The labor theory of value does not mean that the labor-hour is the natural unit of socialist calculation

Labor-money and socialist planning
(part two)

by Joseph Green
(from Communist Voice #26, May 1, 2000)



Reviewing part one
The annual cycle of production
--The "Economic Table" of the Physiocrats--
--Marx's analysis in Volume II of Capital--
--Soviet material balances and Western input-output methods--
The incommensurability of living and past labor
--Circulating goods--
--Fixed goods--
--Capital as the domination of dead labor over living labor--
Contradictions inherent in labor-hour calculation
--As a measure of material abundance--
--As a measure of efficiency--
--The environment and things of zero labor content--

Reviewing part one

. The first part of this article concentrated on the history of the attempts to replace the dollar by the labor-hour. The labor theory of value was first put forward by such bourgeois economists as Adam Smith and David Ricardo, who held that prices averaged around the labor-content of a product. This was taken by many early socialists to contradict the overall standpoint of bourgeois economics, and to prove the justice of the working class cause. Moreover, they also thought it showed that the working masses could be liberated from capital if only buying and selling were based on equal exchange according to the labor-value of the products. A number of labor-exchange bazaars, people's banks and other institutions were founded, based on using labor-money rather than ordinary money.

. A number of anarchists had the same idea. For example, Pierre-Joseph Proudhon, famous for his ringing declaration that "property is theft", also declared that "property is freedom", if only it is based on fair exchange based on using the labor-hour rather than the franc. Josiah Warren, the father of American individualist anarchism, had the same idea, and founded what he called a "Time Shop", where goods were bought and sold according to their labor content. To this day, there are a number of community activists, whether reformist, anarchist or sentimental socialist, who are involved in plans for alternative currency schemes, often based on the labor-hour.

. Marx and Engels brought something new to the socialist interpretation of the labor theory of value. They held that the working class was exploited even when both labor and goods were bought and sold at their value. They showed that the repeated failure of plans for labor-money, and for buying and selling goods according to their true value, weren't due to individual defects in these plans, but to the impossibility of making the market behave in a way that went against its very nature. Marx and Engels showed that socialism required not the reform of the market according to a better system of pricing or value, but the replacement of private ownership of the means of production with social ownership, and the replacement of the market with production according to a unified plan. The law of value was neither to be followed more exactly than under capitalism, nor was it to be reformed, but it was to be overcome and replaced by social planning.

. Particularly notable was Engels's polemic against Duhring, who envisioned a "socialitarian society" based on communal production in "economic communes" that embraced entire localities. Unlike many earlier plans for equal exchange, Duhring's plan differed from ordinary free-market exchange as much in its way as did the state-capitalist economies of the old Soviet bloc. In the system that Duhring envisioned, no individual owned the means of production. Nor was there an ordinary marketplace, because exchanges between communes took place through the intermediary of vast "trading communes", who were the ultimate owners of all productive facilities, and pooled the available goods. Although ordinary money was to be used, goods were to be priced strictly according to their labor-content, which Duhring held was their true or "absolute value". Whether it was a matter of exchange between communes, or of how the communes related to their members, there was always to be an exchange of "equal labor against equal labor".

. Nevertheless, Engels held that the maintenance of the rule of the exchange of "equal labor against equal labor" was sufficient to subject Duhring's system to the law of value, and hence ensure the development of inequality and of the various marketplace and capitalist ills. It didn't matter that, in Duhring's system, price was not determined by market fluctuations, but directly by an estimate of the labor-content of each product. So long as what each commune gave up to other communes was a mass of products worth precisely as much social labor as the products which it received from other communes, no more and no less, and so long as the same rule applied between each commune and its members, Engels held that this system was ruled by the capitalist law of value.

. Engels's polemic would appear to strike at most plans for carrying out economic calculation in labor-hours, if these plans involved enterprises or localities keeping an equal balance of labor-hours in and labor-hours out. However, Engels's polemic has been taken by other activists to have a different meaning. Probably one widespread interpretation is that, Engels having ridiculed Duhring's use of metallic money (such as gold and silver coin) in his ideal society, the main problem of the "socialitarian system" was that Duhring's communes measured the labor-content of goods indirectly as an amount of some metal, rather than keeping their accounts directly in labor-hours. (We will return to this point in part three of this article.)

. By the end of the nineteenth century there were thus a number of different conceptions of the relationship of labor-money and the law of value to socialism. Yet a new twist was added in 1902 when one of the leading theoreticians of the Second International, Karl Kautsky, sketched his conception of a socialist society that had overcome value in his essay The Day After the Revolution. Kautsky dealt only with the first steps away from capitalism, and he described an economy where money was still being used and different forms of ownership of the means of production still existed, and yet he assumed that this economy was already socialist, and not simply a transitional stage preparing conditions for socialism. So he tried to prove that money and the marketplace were compatible with socialism. For example, he claimed that the law of value could be overcome, although buying and selling continued, if only prices did not conform to value.

. This turned on its head earlier (and equally erroneous) theories that had looked towards prices conforming to value as liberation from capitalism. On this question, Kautsky anticipated the erroneous views later developed by such diverse figures as the Trotskyist Preobrazhensky and his murderer, Stalin, both of whom also held that the deviation of price from value, or at least from the pricing policies that prevailed in the Western market-capitalist countries, showed that the Soviet economy was overcoming the law of value. Preobrazhensky claimed in his main work, The New Economics (1926), that the use of money and financial categories in the Soviet state sector was purely formal, and of little consequence, so that "it is quite wrong to say: the field in which exchange of goods for money prevails=the degree of importance of the law of value"(1), and this foreshadowed Stalin's well-known advocacy of a supposedly socialist type of "commodity exchange" in his pamphlet Economic Problems of Socialism in the USSR (1952).

. The Bolshevik revolution of 1917 and the development of Leninism led to a renaissance in communist theorizing. The experience of overthrowing the capitalist class politically, and seeking to supplant it economically, caused a rapid evolution of ideas concerning the transition to socialism. But the plans of several Soviet economists to replace the ruble with the labor-hour came to naught: the attempt to develop economic calculation in labor-hours proved to be a sterile offshoot of communist theory. Instead the attempt to direct and transform the economy as a whole led towards the development of what eventually became the method of "material balances".

. Unfortunately, the Bolshevik revolution was eventually overwhelmed, and degenerated into Stalinist state-capitalism, which was neither socialism nor a stage on the road towards socialism. This was a new type of capitalism, albeit one whose institutions differed from those of free-market capitalism. As such, it too shed a new light on economics, as did the earlier evolution of the capitalist system to monopoly and imperialism. It was during the period of Soviet state-capitalism that the method of material balances received its elaboration. It thus wasn't used for socialist planning, but for state-capitalist planning, and it existed side-by-side with financial methods. But it represented an attempt to run the economy as a whole, and it is notable that this required going beyond planning by use of a single index, whether money or labor-hours.

. Living in capitalist society, we are used to economic calculations made via money and pricing. It is not hard to imagine dollar prices being different from what they are now; here too we have experience from capitalist society, where revolutions in pricing take place every so often. It is not even particularly hard to imagine how economic calculations might be made if labor-hours replaced dollars. A system which uses prices, but not marketplace prices, is also fairly readily conceivable. One might imagine a system where production is planned, rather than being oriented by the marketplace, but the planners are guided by "prices" in some unit, perhaps labor-hours, that indicate the economic effort, or "cost", needed to produce something. But what is beyond most people's experience is any example of a system where economic calculation is made via a method that doesn't rate each product via a single number, such as a "price", whether expressed in dollars, labor-hours, or any other unit.

. Well, we are used to examples of free distribution, but this doesn't deal with the question of economic calculation. For example, consider a public library--and make due haste to consider it, in case the miserable neo-liberal hacks eliminate this useful institution in their next round of privatizations. One can check out a book without paying a fee: the decision whether to check out one or several books has to do with how much time one will have to read them, not with one's pocketbook. But the public library is financed through taxes, and it itself has to spend money to buy books and to pay salaries. It may provide a free service to its patrons, but the calculations that determine how many books it has, how many hours it is open, and how large a building it can occupy, are mainly done in dollars. So this and other free public services don't provide an example of an alternative model of economic calculation, because the supply of these public services is based on financial resources.

. It is thus difficult for us, living under capitalism, to imagine economic calculation unless each product has either a "price", or a "weight", or a "cost", and is thus measured on some numerical scale. This is one of the main reasons for the persistence of the idea of replacing the dollar with the labor-hour. This also lends importance to examining the method of material balances, because here is an example of economic calculation that does not use a single scale. Once one gets used to the logic behind the method of material balances, one begins to understand that measuring a product according to a single number is artificial, and at best an approximation to the real economic costs of production.

. The reader might well consider rereading the section of part one entitled "One, two, three, many natural units (the method of material balances)" before continuing with part two. In brief, the method of "material balances" has gone through a number of variations, but its basic logic is that a product is associated, not with a single number (a "scalar quantity", as it is called in mathematical lingo), but with a list of numbers that correspond to all the inputs that go into its production (a "vector"). Thus, for example, a tractor is associated with the amount of steel that goes into production, the amount of energy used up in its manufacture, the amount of labor directly used in its production, and so forth. Each different input has to be kept track of separately. The number of labor-hours directly used in the manufacture of the tractor is only one of several inputs.(2)

. This completes our summary of part one. Part two will move from the history of the attempt to use labor-hours as the bottom line in economic calculation to additional theoretical considerations about why this won't provide a basis for communist economic calculation.

