I’m a cautious fan of Steve Keen’s post-Keynesian economics ever since I was introduced to him via the AFAQ. A fan because he takes an empirical criticism to contemporary economics and cautious because he still supports the capitalist system and dismisses the LTV. So when I stumbled upon his reasoning for this dismissal [pdf] I felt that there are some flaws in the logic that I should point out.

The basic argument that Keen pursues in his refutation of the LTV is to concentrate on Marx’s own arguments on why Capital does not add any surplus value during the productive process, point out logical contradictions and use this as a proof that capital does add part of the surplus value created in production. First of all, I want to point out that I find this reasoning fallacious. The flaws in Marx’s reasoning might invalidate the proof of the LTV as Marx argued for it, but it just leaves us back in a situation where we again need to figure out what adds the surplus value in production. What it doesn’t do, is constitute a proof for the validity of the STV or even proof that labour isn’t the only thing that adds to the surplus value created in production. But this is the non-sequitur that Keen does as soon as he has pointed out the Marxian inconsistencies.

Of course I can imagine that for Keen, this follows from other theories of value such as Sraffa’s, but still this criticism makes it appear that all those other theories cannot stand unless Marx’s theory of value is countered and labour is shown not to be the only source of surplus value. However I believe that even though Marxian theory might be flawed, there are other argumentation paths that can point out the truth of the LTV, and I’m going to posit one now. I’m going to try and show what the actual purpose of Capital is.

A Primal Example

Lets take a tool-less society of humans (I know, completely unrealistic but stick with me). No tools (and thus capital at all) exists in the current society but nevertheless people can still create some basic commodities (trinkets to exchange, food to eat etc). Now lets take a person in this society which manages to discover the way to make a stone hammer from raw material. Lets say it takes him 20 hours to build it once he’s figured out how (Obviously he will have to do in in his free time, which assumes looking for food does not take up all of his productive life.)

If we assume a market economy in this society and that person wanted to trade the hammer for something else, the would obviously do so for something of equal value, ie something which took approximately the same amount of time to create. Why? Because if either party tried to get more, then a better option would be to build whatever it is you’re looking for, yourself.

For the same of simplicity, lets assume that this corresponds to 20$. Now at this point, we can’t realistically talk about any productivity of capital since none was used in this process. The whole 20$ of exchange value is a result of the surplus value created by only by labour.

Now lets assume that with a stone hammer available, someone can build another stone hammer in 15 hours only. The hammer is now being used as a mean of production, Capital. Does this prove that the capital contributes value to the surplus value created? To see if this is the case, we need to look at two different examples.

1. Let’s assume that the first hammer is not sold while the second hammer is created in order to be traded, seeing as there would be a demand for it. We can safely assume that the second hammer will be sold at the price of 20$ again, for the same reason as before. If it wasn’t, then someone would simply build his own. At 20$ though, a hammer that was made in 15 hours gives a 5$ profit (seeing as in those extra 5 hours, one can work on building more hammers to sell.) Does this show that the hammer provides 5$ of to the final surplus value created? We’ve already seen that the same hammer, and thus the same value can be created with no capital at all, and thus its “contribution” is not actually necessary at all. The only evidence of capital’s contribution is the price difference between the hours worked and the fair price requested for it.

But there is one simple problem. The price of the hammer will not stay at 20$ for long. As soon as the second and third hammer has been sold, others will figure out that there is a profit to be made in selling hammers and will use their new hammers to build them within 15 hours as well. A price war will occur until the price now stabilizes at around 15$, which will correspond to the time required to build it. So what has just happened? Where has Capital’s contribution disappeared to?

What happened is that once new novel capital was created, there was an immediate disequilibrium between the Socially Necessary Labour Time (SNLT), that is, the average time required to build the commodity with the new technology level, and the current price which still corresponds to the old SNLT. So what was the role of Capital in this case? Reducing the SNLT. It doesn’t provide surplus value, it doesn’t contribute anything, it simply makes the productive process faster.

