, in countertrade where x amount of goods p are worth y amounts of goods q). Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
makes this abundantly clear in his dialectical derivation of the forms of value in the first chapters of Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
(see value-form
Value-form
The value-form or form of value is a concept in Karl Marx’s critique of the political economy. It refers to a socially attributed characteristic of a commodity which contrasts with its tangible use-value or utility .The concept is introduced in the first chapter of Das Kapital where Marx argues...
).
Actually, the word "price" came into use in Western Europe only in the 13th century AD, the Latin root meaning being "pretium" meaning "reward, prize, value, worth," referring back to the notion of "recompense", or what was given in return, the expense, wager or cost incurred when a good changed hands. The verb meaning "to set the price of" was used only from the 14th century onwards.
The evolving linguistic meaning
Linguistic meaning
The nature of meaning, its definition, elements, and types, was discussed by philosophers Aristotle, Augustine, and Aquinas. According to them 'meaning is a relationship between two sorts of things: signs and the kinds of things they mean '. One term in the relationship of meaning necessarily...
s reflect the early history of the growing cash economy, and the evolution of commercial trade. Nowadays what "price" means is obvious and self-evident, and it is assumed that prices are all one of a kind. That is because money has become used for nearly all transactions. But in fact there are many different kinds of prices, some of which are actually charged, and some of which are only 'notional prices
Real prices and ideal prices
Real prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour , and computed prices which are not actually charged or paid in market trade, although they may facilitate trade...
.' Although a particular price may not refer to any real transaction, it can nevertheless influence economic behavior, because people have become so used to valuing and calculating exchange-value in terms of prices, using money.
Exchange value and commodification
In the first chapters of Das KapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, Marx traces out a brief logical summary of the development of the forms of trade, beginning with barter and simple exchange, and ending with a capitalistically produced commodity. This sketch of the process of "marketisation" shows that the commodity form is not fixed once and for all, but in fact undergoes a development as trade becomes more sophisticated, with the end result being that a commodity's exchange-value can be expressed simply in a (notional) quantity of money (a money price).
However, the transformation of a labor-product into a commodity (its "marketing") is in reality not a simple process, but has many technical and social preconditions. These often include:
- the existence of a reliable supply of a product, or at least a surplus or surplus productSurplus productSurplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
. - the existence of a social need for it (a market demand) that must be met through trade, or at any event cannot be met otherwise.
- the legally sanctioned assertion of private ownership rights to the commodity and the right to trade it.
- the enforcement of these rights, so that ownership is secure.
- the transferability of these private rights from one owner to another.
- the (physical) transferability of the commodity itself, i.e. the ability to store, package, preserve and transport it from one owner to another.
- the imposition of exclusivity of access to the commodity.
- the possibility of the owner to use or consume the commodity privately.
- guarantees about the quality and safety of the commodity, and possibly a guarantee of replacement or service, should it fail to function as intended.
- the ability to produce the commodity at a cost and sale-price sufficient to yield an adequate and predictable income or profit.
- the ability to produce and trade a commodity without too much risk of a type that would undermine the business.
Thus, the commodification
Commodification
Commodification is the transformation of goods, ideas, or other entities that may not normally be regarded as goods into a commodity....
of a good or service often involves a considerable practical accomplishment in trade. It is a process that may be influenced not just by economic or technical factors, but also political and cultural factors, insofar as it involves property rights, claims to access to resources, and guarantees about quality or safety of use.
"To trade or not to trade", that may be the question. The modern debate in this regard focuses often on intellectual property rights because ideas are increasingly becoming objects of trade, and the technology now exists to transform ideas into commodities much more easily.
In absolute terms, exchange values can also be measured as quantities of average labour-hours. By contrast, prices are normally measured in money-units. For practical purposes, prices are however usually preferable to labour-hours, as units of account, although in capitalist work processes the two are related to each other (see labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
).
Marx's quote on commodities and their exchange
Marx's view of commodities in CapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
is illustrated by the following quote:
- “We have seen that when commodities are in the relation of exchange, their exchange-value manifests itself as something totally independent of their use-value. But if we abstract from their use-value, there remains their value, as has just been defined. The common factor in the exchange relation, or in the exchange-value of the commodity, is therefore its value.” (Vintage/Penguin edition, p. 128, chapter 1, §1, para. 12)http://www.marxists.org/archive/marx/works/1867-c1/ch01.htm#S1
This first part says that the value of commodities as they are exchanged for each other –- or when stated in terms of money units, their prices –- are very different from their value in use to human beings, their use-value.
Next, Marx describes how he had abstracted from the differences in use-value and thus from the concrete differences amongst commodities, looking for their shared characteristics. He famously claimed to find that what's left is that all commodities have value (or "labor-value"), the abstract labor time needed to produce it. That is, all commodities are social products of labor, created and exchanged by a community, with each commodity producer contributing his or her time to the societal division of labor. Each commodity is a social product by nature.
Third, value is not the same thing as exchange-value (or price). Rather, the value is the shared characteristic of the exchange-values of all the commodities. He calls this the “common factor,” whereas someone else might call it the “essence.” In contrast, the exchange-value represents the appearance or "form" of expression of value in trade. Just as with used cars, the shiny appearance may differ radically from the lemony essence. In fact, one of his major themes (the theory of “commodity fetishism
Commodity fetishism
In Marx's critique of political economy, commodity fetishism denotes the mystification of human relations said to arise out of the growth of market trade, when social relationships between people are expressed as, mediated by and transformed into, objectified relationships between things .The...
”) is that the system of commodity exchange that dominates capitalism obscures the class nature of that institution.