The annual cycle of production

. Communist economic calculation involves planning the economy as an integrated whole. To see what this requires, it helps to make use of the concept of a yearly productive cycle, which we may, for convenience, assume to start on January 1 and end on December 31. One begins such a cycle with so many workers, so much food and other consumer goods, and so much means of production, such as raw materials, equipment, factories, etc.

. "Fixed goods", such as factory buildings and most machinery, are necessary for production, but remain basically unchanged while production proceeds, and continue to exist for many years.(3) One assumes that any new "fixed goods" created during the productive cycle (such as new factories) can only go into operation in the next productive cycle: thus the stock of "fixed goods" at the beginning of the cycle sets an upper limit on what can be produced in the current cycle. It is also assumed that the number of possible workers does not increase during a cycle, so that the total workforce of all productive enterprises can't exceed this number. "Circulating goods"(4) are used up and must be replaced while the cycle of production proceeds: raw materials are used up and must be replaced if production is to continue; food is eaten and must be replaced if the population is to continue to exist.

. Furthermore, in considering a cycle, one often considers that the entire production of "circulating goods" during the last cycle exists as a massive stockpile or inventory at the beginning of the current cycle. During the current cycle, the stockpiles gradually run down, as people eat and factories, farms, and other workplaces use the necessary inputs in order to produce things. One assumes that it takes precisely one year (one cycle) for new production of any product to be finished, and then one considers how the entire cycle's product is divided. This total product has to include sufficient maintenance to keep the fixed goods in running conditions, and sufficient "circulating goods" to replace the consumption of "circulating goods" during the year. Moreover, if production isn't simply to be maintained, but to be expanded during the next cycle, the total product of the present cycle has to also contain sufficient additional materials to provide for this expansion, such as new "fixed goods" (new factories, additional equipment, etc.).

. The annual cycle provides a simplified way of tracking the interconnections of the different spheres of production, of seeing what level of production can actually be carried out, and seeing how far the results of a year's production provides the conditions for resuming, and possibly increasing, production the next year. Clearly this is a vast simplification. New factories and other "fixed goods" don't always begin operation on the first day of the cycle, say January 1, but open at any time during the year. Moreover, according to the picture drawn in the cycle, all production, even of "circulating goods", takes exactly one year. One may regard the entire stock of last year's production as a stockpile for the next cycle, and check to see whether the current cycle's production is capable of restoring what is used up from this stockpile during the year. Reality is far more complex, as an actual material cycle of production varies tremendously from product to another, rather than simply taking one year. Some things can be produced in a few minutes, assuming that the raw materials, equipment and workers are available. Large construction projects, on the other hand, might take many years to finish. Moreover, the cycles in each enterprise don't really start and end at the same time. Instead there are thousands and thousands of cycles of various lengths, beginning and ending on every possible day, mixed together like a mass of spaghetti.

. Nevertheless, by considering the economy as a whole, and all its subordinate parts, as going through a common yearly cycle, one can study a number of important economic phenomena that don't appear when just studying an individual enterprise. The very simplification involved in the conception of the yearly cycle allows some of the new features that only appear when planning an entire economy, rather than a single enterprise, to be stripped of unnecessary complications and seen more clearly. It will be apparent, after studying the productive cycle, that adding into one's picture the complications that exist in a real economy, with its complex interlocking mesh of cycles, will only strengthen the case for the existence of these new features. Moreover, the model of a single yearly cycle is so useful that a good deal of practical statistical work in economics probably will always be devoted to approximating a real economy by one with a cycle of some definite length.

. This standpoint, of the annual productive cycle of the entire economy, is different from that adopted in most explanations of the law of value and the origin of surplus value. One generally starts by examining an enterprise in isolation, and considering how much capital the owner starts with, how it is increased through the productive process, how this increase comes through the workers' labor, etc. One assumes that if the owner has the necessary financial capital, he can obtain the machinery he needs, and hire labor. And one assumes that he can sell his product at its value. And from there, one shows how profit arises from the very process of capitalist production itself, and not simply by cheating at the marketplace. The economy as a whole is seen simply as the sum of many individual enterprises, without worrying too much about the connection between these enterprises. Attention is paid to the struggle of capitalists and workers over the price and availability of labor-power, but otherwise it is simply taken for granted that each individual capitalist can find whatever supplies his (or her, but in present-day capitalism, still mainly his) enterprise needs from the production of other enterprises, and that he can sell his goods on the market.

. This is essentially what is done in volume I of Marx's Capital, and it leads to important conclusions about the origin of surplus value in the productive process itself (and not in buying and selling); about the struggle between the workers and capitalists; about such prerequisites for the development of capitalism as stripping the working masses of the ownership of the means of production; and so forth.

. But, for our purposes, we have to take the next step, which is to examine the full cycle of production. At the beginning of volume II of Capital, Marx says that "the circular movement of capital takes place in three stages". In the first stage the capitalist appears on the labor-market to find his laborers, and on the commodity-market to find the raw materials and other prerequisites of production. The second stage is the actual process of producing something, as opposed to the first and third stages which concern only buying and selling things (the process of circulation). And the third stage sees the capitalist return to the market and seek to sell his product. Marx points out that "The first and third stages were discussed in Book I only in so far as this was necessary for an understanding of the second stage, the process of production of capital." And he later elaborates that this means that

"It was presupposed that on the one hand the capitalist sells the product at its value and on the other that he finds within the sphere of circulation the objective means of production for restarting or continuing the process. The only act within the sphere of circulation on which we have dwelt was the purchase and sale of labor-power as the fundamental condition of capitalist production."(5)

. Volume II of Capital adds consideration of the first and third stages, but--at first--still considers them only from the point of view of an individual enterprise or capitalist. Marx writes that "in both the first and the second Parts [of Volume II] it was always only a question of some individual capital, of the movement of some individualised part of social capital."(6)

. But the latter part of Volume II goes on to take up "the reproduction and circulation of the aggregate social capital", that is, of the entire economy. At this point, Marx no longer assumes that the capitalists can find on the market the goods that they need, or that they can sell their products. Instead, he investigates the conditions that must be satisfied if this buying and selling is to take place. This is the capitalist version of the problem that, in communist society, consists of having the social plan ensure that each workplace produces what is needed, and in the proper quantity, and moreover that each workplace has received sufficient raw materials, equipment, and other necessities so that it can actually carry out this production. Under capitalism, all the means of production are capital, so what is the cycle of production under communism appears as the cycle or circuit of the aggregate social capital under capitalism.

. We will return to Marx's discussion of the circuit of the aggregate social capital in a moment, because Marx's discussion contains, in embryo, the key point about planning that underlies this entire article. But for the moment, we will dwell a bit on the history of the concept of a yearly productive cycle.

--The "Economic Table" of the Physiocrats--

. The Physiocrats, an 18th century trend of political economy in France, were the first economists to raise the issue of the cycle of production of an entire country. Francois Quesnay's Tableau Economique was a milestone in economic theorizing. It presents the economic life of France as a yearly cycle. It takes the start of the cycle as the result of the last year's production, and it refers to the stores of agricultural and industrial commodities and of money that exist at the beginning of the cycle.

. It wasn't a matter of arbitrary choice that the Physiocrats took the productive cycle to last one year. Not only were the majority of the French people rural in those days, but the Physiocrats believed that agriculture was the sole economic activity that produced a surplus. So they based their picture of the economic cycle on the agricultural cycle. Moreover, as they presumably took the main agricultural activity as growing a crop with a yearly harvest, it was natural for them to regard the entire year's product as aggregated together into a large stockpile. After the harvest, one has the entire crop together at a single time. No more crop is going to be added until the next harvest. The existing crop has to suffice for food for the entire year until the next harvest, as well as provide seed so the next crop can be planted. This makes it natural to consider a year's product as a single whole, which then is divided into various parts which are used for different purposes and circulate among different sections of the population. This was probably almost literally true for French agriculture of that time (although some crops do have more than one harvest a year, while farm animals may be slaughtered at different times in the year). It turns out to be a useful simplification for the rest of the economy.

. The Tableau Economique analyzes only the case of what Marx calls "simple reproduction" (the case of one cycle following another without any change in the size of the economic product), so it pays little or no attention to the "fixed goods", which can in this case be regarded as essentially unchanging. It sketches how the marketable produce of the previous year circulates among the different classes of society and is used up, and how money circulates. It seeks to show how, as a result of the current year's production, the stores of commodities and of money are restored and economic life can continue the next year.

. The Physiocrats used this conception of the productive cycle to illustrate their view of the source of the national economic surplus. The Physiocrats held that this surplus-value (which they called the "net product") originated, not in the process of buying and selling goods, nor from having a favorable balance of trade with other countries, but in the course of production. Since the Physiocrats held that industrial production did not add to existing wealth, but simply preserved already existing wealth in an altered form, they believed that this surplus only originated from agricultural production.

