DOCUMENT 15 The Austrian School (1926)

Isaak Il’ich Rubin

Source: I.I. Rubin, ‘Avstriiskaya Shkola', in Bol’shaya Sovetskaya Entsiklopediya (First edition), Vol. 1, Moscow, 1926, pp. 244-54.

Introduction by the Editors

The central theme of all of Isaak Rubin's writings, as will become evident in the next section of this book, is that historically formed social relations between people are the proper subject matter of political economy.

Whereas Marxism starts with the social whole, analyses it and then recon­structs it concretely in thought, the psychological theory of value looks for the ‘final causes' of price changes in judgements of marginal utility by singular indi­viduals. The result, in Rubin's account, is a series of problems involving: a) how to determine the summary value of a series of units, each of diminishing mar­ginal utility; b) how to price means of production when their value is regarded as a derivative of the differing values of things they may be used to produce; c) how to impute discrete values to two or more means of production that may be used to produce a particular commodity; and d) how to explain exchange-value and profit.

Like Conrad Schmidt in the previous article, Rubin emphasises the indi­vidualistic ontology and methodological subjectivism that distinguished the Austrian school.

Isaak I. Rubin on the Austrian School of Economic Theory

1 History

The theory that the exchange-values^[782] and prices of commodities are determ­ined in the final analysis by their use-value, or subjective utility, is known as the Austrian or psychological school of political economy. The rudiments of such a theory are found in certain eighteenth-century economists, particularly Condillac. But up to the end of the nineteenth century these views had not spread. In science the objective theory of value continued to prevail as set out by the classics (Smith and Ricardo). The mid-nineteenth century work of Gos- sen, who was a predecessor of the Austrian school, went unnoticed. It was in the 1870s that works appeared almost simultaneously by Carl Menger, [William Stanley] Jevons and Leon Walras, the founders of the new school, among whom Menger developed most thoroughly the psychological foundation of the the­ory and Walras the mathematical. During the 1880s [Friedrich von] Wieser and [Eugen von] Bohm-Bawerk, students of Menger (all three of them lived in Aus­tria), worked out in detail the psychological theory that is also frequently called the Austrian theory. By the end of the nineteenth century it became widespread in bourgeois university science in almost all countries of the world. A critical attitude towards this theory has only recently grown up, and even among bour­geois scholars an effort can now be seen to return to the theory of the classics, although usually in a half-hearted and compromising manner.

The mathematical theory was also developed at the same time as the psy­chological one, especially in England, America and Italy (with the result that it has come to be known as the Anglo-American theory). The focus of research for both of these theories is the influence of changes in the quantity of goods upon their price and value. But there are also important methodological dif­ferences between them. The psychological theory begins with the motivation of a separate individual living in conditions of a natural economy; it sees the ultimate cause of changes in the price and value of a good in the individual’s subjective evaluations, which vary in response to the quantity of goods that he has at his disposal. The mathematical theory, on the other hand, begins with the phenomena of developed exchange and studies the correlation between the quantity of goods and their objective market price. Ignoring the question of the final cause of changes in prices (i.e. the problem of value), this theory restricts itself to investigating the functional dependence between the level of market prices and the quantity of goods (the laws of supply and demand). The resulting mathematical ‘formulae of exchange’ are then also applied to the phenomena of production and distribution, thereby restricting the entire purview of economic science to a study of the quantitative changes of market prices.

2 The Subjective Theory and Marginal Utility

In a modern exchange society, commodities have a determinate price in which their objective exchange-value is expressed. The Austrian school claims that we can only understand the origin of exchange-value and the laws that gov­ern its changes after a preliminary investigation of the subjective value that items possess in the conditions of a natural economy. By subjective value is meant the importance that the subject assigns to a particular item as a neces­sary condition for satisfying his needs. The classical economists observed long ago that items with a very high use-value - bread, for instance - are given a much lower evaluation in the market than items that have less use-value, e.g.