To Marx, the "exchange value" of a commodity also represents its owner's purchasing power, the ability to command labor, i.e., the amount of labor time that is claimed in acquiring it. This aspect appears not only in the modern services economy, but in the market for tangible goods: by purchasing a good, one is gaining the results of the labor done to produce it, while one is also commanding (directing) labor to produce more of it.
Exchange value and the transformation of values into prices
In volumes I and II of CapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, Marx usually assumed that exchange values were equal to values, and that prices were proportional to values. He was talking about overall movements and broad averages, and his interest was in the social relations of production
Relations of production
Relations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...
existing behind economic exchange. However, he was quite conscious of the distinction between the empirical and microeconomic concept of prices (or exchange values) and the social concept of value. In fact he completed the draft of volume 3 of Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, before he published volume 1.
Despite this, the fruitless search for a quantitive relationship allowing the logical derivation of prices from values (a labor theory of price) with the aid of mathematical functions has occupied many economists, producing the famous transformation problem literature.
If, however, prices can fluctuate above or below value for all sorts of reasons, Marx's law of value
Law of value
-General:The law of value is a central concept in Karl Marx's critique of political economy, first expounded in his polemic The Poverty of Philosophy against Pierre-Joseph Proudhon, with reference to David Ricardo's economics...
is best seen as a "law of grand averages", an overall generalisation about economic exchange, and the quantitative relationships between labour hours worked and real prices charged for an output are best expressed in probabilistic terms.
One might ask, how can "value" be transformed into "price" if a commodity by definition already has a value and a price? To understand this, one needs to recognise the process whereby products move into markets and are withdrawn from markets. Outside the market, not being offered for sale or being sold, commodities have at best a potential or hypothetical price. But for Marx prices are formed according to pre-existing product-values which are socially established prior to their exchange.
Marx sought to theorise the transformation of commodity values into prices of production
Prices of production
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
within capitalism dialectically, as a "moving contradiction": namely, in capitalism, the value of a commodity output produced encompassed both the equivalent of the cost of the used inputs which were initially bought to produce it, as well as a gross profit component (surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
) which became definite and manifest only after the commodity has been sold and paid for, and after costs were deducted from sales. Value was, as it were, suspended between the past and the future.
An output with a certain value was produced, but exactly how much of that value would be subsequently realised upon sale in markets was usually not known in advance. Yet, that potential value also strongly affected the sales income that producers could get from it, and moreover that value was determined not by individual enterprises, but by all enterprises producing the same type of output for a given market demand ("the state of the market"). The business results of each enterprise were influenced by the overall effects created by all enterprises through their productive activity, as an ongoing process.
This simple "market reality" has stumped many of Marx's interpreters though; they fail to see that value is conserved, transferred and added to by living labor, between the initial purchase of inputs with money on the one side, and the subsequent sale of outputs for more money, on the other. They see only input prices and output prices, or cost-prices and sale-prices, and not the creation of a product which already has a value prior to being exchanged at a certain price - a value which is moreover socially determined by a group of enterprises together, and which sets limits for price fluctuations.
For that reason, the whole process of the formation of value which Marx so carefully lays out, with its complex determinants, seems like an unnecessary detour from commercial wisdom. If, however, we wish to understand the "deep structure" of market behavior, then we rapidly confront all the issues that Marx was concerned with.
Other theories of exchange value
In modern neoclassical economicsNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, exchange value itself is no longer explicitly theorised. The reason is that the concept of money-price is deemed sufficient in order to understand trading processes and markets. Exchange value thus becomes simply the price for which a good will trade in a given market. These trading processes are no longer understood in economics as social
Social
The term social refers to a characteristic of living organisms...
processes involving human giving and taking, getting and receiving, but as technical processes in which rational, self-interested economic actors negotiate prices based on subjective perceptions of utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
. But armed only with prices and subjective preferences, it becomes difficult to understand market realities. Professor John Eatwell has summarised the overall result of this approach as follows:
Among the very few attempts in the modern era to genuinely theorise economic exchange is the autodidactic businessman Alexander Gersch. Gersch writes in the preface to his book:
.
However, in paragraph 101 on p. 631 he arrives at a concept of exchange value not very different from Marx's, voicing the splendid non sequitur
Non sequitur (logic)
Non sequitur , in formal logic, is an argument in which its conclusion does not follow from its premises. In a non sequitur, the conclusion could be either true or false, but the argument is fallacious because there is a disconnection between the premise and the conclusion. All formal fallacies...
that "Economics must take into account both the objective and the subjective background of exchange value because these interact."
See also
- labor theory of valueLabor theory of valueThe labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
, - use valueUse valueUse value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
, - Value-form (Marxism)
- Real prices and ideal pricesReal prices and ideal pricesReal prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour , and computed prices which are not actually charged or paid in market trade, although they may facilitate trade...
- value in economicsValue (economics)An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
- law of valueLaw of value-General:The law of value is a central concept in Karl Marx's critique of political economy, first expounded in his polemic The Poverty of Philosophy against Pierre-Joseph Proudhon, with reference to David Ricardo's economics...
- prices of productionPrices of productionPrices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
- Natural economyNatural economyNatural economy refers to a type of economy in which money is not used in the transfer of resources among people. It is a system of allocating resources through direct bartering, entitlement by law, or sharing out according to traditional custom...
Literature
- Karl Marx, Das KapitalDas KapitalDas Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
. - Makoto Itoh, The Basic Theory of Capitalism.
- Alexander Gersch, On the Theory of Exchange Value.
- David Ricardo, The Principles of Political Economy and Taxation.
- James Heartfield, The Economy of time http://www.heartfield.pwp.blueyonder.co.uk/economy.pdf