. Thus Marx points out that the Tableau Economique went well beyond simply tracing the flow of money from one place to another during the year. It connected these flows to the production of material goods, and their transfer from one section of the population to the other. Marx states that

. "The first point to note in this Tableau, and the point which must have impressed his [Quesnay's] contemporaries, is the way in which the money circulation is shown as determined purely by the circulation and reproduction of commodities, in fact by the circulation process of capital."(7)

. Perhaps it might be asked, how is this conception of the annual cycle of production different from past conceptions? Didn't people, firms and governments previously check their budgets from time to time and note whatever changes took place in them? But a picture of the productive cycle is something far beyond simply checking one's budget each year. It's one thing to note that one's income is down, and that one has to raise taxes or otherwise step up the plunder of one's serfs or subjects to make up for it. It's another to study how the different incomes in society relate to productive activities, and to seek to identify how a surplus is formed as a result of these activities. This difference in conception can also be illustrated by the way that the stock market is usually discussed in the media today. It is regarded as simply the source of financial gain (or loss), and how much it goes up or down each year is noted. Naturally, it will also be noted whether this or that economic event will affect it, but it's not good form to ponder where the capital gains in the stock market really come from, and how they relate to the labor of tens of millions of workers in the economy.

. The Tableau Economique came in several forms, but in any form, it was small. The versions analyzed by Marx each comprise about half a dozen lines, with three columns, and few of the lines had all the columns filled in. There were linking lines between various of the entries in this table, each link indicating a flow from one entry to another.(8) No doubt the French economy was simpler in those days than today, yet it still embraced a large number of different products. There was no way such a tiny table could embrace its detailed complexity.

. But the interest of the Physiocrats in the cycle of production was different from ours in this article. They had no intention of seeking to plan the production of various enterprises, and indeed were the first school of economists that popularized the phrase laissez-faire, laissez-passer. The Tableau Economique aimed at analyzing and perfecting commodity production, not planing a replacement for it. In analyzing commodity production, the Physiocrats wanted to show the flow of wealth and of products between what they saw as the major classes of French society.(9) Whatever the major errors of the Physiocrats in identifying these classes (for example, they obscured the antagonistic interests of workers and capitalists), a commodity economy should indeed be analyzed in terms of its division into classes. Marx approvingly points out that, in the Tableau Economique, "The innumerable individual acts of circulation are at once brought together in their characteristic social mass movement--the circulation between great functionally determined economic classes of society."(10)

. The Physiocrats were not socialists, but bourgeois economists. But Marx, while scathingly condemning the justifications for exploitation and the hiding of the crimes of capitalism by all bourgeois economists, never hesitated to appreciate any scientific understanding of the economy that some of them may have uncovered. With respect to the Physiocratic conception of the Tableau Economique, which included both the presentation of economic life as based on a cycle of production and an attempt at analyzing the various phases of this cycle, he stated that, coming "when political economy was in its infancy", it was "an extremely brilliant conception, incontestably the most brilliant for which political economy had up to then been responsible."(11)

--Marx's analysis in Volume II of Capital--

. Now let's return to Marx's own analysis of the circuit of the total capital of the economy. The key point of concern to us is that this involves not just considering the value of the various components of the total capital, but their actual physical form. Marx points out that

. "So long as we looked upon the production of value and the value of the product of capital individually, the bodily form of the commodities produced was wholly immaterial for the analysis, whether it was machines, for instance, corn, or looking glasses. It was always but a matter of illustration, and any branch of production could have served that purpose equally well. . . . So far as the reproduction of capital was concerned, it was sufficient to assume that that portion of the product in commodities which represents capital-value finds an opportunity in the sphere of circulation to reconvert itself into its elements of production and thus into its form of productive capital; just as it is sufficient to assume that both the labourer and the capitalist find in the market those commodities on which they spend their wages and the surplus-value. This merely formal manner of presentation is no longer adequate in the study of the total social capital and of the value of its products. The reconversion of one portion of the value of the product into capital and the passing of another portion into the individual consumption of the capitalist as well as the working-class form a movement within the value of the product itself in which the result of the aggregate capital finds expression; and this movement is not only replacement of value, but also a replacement in material and is therefore as much bound up with the relative proportions of the value-components of the total social product as with their use-value, their material shape." (emphasis added)(12)

. Thus, under capitalism, consideration of the annual cycle of the entire economy forces consideration of the physical nature, the material specificity, of each product, and not just of its value. Similarly, the study of the annual cycle of a marketless or communist economy requires considering the physical nature of each good. So one can't simply measure each good by a single index (such as the labor-content)--as this would negate the material differences between different goods as measurement by a single index means regarding these goods as differing only quantitatively. This is a key point which shows that simply replacing dollars with labor-hours doesn't suffice to allow communist planning of an entire economy.

. Thus, when Marx analyzes the economic relations that have to be fulfilled for the annual cycle to take place, he divides the economy into parts, according to the physical nature of what each section of the economy produces. The main division he makes, a division that is particularly important, is into what Marx calls "Department I", which produces the means of production, and "Department II", which produces consumer goods. The basic formulas for the value of the product in terms of the original capital and surplus value have to be written separately for the two departments. Let's see what this means by first writing the formula for the value of the product of an individual enterprise, and then seeing how this formula splits up into additional formulas when one deals with the entire economy.

. Now, when dealing with a single enterprise by itself, it is sufficient to note that the capital which an enterprise starts with is divided into two parts, the constant capital (whose value is equal to that of the means of production) and variable capital (whose value is equal to that of the labor-power of the workforce). The enterprise ends up with a product whose value is equal to the original constant capital (c) plus the original variable capital (v) plus an additional surplus value (s).(13) So we might indicate this process by writing

Ent(c) + Ent(v) ---> Ent(c) + Ent(v) + Ent(s).

In writing it this way, we assume that the enterprise not only can sell its product for its value, but it can find the necessary materials on the market to replace the used up constant capital, and hire sufficient labor, so that it can continue production in the next annual cycle.

. When dealing with the total economy, one might repeat these formulas, only this time using aggregate figures for the total economy:

Total(c)+ Total(v) ---> Total(c) + Total(v) + Total(s).

But this would be what Marx calls a "merely formal" approach to the question which would ignore the fact that the used up capital must be replaced not only in value, but also "in material". When dealing with a single enterprise, one naturally would expect it to find elsewhere the necessary means of production and labor power. But when dealing with the economy as a whole, then--foreign trade aside--there no longer is an "elsewhere". So the question arises of what conditions ensure that a replacement "in material" form is actually possible.

. To investigate this issue, Marx writes separate value-formulas for Department I and Department II. If we follow Marx in doing this, we would get:

I(c) + I(v) ---> I(c) + I(v) + I(s).
II(c) + II(v) ---> II(c) + II(v) + II(s).

Furthermore, Marx notes that these formulas are not independent of each other. He shows, for example, that it must be the case that

II(c) = I(v) + I(s)

in the case of an economic cycle simply duplicating the previous one, without growth or decay ("simple reproduction").(14) If this doesn't hold, if the amounts produced by Departments I and II aren't in the proper proportion to each other, then some goods on the market will remain unsold, while there will be a shortage of other goods. This proportionality is necessary because something produced by Department I is not the same as something produced by Department II, even if it has the same value. A machine-tool produced by Department I and a ton of wheat produced by Department II cannot be considered interchangeable from the viewpoint of the entire economy (as opposed to the viewpoint of a single enterprise with access to a well-stocked market, on which any good can be exchanged for any other good of equal value), even if they have the same value. They play different economic roles. If they have the same value, and if they have been produced in the right proportions so that there is a market for them, they can be exchanged, and indeed a specific number of such exchanges must take place if the economic cycle is to proceed smoothly. But to discover the right proportions for their production, one has to go beyond their value and regard them as qualitatively, materially different. In the world of formulas, this is reflected in that separate formulas have to be given for the two different Departments of Production.(15)

. However, having II(c) = I(v) + I(s) isn't sufficient to ensure that one economic cycle produces exactly the right amount to allow another economic cycle of the same size to follow it. This only ensures that, in value terms, Department I as a whole is in the correct proportion to Department II as a whole. But the question remains of whether the right things have been produced in material terms, not just in value terms. Thus Department I must produce not just the right total amount of means of production, but also the right assortment of different types of means of production, and in the proper amounts. For example, if so much electricity is needed by factories and farms in California, it wouldn't suffice to replace it with a lot of other means of production, even though they have the same value as the needed electricity.

. Thus, to study more precisely what it takes to ensure that the economic cycle can proceed without disruption, Department I would have to be divided into subdepartments, such as the production of machinery, the production of raw materials, the production of energy, etc. Separate value-formulas would have to be written for each subdepartment, and proportionality conditions could be derived for the size of the production of each subdepartment .

. The same thing applies to Department II, consumer goods. In fact, in volume II of Capital Marx goes on to divide Department II into Departments IIa and IIb, with IIa producing the necessities consumed by the whole population, and the IIb producing luxuries enjoyed only by the capitalists.

. So it isn't the case that analyzing the entire economy simply requires doubling, so to speak, the number of formulas used in analyzing a single enterprise. The division into Department I and II is one of the most useful ways of dividing the economy and getting an overall picture of what is happening. But the economy can be divided into three or four or many parts, depending on the problem that the particular economist is investigating. And if one wanted to specify all the relations necessary to provide a stable market, neither overstocked nor short of goods, one would have to consider every major type of product separately, just as it is necessary to do in the method of material balances.