But one would ask: What about the initial profit that the first builder made between making the first hammer and until the price stabilized to 15$? To jump to the conclusion that this was capital’s contribution is wrong. Not only because the capital’s contribution was in fact the original worker’s in the first place, as the hammer was nothing more than crystallized labour-power, but also because there are far more fitting explanations for the initial profit, the most simple one being: Reward for the intellectual labour required to build novel capital, ie a return for innovation. It’s only natural to assume that the first prototype of the hammer took far more effort to build than any subsequent copies. But this labour lost can never be captured simply through selling, for once it’s been designed, it’s not difficult for others to copy the idea anymore, so that’s basically labour-time lost. However, the time between the creation of novel capital and the reset of the SNLT is exactly which provides the opportunity for the creative labour investment to be returned.

So it all ties perfectly together in showing how labour is the only thing that created the surplus value (realized via the exchange value) while capital’s purpose was simply to reduce the SNLT and allow humans to produce more stuff in less time. However this does not change the fact that the average exchange value of whatever is produced is tied directly and only to the labour-time extended to replicate a commodity. This is in fact the process by which human production achieves an exponential rate since each new piece of capital frees up more time and thus allows more commodities and new capital to be built, and so on.

But now, lets take the second example, in which I’ll try to take a society that approaches our a bit more.

2. Let’s now assume that we have a similar situation of creating novel capital, but in this case, within a society which is  wildly unequal. Some people have hoarded all the land for themselves, which means that there are a lot of people who do not have the capability of feeding themselves without working for others. Let’s also assume that the same hammer was created by one of those who own the land. Again, the hammer’s fair price is once more the same 20$ since anyone with free 20 hours would be able to make it. However now there’s a problem: Most don’t have the capacity to extend these 20 hours as their whole productive power is spent in the time they need to work for others. If they took this time off, they would starve ((OK, this might sound silly when used about something that needs 20 hours to create but the same principle applies to larger scale capital which requires hundreds of hours to build. However this is simply a hypothetical example where one full days work as a wage-labouring farmer provides enough food live and be productive for one day. Please bear with me.)) and thus even though the capital is as costly as before to make, it is external circumstances which make it unfeasible for others to trade for it in a fair price.

Now our wannabe-capitalist knows that most people can’t afford it and thus there is a market only for other capitalists (ie, those who make stone idols or other stone commodities). He knows that those will build in in 20 hours themselves if he tries to sell it at a higher price, so his max is 20$ again. However, now he has another way to make more money. Rather than use the hammer himself to make new hammers to sell as in example 1, he now hires one of those people who don’t have another choice (remember, everything is hoarded already by the few, much like the current system) to use his hammer and make new hammers. He gives them a wage of 10$ per hammer created (which is enough money to live and be productive for one day and something extra to give incentive for people to work for him) which means that he starts with a profit of 10$ which eventually drops to 5$ once the hammers have become distributed and the SNLT has dropped to 15 hours.

Now according to opponents of LTV, the 5$ of profit is now considered the productivity of capital and thus belongs to the person who created and owns the capital that the worker’s use. But there is a problem as we’ve seen in example 1: The only way that the productivity of capital can even exist when the SNLT has moved to 15 hours is if the new hammers are being produced via wage-labour. And this can only exist in a situation where all other resources have been hoarded and people are being passively coerced (ie starvation, homelessness) into wage-labour.

As such, the “productivity of capital” is in fact completely indistinguishable from the rate of exploitation caused by an unfair distribution of resources. The flaw in this logic in short, is that it assumes an unfair distribution of resources (ie hoarding) as a normal and appropriate situation which evolved naturally and from this starting point tries to understand capital’s relation to the production. But the hoarding of resources is not something that can happen naturally, both in theory and the history of humanity can point to this as it took very extended state and private violence in order to allow some to control most of the land.

The role of Capital then, has always been simply to reduce the SNLT required to produce any commodity. It’s role is not to contribute to surplus value, but simply to allow humans to produce the same amount of surplus value in lesser time than they would need without it. The surplus value is still created by the actual human labour and as such, all the conclusions that follow from this point still stand. To claim that capital contributes to production and therefore its owner needs to be “rewarded” for such production (even though the owner did nothing other than claim ownership) is simple apologetics for wage-slavery and exploitation.