. But, it might be asked, if this is so, then wouldn't it lead to the absurd conclusion that capitalism is impossible? After all, few, if any, private capitalist firms make this type of calculation for the entire economy. But while capitalism definitely still exists, the marketplace constantly goes through imbalances and disproportions. Goods are over or undersupplied to the market, resulting in prices constantly vacillating according to supply and demand, rather than staying fixed at the value of products. Moreover, aside from minor over or undersupplies of the market, there are also general crises of overproduction in which the market is glutted with goods that cannot be sold. A good deal of bourgeois economic theorizing has been devoted to the attempt to get rid of economic crises, while Marx showed that such crises are a manifestation of the anarchy of production that is inherent in capitalism. Marx's formulas express conditions that regulate the capitalist economy not by plan, but by virtue of the economy constantly deviating from these conditions, and constantly suffering the consequences.

. Thus, Marx summarizes his analysis of the economic cycle, not in a chart like that of the Physiocrats, but in formulas. These formulas have to be separate for different material sectors of the economy, such as means of production and consumer goods. If they were to be used not simply to explain bourgeois economic relations but in an attempt to fully plan an economy, there would have to be formulas for each major product group. Even though the formulas are expressed by Marx in value terms, the fact that there is a multiplicity of them shows that planning has to go beyond value. The multiplicity of formulas results from the fact that, when it is a question of looking at the economic cycle, one material good is not equivalent to an equal value's worth of a different material good. Thus an analysis of the economic cycle has to deal with the reproduction of economic goods in material terms, as the quote from Marx given at the start of this section points out.

. If one attempted a similar analysis for a communist society, only replacing value with calculation directly in labor-hours, Marx's reasoning would still show that one had to consider the material form of goods, and not just their labor-content. Planning the cycle of production would require a multiplicity of formulas, showing that neither the labor-content nor any other single measure can serve as the "natural unit" of planning. There are instead a multitude "natural units", such as the actual amounts of each material or economic good. So even if one measured each good in labor-hours, an hour's worth of steel and an hour's worth of electricity would not be equivalent; one couldn't stand in for the other; and the units of steel and electricity would remain separate units. The labor-hour will always remain one of the important considerations in planning, but it will be accompanied by other "natural units".(16) Thus Marx's discussion of the cycle of the total capital of the economy already contains in embryo a good part of the argumentation against the labor-hour as the "natural unit" of communist calculation.

. However, the formulas given by Marx for the cycle of the total capital do not apply unchanged to communist calculation, no matter what units one expresses these formulas in. The difference between bourgeois and communist conditions is greater than just rebaptizing the bourgeois categories with terms directly expressing material concepts, "constant capital" becoming means of production, "variable capital" becoming labor-power, or the consumer goods consumed by the laborers, "value" becoming the labor-content, etc.

--Soviet material balances and Western input-output methods--

. Another analysis of the economic cycle is given by the method of material balances. It arose in the Soviet Union to deal with the problem of planning an economy. The Soviet planners were especially concerned with the problem of speeding up economic growth and of increasing the stock of fixed goods. It was necessary to see what changes would be required all throughout the economy to accomplish these aims.

. As we have seen, Marx's analysis of the circuit of the aggregate social capital showed the necessity of taking into account the material form of products. He particularly dealt with the distinction between the means of production and consumer goods. This led to "doubling" the set of formulas needed to analyze the process of production. If one went further and also divided consumer goods into necessities and luxuries, the number of formulas was now tripled. Material balances took this even further to separating the economy into each of its major sectors, or eventually, each major type of good or service, and the result was that there had to be a separate balance for each of them. We are no longer talking of merely doubling or tripling the number of formulas, but of producing a large number of separate balances and coordinating them.

. This is necessary because each good is qualitatively different from every other good. In analyzing an economic cycle, one good is not interchangeable with another, and so each good must be kept track of separately. In the balance for a particular good, one keeps track of how much of each good is either used during a cycle or added to a stockpile, and how much is produced or taken from a stockpile, and the figures for use and for production must balance each other.

. Moreover, in preparing such balances, one associates with each product, as we mentioned earlier, not a single number or "scalar quantity" or price, but a list of inputs. Thus, for example, a tractor "is associated with the amount of steel that goes into production, the amount of energy used up in its manufacture, the amount of labor directly used in its production, and so forth."

. Such lists then allow one to check that the figures for the balances of different goods are mutually consistent. For example, if so many tractors are produced during an economic cycle, then one knows that there must be a corresponding figure in the balance for steel which reflects the use of steel in tractor manufacture. This type of relationship between the different balances plays the role that such relationships as II(c)=I(v)+I(s) play in Marx's analysis of the economic cycle.

. Material balances may have been originally prepared, as the name suggests, in directly material terms. For example, the amount of steel used or produced might have been measured in, say, tons of steel, and not in financial terms. This would make it intuitively clear that the material balances make use of qualitatively different units: a tons of steel and so many gallons of gasoline seem quite different, etc. But the balances can actually be kept in any convenient unit.

. Even if the goods were measured in units that sounded the same, the balances were still kept distinct: a ton of steel and a ton of wheat are very different things. This is true even if the balances are made either in dollars or labor-hours: a $1 million worth of steel and $1 million worth of wheat are very different things. The monetary figure here figures simply as a way of indicating a certain physical quantity of goods. (Naturally, financial figures can only represent the physical quantity of some good over a period of time during which the price of that good is stable, or by using a financial figure with respect to the prices that existed on a certain definite date. Similarly, the labor-content of a good--so many hours' worth of steel, wood, electricity, or whatever--can only represent its physical quantity over a period of time during which the amount of labor, both direct and indirect, that it takes to produce that good is stable.)

. This distinctness of each major good can also be seen with regard to Western input-output methods, which are essentially a variant of the method of material balances. Input-out methods start, as does the method of material balances, from the point of working with balances of goods regarded as qualitatively different. These balances are generally presented in the characteristic input-output matrix or checkerboard-style table. Input-output economists go on to use a variety of mathematical techniques, such as linear-programming, to work with these balances. Western economic authors like to make various fine distinctions between material balances, input-output methods, and linear programming. For example, one author may regard that only the use of linear programming, not the mere use of material balances, counts as input-output methods. (Soviet economics did not make use of these methods until sometime after the death of Stalin, although the Soviet mathematician Kantorovich is one of the founders of linear programming and wrote about its use for economic planning as early as 1939.) These terminological disputes don't affect the issue raised in this article. What is important, is that all these methods use a multitude of separate balances of qualitatively distinct goods.

. Historically, the Soviet method of material balances seems to have helped inspire Western input-output economics. For example, Wassily Leontief, later to be a Harvard professor and the father of Western input-output analysis, wrote about the first Soviet national economic balance, that of 1923-24, in the Soviet journal Planovoe khoziaistvo in 1925. (See the English translation of this article, "The balance of the economy of the USSR: A methodological analysis of the work of the Central Statistical Administration", in Leontief's book Essays in Economics: Theories, Theorizing, Facts, and Policies, pp. 251-7.)

. Western input-output tables may be expressed in physical terms, but are far more often expressed in financial terms (e.g., so many dollars worth of steel, rather than so many tons of steel). Nevertheless, according to Leontief, "in principle the intersectoral flows as represented in an input-output table can be thought of as being measured in physical units".(17) This is because an "intersectoral flow" refers to the amount of goods from one definite economic sector which is used in another sector. Thus the intersectoral flows balance the figures for the goods of each industrial sector separately. Leontief promotes the value of input-output methods by stressing the importance of keeping track of the qualitative differences between different sectors of the economy and between different goods and services. He complains of the "weakness of aggregative indices" (that is, attempts to combine qualitatively different things such as steel and wood and plastic under a single index), and finds that they have "a faint but unmistakable air of unreality".(18)

. Of course it is no accident that Western input-output tables are mainly expressed in financial terms (what Leontief calls "value terms"). Western statistics are generally collected in financial terms. Moreover, while Western input-output analysis begins by recognizing the material distinctness of different sectors of the economy, it seeks to describe economies where the law of value is a reality (even if value is an "aggregative index"), and it is integrated into Western bourgeois economics with all its market prejudices. But an input-output table recognizes the qualitative differences between different goods or different sectors of the economy insofar as it keeps separate balances for these goods or sectors, whatever the nature of the unit used in these balances. Moreover, even if physical units, such as tons, are used in maintaining balances, this does not prevent the method of material balances from being combined with financial methods, as it was in the Soviet Union.

. Unlike either the Physiocratic Tableau Economique or Marx's analysis of the circuit of the total social capital, the method of material balances does not make any attempt to deal with the class issues involved. It's not a defect of these previous pictures of the economic cycle that they raised class issues, because they sought to analyze capitalist class society in which these class issues are key. By apparently eliminating class issues, the method of material balances is at best incomplete with respect to class economies. For example, it cannot explain why the Soviet economy couldn't eliminate the anarchy of production and eventually fell into a deep stagnation, because these were not technical faults of the planning process, but due to the class nature of Soviet society (we pointed to this in part one of this article, and will return to it in part 3 of this article). But by focusing attention on the physical flows from one sector of the economy to the other, the method of material balances does shed some light on issues of planning that will arise in a communist classless society. In particular, it does show that economic calculation is possible without reducing everything in an economy to a single unit, whether a financial unit or a "natural" unit. Moreover, it shows graphically how incomplete is the information about the economy provided by the usual financial indicators.

. But the method of material balances, as carried out in the days of the Soviet bloc, does not provide a model of communist calculation. For one thing, while it doesn't explicitly make any reference to the class nature of the economy it is being used to describe, it does, in fact, implicitly adopt itself to this class nature by the assumptions that are made about how intersectoral flows take place. For example, whether wage-labor exists will be reflected in how the input-output tables account for consumer goods. Moreover, in the practice of the material balances in the Soviet bloc, these balances always existed side by side with the use of explicit financial methods.

. Another issue that has come up about the method of material balances is its complexity. At first sight, the normal financial methods of capitalism appear much simpler. One can compare two possible ways of producing a particular product simply by seeing which is cheaper, and a relative handful of financial figures seem to describe an entire economy. On the other hand, anyone who has seen an input-output table describing in reasonable detail either the Soviet economy or a Western one, has been confronted with a huge mass of figures that runs on and on from column to column, and from row to row. It takes a good deal of effort to make sense of it, and a lot of work to plan the next economic cycle on the basis of the information it contains.

. But the apparent simplicity of financial planning breaks down in practice. It may be easy to imagine that an enterprise can simply decide that one production method will cost less than the other, but there is no guarantee that the prices it bases its decision on won't change, that the materials needed for this or that production method won't turn out to be hard to find on the market, or that the product itself won't end up oversupplied. And the situation is even worse when it comes to trying to figure out how to direct the economy as a whole in some desired direction. What will be the overall effect of interest rate changes? Of new technical developments? Of changes in the tax code? And consider such general questions or perspective as: Is the US going into a long recession? When will Japan emerge from its recession? Why did the Asian financial crisis of several years back take place? And, what accounts for the miserable performance of the market economies in most of the countries where state capitalism collapsed? All these questions result in a large outpouring of every different opinion possible from a sea of economists. Capitalist economics reached a certain degree of mathematical sophistication over a century ago. Since then thousands upon thousands of highly-trained economists have toiled at any one time trying to predict where the capitalist economies of various countries are going, and what to do about it, and what's happening to the world economy. Largely in vain.

. It's true that some of the confusion in the sayings of the bourgeois economists comes from the necessity to provide a rationale for whatever the bourgeoisie wants--thus just about every bourgeois economics text seeks to prove that minimum wage laws are bad. It would be easier if they could just say that the rich don't want these laws and explain why, but instead they try to prove that the minimum wage laws hurt the poor, providing yet another example of the air of unreality pervading modern academic economics. But aside from the direct prostitution of bourgeois economics to the class interests of the bourgeoisie, the economists really just don't know what the capitalist economies are going to do. It may take hard work to use the method of material balances, but the ease that comes from financial methods is the ease of leaving things to chance.

The incommensurability of living and past labor

. Thus once one studies, not an individual workplace, but the annual cycle of an entire economy, it is necessary to take account of the material form of goods. One cannot plan an economy as an integrated whole on the basis of evaluating goods on a single numerical scale, because such a scale regards goods as differing only in quantity, and negates their material form. This point alone, already implicit in Marx's discussion of the economic cycle, would suffice to show that the labor-content won't suffice for communist planning. But to make this point more concrete, we will now proceed to draw out a number of its consequences more slowly.

. Existing goods are, with respect to the labor-content, simply the material form of a certain amount of past labor hours. They are congealed labor or, more poetically, dead labor. They are equivalent to the same number of hours of living labor. In fact, with regard to exchange on a capitalist market, such congealed labor can be exchanged for an equal amount of living labor. But, as we shall see, in planning the economic cycle of a marketless or communist economy, this equivalence between living and dead labor breaks down.

--Circulating goods--

. Suppose we are at the start of the annual cycle of such an economy. And, as we have been doing throughout this discussion of the annual cycle, we are considering how the economy works in itself, leaving aside the possibility of foreign trade. (Indeed, we might be considering the total world economy.)

. It might happen that society finds itself short of enough seed grain to plant as much wheat as one wants. Let's say, it is short by a hundred thousand hours worth of seed grain. It might also be that there was going to be a lot of surplus labor during the coming cycle, maybe even millions of labor hours worth. As far as the labor content goes, there is therefore no problem. One might be short a hundred thousands hours of past labor in the form of a stockpile of seed grain, but it can be more than covered by a large surplus in the amount of living labor that will be available.

. But in reality, no amount of living labor will make up for the lack of seed grain at the start of the current cycle. Only as much grain can be planted, as there are available seeds. True, one might take steps to ensure a greater stock of seed grain for the next cycle, such as by setting aside more of the next harvest for seed grain. But this won't help with the planting in the current economy cycle: it will only help with the planting in the next cycle. It is, of course, conceivable that the surplus labor during the present cycle might help in providing more seed for the next cycle. For example, one might cultivate the fields more intensively to provide a bigger crop than usual from the same seeds. One would probably use far more labor to obtain wheat than would have been the case if there had been sufficient seed grain available, and probably one will obtain much less wheat too. But something can probably be achieved. However, here again this will only provide additional seed grain for the next cycle, not for the planting during the current cycle. Thus one will have to change one's plans for the current cycle due to the shortage of seed grain, and either make do with less grain than one otherwise wanted, or use desperate ways of stretching grain production from a given amount of seed.

. Thus the current cycle is limited by the amount of stockpiled seed grain from the past. It doesn't matter if the total amount of labor available, with past labor and living labor combined, is sufficient. The amount of stockpiled past labor (in the form of seed grain) constrains the production plan for the current cycle. One might measure past and living labor in the same terms, the labor-hour, but nevertheless one form of labor cannot, generally, stand in for or replace the other.(19)

. Moreover, this applies not just to seed grain, but to most goods. Even though circulating goods are repeatedly used up and replenished during a cycle, there generally has to be a certain stockpile of them at the beginning of a cycle. If there isn't a sufficient amount of them, the amount of production possible in the cycle is adversely affected. For example, if one needs a certain amount of steel at the beginning of the productive cycle in order to immediately start building various bridges, and it's not available, then it doesn't matter how much living labor is available, or even how many goods (past labor) of another type are available. The cycle of production is disrupted, and the bridge projects will be delayed. True, one might be able to produce enough steel during the present cycle to make up for the shortfall in stockpiles by the time of the next cycle. But this would mean that the next cycle wouldn't suffer delays, not the present cycle could be retroactively repaired. Thus one has to keep separate track of past and living labor.

--Fixed Goods--

. The differences of past and living labor appear particularly dramatic with respect to fixed goods. Factories or other fixed goods are necessary for the production of many types of goods. For example, a factory with a labor-content of a million hours may be necessary. If the factory isn't present, then, just as in the case as when necessary stockpiles of circulating goods aren't present, the current economic cycle is disrupted.

. True, there might be a large surplus of living labor available in the current cycle, perhaps even enough to cover the million hours which represents the labor-content of the factory. But this can't stop the immediate lack of the necessary factory from having a disruptive effect. One might set to work building the factory. When the factory was complete, in a future economic cycle, perhaps several cycles in the future because construction can take a long time, then it will be possible to produce the desired products. But for the time being, the desired products either can't be built, or can only be built inefficiently or by another production method.

. Thus production during the current cycle is limited by the amount of fixed goods, even if the total amount of labor available, past and living labor combined, is otherwise quite sufficient. This, indeed, is a typical problem facing economies seeking to grow. It is one of the key issues that faced the Soviet economy in the 20s and was responsible for much of the economic theorizing of that time. The method of material balances originated in large part under the pressure of the problem of building up the stock of fixed goods as rapidly as possible.

--Capital as the domination of dead labor over living labor--

. Past and living labor are equated in the capitalist marketplace everyday. Yet not only does one have to consider past and living labor as incommensurable in order to understand the economic cycle, but also to understand such basic institutions of capitalism as wage-labor itself. The capitalist is able to employ and exploit his employees because the worker no longer possesses the means of production--the tools, factories, stockpiles of raw materials and other things necessary for work to be productive. But what are these tools, factories, stockpiles, and other necessary preconditions of productive labor? They are simply the product of past labor, simply congealed past labor.

. So Marx points out that, under capitalism, the very product of the worker's labor is used to enslave him. It is from what the working class has produced in the past, which thus represents so much past labor in material form, that the capitalists forge the iron fetters that bind the working class to its enslaved condition. It is in this sense that capitalism is the rule of dead labor over live labor. As Marx puts it: "Capital is dead labor, that vampire-like, only lives by sucking living labor, and lives the more, the more labor it sucks." (emphasis added)(20)

. Under any system of modern production, it will be the case "that accumulated labor serves living labor as a means for new production." But under communism, living labor will decide on the utilization of this past labor in its own interest, while under capitalism, the domination of the capitalist appears as past labor bullying and exploiting living labor. As Marx says, "It is only the dominion of past, accumulated, materialized labor over immediate living labor that stamps the accumulated labor with the character of capital."(21)

. Socialist wisdom begins with the law of value, which shows how capitalism equates everything, from material goods to living labor, according to the marketplace. But this is only the starting point, not the end point, of Marxism. The Marxist analysis also shows that the labor-content is not a natural measure of goods, but only the lingua franca of the capitalist marketplace. Neither the economic cycle of a communist society, nor the class relations of capitalism, can be understood without realizing that living and past labor are incommensurable in their overall economic role.

Contradictions inherent in labor-hour calculation

. The inability of the labor hour calculation to serve as the main planning tool for an economic cycle can also be seen in the difficulties it has with in dealing with a number of important issues of planning. Most advocates of calculation according to the labor-hour believe that this alone would usher in a simple and more direct way of dealing with the economy than measurement according to the dollar. We shall see that, on the contrary, calculation according to the labor-hour often leads to duplicating the problems of capitalist value. This is no big surprise, as numerically the value of a good and its labor-content are the same. True, a communist society would directly estimate the labor-content while a market capitalist society determines the value of a product by averaging out the fluctuations of its marketplace price. And indeed the fluctuations of capitalist price can exact a terrible punishment on the masses. But running the economy according to a measure which is numerically equivalent to value, no matter how one determines the place of any good on that scale, suffices to reproduce some capitalist practices. This does not mean that the labor-content will necessarily have no use at all in a communist economy, but that it can at most be a subordinate tool, if capitalist value is to be surmounted

--As a measure of material abundance--

. One of the needs of any economic system is a way to measure its stocks of goods. Capitalism generally prefers financial measurements--so many million dollars of this or that good. Will the labor-hour provide a more accurate and easily usable measure?

The problem with using the labor-content to measure the amount of some good, however, is that the labor-content of a stockpile measures two different things, and yet seeks to represent the result as a single number. It combines two separate factors together. The labor content is affected both by how many items there are of the good in question, and by how easy it is to produce a single item.

. For example, if one is measuring a stockpile of coats, the labor-content would be half as big if there were only half as many coats. But the labor-content would also be cut in half if the number of coats stayed the same, but it was now possible to any individual produce coat with half as much labor as before (counting both the labor directly used in production, and the indirect labor, such as the labor needed to produce the material out of which the coat is made). Thus if the labor-content of the stockpile drops, one doesn't know whether society is poorer, because there are less spare coats, or whether society is richer, because it is now easier to produce coats.

. Marx discussed a similar point with respect to value. Since the labor-content is numerically equivalent to value, Marx's remark applies with equal force to the labor-content. As Marx puts it:

. "An increase in the quantity of use-values is an increase of material wealth. With two coats two men can be clothed, with one coat only one man. Nevertheless, an increased quantity of material wealth may correspond to a simultaneous fall in the magnitude of its value. This antagonistic movement has its origin in the two-fold character of labour. . . . However then productive power may vary, the same labour, exercised during equal periods of time, always yields equal amounts of value. But it will yield, during equal period of time, different quantities of values in use; more, if the productive power rise, fewer, if it fall."(22)

. The result is that if the labor-content of a stockpile goes up, it might mean that the stockpile had grown bigger. But it might also simply mean that it was now harder to produce something (for example, it was harder to obtain the raw materials). If the labor-content of a stockpile falls, it might mean that the stockpile had shrunk. But it might simply mean that production had become more efficient.

. Let's consider the problem of stockpiles of grain (and other foods), as will no doubt exist in order to provide for those years of natural disasters when the harvest fails. In this case, one might think that the amount of grain would be a more appropriate measure than the labor-content, since one would want to know if one had enough food to feed such-and-such a population for so long. However, so long as so many labor-hours of grain were always equivalent to so many tons of grain, it wouldn't matter much whether the grain were measured in labor-hours or some physical measure, such as tons, since one could always easily convert from one measure to the other.

. What is a serious problem, though, is that the labor-content of the stockpile will rise or fall according to the difficulty of grain production. In a bad year, the labor-content of the stockpile would rise, because grain was now harder to produce. This would give a false sense of security to anyone who forget about the complexities of measurement by the labor-hour, because the amount of grain would be no larger than before, and might even be falling, because society had already dipped into its reserves, and yet the labor-content of the stockpile would be rising rapidly.

. It should be noted that this strange behavior of measurement according to the labor-content, whereby the labor-content of a stockpile of grain zooms during a drought or other bad year, is not really a defect of the labor-content. This is exactly how the labor-content should behave if it were a measure of how things take place under capitalism, and that's exactly what the law of value says the labor-content is. In a bad year, as agricultural goods become scarce, their price in a capitalist market zooms. Since money has a real meaning under capitalism, this is a real economic phenomenon, and the labor-content helps explain it.

. In a marketless society, however, which has neither money nor the marketplace, a different way of measuring stockpiles would be more appropriate. There would be a use for a measurement of the physical amount of grain, and a use for an index indicating how difficult farm conditions are, if such an index is possible. But it's not clear if there would be any sense in trying to combine such separate indices into a composite figure, as the labor-content does, and it certainly wouldn't make sense to regard the composite figure as a measure of the total abundance of grain.

. The problem of the changing relationship of the labor-content to the physical quantity of grain could be avoided, of course, if one relied on the measurement of stockpiles not according to the current amount of time it would take to produce the stockpile (its current labor-content), but the amount of time it would take under standard conditions, such as in some specified year where there was average growing conditions. Then the labor-content wouldn't change from year to year, or with regard to weather conditions, and it would be just as good a measure of material abundance as any other measure. But it would no longer really be measurement by labor-hours. The whole point of the labor-hour as an alleged natural unit of economic calculation was that the number of labor-hours was supposed to have an immediate meaning. It was supposed to tell you right away what would be needed to produce a good. If one uses a measurement of labor-hours according to conditions that don't currently exist, then labor-hour becomes, just to that extent, a conventional or artificial unit. In the same way, the British "pound sterling" doesn't really mean the amount of money represented by a pound of silver. It's just a historical name for an arbitrary monetary unit.

--As a measure of efficiency--

. Another economic problem is measuring the efficiency of any particular factory or workplace. It might be thought that here the labor-content will really shine. The labor-content of a good is how many hours are socially necessary for its production, counting both the labor used directly and indirectly. So, it might seen, all it takes to measure the efficiency of a workplace is to compare how many hours it took to produce a good, to the labor-content of that good.

. But the labor-content just represents the socially-necessary, or average, amount of hours used in the production of a good. By comparing the performance of any one workplace against the labor-content, one is simply comparing its performance to the average performance of all similar workplaces. This provides some information of importance: namely, how the workplace stacks up against similar workplaces. But it doesn't provide a measure of how efficient all these workplaces together, comprising the industry as a whole, are with respect to what is technically possible. It doesn't show in the slightest whether the industry as a whole is stagnating.

. Does this mean that capitalism has a good measure of technical efficiency in financial profitability, while communist society has no such measure? This is what various bourgeois economists, such as the followers of von Mises and Hayek, claim. But this isn't true. Financial profitability is also not a measure of technical possibilities, but of how well any particular firm compares to other firms with whom it is competing. (That competition, moreover, is by no means always on quality or efficiency, but is also on the basis of who can advertise better, influence government better, harass their competitors better, evade environmental regulations more successfully, and especially on who can exploit their workers more thoroughly.) So financial profitability itself only provides a measure of how a firm is doing with respect to the industry as a whole. Here too, the labor-content basically reproduces what happens under capitalism.

--The environment and things of zero labor content--

. Not everything has a labor-content. Marx explains that many things of importance (in the ordinary sense of the word) are not the product of labor, and therefore don't have any value as commodities. This also shows that their labor-content is zero. He writes that:

. "A thing can be a use-value, without having value. This is the case whenever its utility to man is not due to labour. Such are air, virgin soil, natural meadows, &c."(23)

He also stated that

. "Labor is not the source of all wealth. Nature is just as much the source of use values (and it is surely of such that material wealth consists!) as labour, which itself is only the manifestation of a force of nature, human labor power. . . . The bourgeois have very good grounds for falsely ascribing supernatural creative power to labour; since precisely from the fact that labour depends on nature it follows that the man who possesses no other property than his labor power mus t. . . be the slave of other men who have made themselves the owners of the material conditions of labor. He can work only with their permission, hence live only with their permission.""(24)

. Most environmental issues involve working with things which cannot be adequately measured by their labor-content, or even have zero labor-content. For example, what is the labor-content of a species? Species are not created by human labor (except for those species which can be created by such means as selective breeding or genetic engineering). One cannot, therefore, talk of the average amount of labor socially necessary for producing a species. Its labor-content is zero. And yet preservation of biological diversity is of great importance. Thus all those aspects of communist planning that concern the preservation of bio-diversity will revolve around decisions that have little to do with the calculation of labor-hours. To be more precise, the effort that is put into environmental work may be measured in labor-hours and other ways, but the decision to carry out this work cannot be made on the basis of calculating the labor-content of the environment. It is, for example, impossible to compare the work needed to preserve a threatened species to the labor-content of that species, as the species does not have a labor-content.

. This is recognized even by some passionate advocates of the labor-content. Professors Cottrell and Cockshott are among the most fervent recent advocates that the labor-hour will be the unit of calculation in what they regard as a socialist society. They believe that modern computers make possible a type of "direct calculus of labor time". Arguing against a supporter of capitalist economics who claimed that "there is no direct way [labor-time] calculation can cope with non-reproducible natural conditions of production", they correctly observed that "socialist planners should be able to take more far-sighted decisions on resource conservation than profit-maximizing firms". But they held that this required socialist planners to go beyond labor-hour calculation. They said

"We are not claiming that labor-time calculation would necessarily do better [than capitalism] in cases where the market fails to conserve resources. . . . we should emphasize that we do not regard labour-time calculation as providing a mechanical decision procedure for all planning questions. A socialist society might open up democratic debate on specific technologies or projects with substantial environmental impacts, and might allow environmental considerations to override 'efficiency' measured in terms of labour-minimization. We have no problem with the idea that environmental considerations and labour-time accounting are not necessarily reducible to a scalar common denominator, and that the balancing of these considerations may require political judgment on which opinions can differ." (emphasis added)(25)

. Yet environmental issues aren't simply a minor aspect of future communist planning. Environmental concerns will have a much larger role than under capitalism. Indeed, even aside from direct projects to save or restore various parts of the environment, environmental considerations will be intimately involved even in basic decisions concerning whether to use this or that production technique. So it is not just a minor defect of the labor-content if these decisions are outside the sphere of the "direct calculus of labor-time".

. Moreover, it's not just the environment that goes beyond the sphere of the labor-hour. Such issues as health, education, and child care would also go, to varying extents, outside the sphere of the labor-hour calculus. No doubt the labor-hours and other resources devoted to these issues will be measured, but the decision to devote these resources cannot come from a simple comparison of these resources to the supposed labor-content of, say, a healthy or an educated population.

To be continued.

Part three with deal with
­more on Marx and Engels' views
­some remarks on planning in a classless society
­value and the transition period.


(1) Evgeny Preobrazhensky, The New Economics, Ch. II, subsection "The Struggle between the Two Laws", p. 140, emphasis as in the original. Also see Preobrazhensky--ideologist of state capitalism, parts 1 and 2, in Communist Voice, vol. 4, #2 (April 20, 1998) and vol. 4, #3 (August 1, 1998). (Return to text)

(2) The number of labor-hours directly used in the manufacture of the tractor is, of course, not the labor-content of the tractor. The labor-content is a larger figure. In order to take account of the other inputs needed to produce tractors, it adds to the number of labor-hours directly used in the tractors' manufacture figures representing the labor-content of these other inputs, such as a figure for labor-content of the needed steel, a figure for the labor-content of the needed energy, etc. In such a single or composite figure, the distinctness of the various inputs gets lost. For example, it makes no distinction between a process which uses steel of a labor-content of x hours and a process which uses wood of a labor-content of x hours or plastic of a labor-content of x hours. With respect to labor-content, a labor-hour's worth of one material is the equivalent of a labor-hour's worth of another material. The method of material balances, on the other hand, distinguishes these processes, but at the cost of representing the tractor not by a single number, but a list of numbers. (Text)

(3) I call them "fixed goods" for lack of any other term and because, in a capitalist economy, they are the "fixed capital". Replacement of worn-out parts and other maintenance has to be done on the fixed goods, or else they decay, but they otherwise remain unchanged during production. (Text)

(4) Most of what I call "circulating goods" correspond, under capitalism, to the"circulating capital". There are different types of circulating goods. Raw materials are an example of circulating goods which are means of production; under capitalism, such circulating goods are what Marx calls "circulating constant capital". The consumer goods used by the workers are also part of the "circulating goods"; under capitalism, they are equal in value to the "variable capital" used by the capitalists to employ labor. Thus all variable capital is circulating capital, but not all circulating capital (consider the circulating constant capital) is variable capital. Consumer goods enjoyed by the capitalists also are "circulating goods", but they are not part of the capital at all, but represent part of the surplus value the capitalists extract from the workers (the capitalists also use surplus value to provide a fund for expanding production as well as for paying rent to landlords, interest to financiers, tax to the government, etc.) (Text)

(5) Marx, Capital, volume II, Progress Publishers, Moscow, 1971, Part I, Chapter I prior to Section 1, p. 25 and Part III, Chapter XVIII, Section I. The Subject Investigated, pp. 356-7.

. "First stage: the capitalist appears as a buyer on the commodity- and the labour-market; his money is transformed into commodities, or it goes through the circulation act M-C.
. "Second stage: Productive consumption of the purchased commodities by the capitalist. He acts as a capitalist producer of commodities; his capital passes through the process of production. The result is a commodity of more value than that of the elements entering into its production.
. "Third stage: The capitalist returns to the market as a seller; his commodities are turned into money, or they pass through the circulation act C--M.
. "Hence the formula for the circuit of money-capital is: M--C . . . P . . . C'--M', the dots indicating that the process of circulation is interrupted, and C' and M' designating C and M increased by surplus-value." (Ibid., p. 25) (Text)

(6). Ibid.,, p. 357. (Text)

(7) Marx, Theories of Surplus Value, Part I, Chapter VI, "Quesnay's Tableau Economique (Digression)", p. 308. (Text)

(8) Theories of Surplus Value, Part I, Chapter VI, "Quesnay's Tableau Economique (Digression)",p. 308 and Addenda, section 8a "Supplementary Note on the Tableau Economique. Quesnay's False Assumptions." p. 378. Some forms of the Tableau Economique had quite a few more lines than the forms reproduced by Marx, but they didn't show any more detail concerning the different sectors of the French economy. These forms of the table showed the year's economic activity as an unending chain of flows going back and forth between the different sectors, with each flow requiring yet more flows, and only the sum of these flows ending up as a closed cycle. Thus, what in the shorter forms of the table was pictured as the overall annual flow from one sector of the economy to another, appeared in the longer forms of the table as a large number of component flows: the sum of all the flows in the same direction from one sector to another was the total annual flow in that direction. (Text)

(9) They divided French society into, roughly speaking, "farmers (the productive class)", "landlords", and "the sterile (industrial) class". They also hid the exploiting nature of capitalism by having the category of "farmers" group together both capitalists and laborers, and similarly grouping both workers and capitalists in the industrial class. Their view that only agricultural activity created a surplus (hence their declaration that the industrial population was the "sterile" class) makes them appear to be supporters of the old agrarian system, but in essence they were bourgeois economists. For example, they envisioned a capitalist agriculture, advocated that only rent on land should be taxed (shades of Henry George's later "single tax" proposal), and promoted a policy of laissez-faire for industry. (Text)

(10) Marx, Capital, vol. II, Part III, Chapter XIX "Former Presentations of the Subject" Section I. "The Physiocrats", p. 363. (Text)

(11) Theories of Surplus Value, Part I, p. 344. (Text)

(12) Capital, vol. II, Part III, Chapter XX "Simple Reproduction" Section I. "The Formulation of the Question", p. 398. (Text)

(13) Actually, following Marx, here we use the letter "c" to refer to only part of the constant capital. He writes that "Portion c of the value, representing the constant capital consumed in production, does not coincide with the value of the constant capital employed in production. (Capital, Vol. II, Chapter XX, Section II. "The Two Departments of Social Production", p. 400, emphasis as in the original) Part of the constant capital is used during production, but continues to exist after a cycle of production. For example, the factory building and the machinery (which are "fixed capital") remain after a cycle of production. True, part of the machinery and building may be regarded as used up during a cycle of production as it is necessary to replace worn out parts, do general maintenance, etc., but most of it continues to exist for a long time. But for the time being, we will simply assume that all constant capital is used up during a cycle of production, and ignore the issue of the fixed capital. This is basically the same simplifying assumption as Marx makes at the beginning of his discussion of the economic cycle, when he first sets up the formulas for the different departments of production. Later on, Marx removes this assumption and discusses a number of the resulting complexities.

. As far as terminology goes, Marx refers to the fixed capital that is not consumed during production as the "persistent portion of the fixed capital". He refers to the constant capital used up during production as composed of the "circulating constant capital" and the other part of the fixed capital (aside from the "persistent portion").

. In volume III of Capital, Marx also makes the distinction between the constant capital that is used up during production, and the total constant capital. He still uses a small "c" to refer to the constant capital that is used up during production, and he uses a capital "C" to refer to the total constant capital that is needed during production. (Text)

(14) There are a number of different ways to see this. For example, the amount of means of production used up during an economic cycle is the amount used up in Department I plus the amount used up in Department II, i.e., the amount with the value I(c)+II(c). For this to be replaced, it is not just necessary for the total production of the economy to have a sufficiently large value, but also that the production of precisely Department I, means of production, has a value at least as large as I(c)+II(c). This is because it is impossible to replace means of production with the products of Department II, which only consist of consumer goods. Moreover, if the product of Department I, which consists of newly-produced means of production, is to be sold, it can only be sold to replace the used up means of production. So Department I, if it is to sell all its production, can't produce any more than the amount of constant capital that has been used up, namely, I(c)+II(c). (In the case where the economy is growing from year to year, Department I can sell I(c)+II(c) plus the additional amount of means of production to provide the increased fixed capital and stockpiles of constant capital which will be required by this growth. But we are assuming "simple reproduction" here, in which one cycle follows another with production remaining on the same scale.) Therefore the total production of Department I must, in value, exactly equal I(c)+II(c). But the total production of Department I is, in value, I(c)+I(v)+I(s). So

I(c) + I(v) + I(s) = I(c) + II(c).

Subtracting I(c) from both sides of this equation, we get

I(v) + I(s) = II(c).

. It might be noted that these formulas don't deal with the issue of the "fixed goods" any more than the Physiocratic Tableau Economique did, and for the same reason: they are analyzing a cycle of simple reproduction. Indeed Marx carefully points out that, at this point, he isn't even dealing with the wear and tear of the fixed capital, except insofar as it is actually "replaced in kind during the year"--that is, repaired during the current productive cycle. (Capital, vol. II, Chapter XX, Section II, p. 401.) It is only later that Marx goes on to a more detailed consideration of the depreciation of the fixed capital and its effect on simple reproduction. Moreover, he proceeds later to an analysis of "accumulation and reproduction on an extended scale", that is, when there is a growth of the economy from one cycle to the next. (Text)

(15) It might be argued that, although separate sets of formulas are needed for Departments I and II, both sets of formulas are written by Marx in value terms. Hence, it might be thought, all that really matters is simply value. But consider chemistry. Every molecule is made up of a number of atoms. In balancing the equation for a chemical reaction (provided it really is a matter only of a chemical, not a nuclear reaction), the number of atoms have to be the same on both sides of the arrow. But that's not sufficient. There also has to be a balance for each type of atom (that is, for each chemical element, such as hydrogen, helium, carbon, oxygen, iron, uranium, etc.). If there are, say, five oxygen, six carbon and nine hydrogen atoms on one side of the arrow, there have to be precisely five oxygen, six carbon and nine hydrogen atoms on the other. It's not sufficient to simply have 20 atoms total on either side, but they must be the right assortment of atoms. You can't, say, have only four oxygen atoms on one side, but compensate by having an extra carbon atom on the same side, thus keeping the total number of atoms equal to 20. Thus the fact that there isn't, so to speak, a single "natural unit" for chemistry, the undifferentiated or abstract atom, but there are instead over 100 different "natural units", namely, the different chemical elements (or concrete, specific types of atoms), is reflected in the fact that there has to be separate balances for each element. It doesn't matter that each of these separate balances can be said to be done in terms of the number of atoms. What matters is that each type of atom has to be balanced separately. (Text)

(16) Clearly this doesn't mean that the labor-hour vanishes from economic planning, but that it is only one among many different economic measures that will be in use. What was said in the opening sections of part one of this article should be recalled:

. ". . . the article is not putting forward a type of magic which would make the number of hours of concrete labor of a definite sort used to produce a product disappear from economic planning, nor does it even advocate that the labor-content--a measure of abstract rather than concrete human labor--will necessarily disappear altogether from economic considerations. . . . It will also point out that communist society will routinely, frequently, and inevitably take major and minor decisions that ignore or even completely violate this scale...
. "If the reader didn't realize in advance that this article is not arguing that the labor-hour is irrelevant to economic planning, the reader might end up feeling cheated. Coming to the latter part of the article, such a reader will feel that the article, in discussing the subordinate uses which the labor-content might have in communist planning, is going back on everything said earlier. If the distinction between concrete human labor and an abstract measure of labor (such as the labor-content), and the distinction between the labor-content as the the bottom line of economic planning versus being a subordinate measure, seem at first to be vague and forced to some readers, such a reader, being warned in advance, may then consider these points in connection with every argument against the labor-content as bottom line or natural unit that is made throughout this article. Again and again, the reader will see that there is a distinction between concrete labor-hours and abstract labor-hours. Concrete labor-hours are not interchangeable and have distinct, qualitative features (such being crystallized in past production, and some being the labor expended during the current production cycle; some being done by workers of one skill or residing at one particular location, some by workers with another skill or living elsewhere; etc.). Abstract labor-hours are interchangeable, one abstract labor-hour being equivalent to any other such hour. The labor-content is a measure of abstract labor-hours, which would only be a natural unit if all labor-hours were indeed interchangeable. But labor-hours are only interchangeable on the market; once the market is gone, labor-hours must be considered in their material distinctness. In such a situation, a measure of abstract labor-hours can only be an approximation, and can only be of use under certain circumstances." (CV, vol. 6,#2, pp. 28-9) (Text)

(17) Wassily Leontief, Input-Output Economics, Second Edition, 1986, chapter 2 "Input-output analysis (1985)", p. 21. However, various additional entries, that don't have a physical meaning, may appear in input-output tables. For example, when such a table indicates that the output of electricity power is divided equally between two different uses, it expresses a physical fact, and in principle it doesn't matter whether it uses kilowatt hours or dollars to express this fact. But suppose one seeks to add together 3 tons of steel and 5 tons of coal. Now it does matter whether one uses physical terms (like tons) or financial terms. There is no way to combine 3 tons of steel and 5 tons of coal into one meaningful number in physical terms. They combine only into a list ("vector") of inputs, such as (3,5), which preserves the original figures. $3 million of steel and $5 million of coal can, however, be added to obtain $8 million. But $8 million of what? Not of steel, and not of coal, just $8 million in itself, that is, $8 million of money, or possibly $8 million of value. When one adds together figures belonging to qualitatively different sectors of the economy, the resulting sum loses its physical significance. Thus the $8 million no longer has a direct physical meaning, and can no longer be part of a material balance. To convert this $8 million into steel, or coal, or wood, or whatever, one would have to go to the market. There is no guarantee that the market would have sufficient steel or coal or wood to redeem this $8 million. By way of contrast, the "intersectoral flows" are supposed to represent directly what physical quantities of various goods do exist.

. For example, Leontief refers to the fact that some entries represent physical quantities and some don't while discussing a small, sample input-out table. This table is expressed in dollars, but most of its entries represent "intersectoral flows". However, its also has a bottom line which sums up all the inputs to each particular sector of the economy. Thus a typical entry in the bottom line is the financial sum of amounts coming from different sectors of the economy to one individual sector. All the other entries in the table consist of the flow of one particular good or service from one economic sector to another. Leontief concludes that, if one wishes, all these entries can be taken as physical quantities, except the bottom line. He writes that "All figures in Table 2-2--except the column sums shown in the bottom row--can also be interpreted as representing physical quantities of the goods or services to which they refer. This only requires that the physical unit in which the entries in each row are measured be redefined as being equal to that amount o f the output of that particular sector that can be purchased for $1 at prices that prevailed during the interval of time for which the table was constructed." (Ibid., 22, emphasis as in the original. Table 2-2 is on page 21.) (Text)

(18) Essays in Economics, Ch. 2, "When should history be written backwards?", pp, 18-19. Also see Ch. 4, "The problem of quality and quantity in economics". In his Essays, Leontief directs a number of barbs against current-day Western theoretical economics, with its abstract deductive style and its aversion to "the harsh discipline of systematic fact-finding" (Ibid., Introduction to the Transaction Edition, p. x). He talks of the problems that arise when concrete facts are hidden under general numerical comparisons, and points to several of the sore points of current economic theorizing. And well he might. Today, shrugging off the evidence of one disaster after another, the neo-liberal theoreticians assure everyone that free-market fanaticism will bring prosperity and progress for all. Whatever Leontief may have had in mind, here indeed is the "unmistakable air of unreality" and more: pervading most of bourgeois economics is willful blindness and zealous toadying to the rich and powerful.

. But unwilling to deal with the issue of class struggle, Leontief goes overboard in identifying the problem of Western economism simply with the unreality of aggregative indices and the lack of empirical work. Indeed, it is not all theorizing and aggregative indices that are unreal, but only certain theorizing. Money itself provides an aggregative indice which has an iron reality in a capitalist economy. And when Leontief puts profits and return on capital into his models of the economy, he himself is attesting to this reality. The identification of useful aggregative indices, and of the limits in which they are meaningful, is no doubt one of the major issues of practical economics. This is so, even though the search for the single, overall aggregative index that can serve as the natural unit of economic calculation is doomed. (Text)

(19) Well, as pointed out above, an amount of current labor can, to a certain extent, stand in for a shortfall of past labor. But in that case, many hours of current labor are usually needed to deal with a shortfall of each hour of past labor, because one will be forced to use production methods that are much more inefficient. In our example above, instead of simply planting more wheat, one was forced to do everything possible to ensure that every last wheat plant is saved, or to substitute other products for wheat. Thus, even in thus situations where living labor can substitute for past labor, it generally doesn't do so on a one-to-one basis. (Text)

(20) Capital, vol. I, Chapter X. Section 1, "The Limits of the Working Day", p. 257 (Modern Library or Kerr edition) or p. 233 (International Publishers edition). (Text)

(21) Wage-Labour and Capital, end of Chapter V "The Nature and Growth of Capital", italics as in the original. (Text)

(22) Capital, vol. I, Chapter I, near the end of Section 2, "The Twofold Character off the Labour Embodied in Commodities", p. 53 (Modern Library or Kerr edition). (Text)

(23) Capital, vol. I, Chapter I. At the end of Section 1, p. 47. (Text)

(24) From the opening of Marginal Notes to the Program of the German Workers' Party (Critique of the Gotha Program). (Text)

(25) Allin Cottrell and W. Paul Cockshott, "Calculation, Complexity and Planning: The Socialist Calculation Debate Once again", in Review of Political Economy, vol. 5, no. 1, 1993. The first quote is from section IV.1.b. and the environmental quotes are from section II.3.a. Also online. Post Keynesian Thought Internet Archive. Available: (Text) <>

Back to main page, CV #26, write us!

Last modified: August 5, 2009.