If the intensity of a given need declines as the need is satisfied, the question then is: What determines the degree of satisfaction? Clearly, that depends on the quantity of goods at the individual's disposal. If the available supply of a particular good exceeds the quantity needed to satisfy all of the needs for it, then that good - even though it has use-value, or the ability to satisfy human need - will not have subjective value since the loss of a unit of this good will have no effect on the individual's well-being. Such goods (air, for example) are said to be ‘free', as distinct from ‘economic' goods, which are distinguished not only by their usefulness but also by their relative scarcity; that is, they are available in such limited quantity that losing a unit of such a good will compel the individual to forgo satisfaction of some other need. If the supply of bread is only one pound, the subjective value of the latter is equal to 10. If the supply of bread is 3 pounds, then losing one pound of bread will compel the individual to forgo his third need (feeding the household chicken), which is measured by the figure 6. This means that if the supply is 1 pound, the value of one unit of the good is 10; if the supply increases to 3 pounds, the value is 6; and if the supply is 5 pounds, the value of a pound of bread is 1. In the eyes of the person possessing them, all units of the particular good's supply have the identical subjective value, since loss of any one of these units causes him to forgo satisfaction of the least urgent need (e.g. feeding the parrot) among those that can be satisfied with the existing supply of the good. This means that the subjective value of a given good is determined by the utility of the last unit of the existing supply, which enables satisfaction of the least intensive need (the theory of marginal utility). The greater is the supply, the weaker will be the last need it serves to satisfy, the lower will be the marginal utility, and thus the lower will be the subjective value that the individual assigns to a unit of the particular good.

If, with a supply of bread amounting to 5 pounds, the value of each pound is 1, then we may ask: What is the value of the entire supply? The Austrian economists give different answers to this question. Wieser says that once the value of each pound of bread equals 1, the value of all five pounds is 1?5 = 5; that is, the marginal utility is multiplied by the number of units of the particular good. But Bohm-Bawerk says that even though the value of each pound of bread is 1, loss of the entire supply would mean forgoing satisfaction of the five needs that are expressed by the figures 10 + 8 + 6 + 4 + 1 = 29. This means that the value of the entire supply is 29. Wieser's view contradicts the foundations of the Austrian theory, while Bohm-Bawerk's contradicts the facts.

3 The Value of Means of Production

Marginal utility determines the value of ‘consumer goods' or ‘first-order goods', i.e. items of consumption. The value of the latter, in turn, determines the value of the means of production required in order to make them, the so-called ‘producer goods' or ‘higher-order goods'.^[783] If bread is the consumer good, then the flour and labour needed in baking the bread are goods of the second order, while grain, millstones and the labour of grinding the grain are goods of the third order, and so on. The producer goods are regarded as material things, as are labour expenditures. For the sake of simplification, let us suppose that for production of consumer good A it is enough to have only a single producer good of the second order, A2 (it makes no difference whether this is a thing, labour, or some combination of the two); and for production of the latter we require the third-order good A3, etc. It is clear that each of these producer goods (A2, A3, A4 and so forth) makes it possible to acquire product A, following one or several stages of production, so that each has a value equal to the value of the latter. Accordingly, the value of the producer good, with the help of which consumer good A can be produced - either directly or through a number of intermediate stages of production - is determined by the marginal utility of the latter. The value of items of consumption and the value of the means of production required in order to make them are equal - not, however, because the former is determined by the latter, as classical theory thought, but rather because the latter is determined by the former.

If, as is generally the case, different units of a given producer good (iron, for example) are used for making various consumer goods with different marginal utilities (such as a stove with a marginal utility of 20, a spade of 17, and a bucket of 15), then it is understandable that the loss of one unit of iron means having to forgo production of the bucket. This means that the value of the means of production depends on the value of the ‘marginal product', that is, the product with the least marginal utility among those that are made with the help of the given supply of means of production. In the present case the value of each unit of iron, including that expended in producing the stove, is equal only to 15, in which case the value of the stove itself also falls to 15, since loss of the stove does not entail forgoing the marginal utility of 20 that it provides, but only the expenditure of a unit of iron in making a new stove, and that is valued at 15. It follows that the various consumer goods (the stove, the spade and the bucket), regardless of their individual marginal utilities, have an identical value if they are produced with the help of an identical quantity of the same means of production (or labour). The value of the products being reproduced is determined by the value of the means of production expended in making them; but the value of the latter is determined, in turn, by the utility of the ‘marginal product'. The bucket imparts its value (of 15) to the iron, and the latter imparts the same value to the stove and the spade. In the final analysis, the value of both consumer and producer goods is determined by the marginal utility of the ‘marginal product' (the bucket). Thus the Austrian school, although it recognises the action of the ‘law of costs of production', regards it merely as a particular instance of applying the ‘law of marginal utility' to the goods being reproduced.

4 The Theory of Imputation (or of Distribution)

We have looked at a case in which one producer good (iron) is used in mak­ing several consumer goods. But the reverse condition also generally prevails: to make a given consumer good A (the bucket) requires an aggregate or com­bination of several producer goods, for example, B and c, or labour and the material means of production that the Austrian economists call ‘capital' (we are leaving aside land, the third factor of production). The given labour and the given means of production are ‘complementary’ goods (they complement one another), since it is only possible to make the bucket by taking them together. The aggregate value of the two of them is determined by the marginal utility of the bucket; that is, it is equal to 15. But which part of this value must be assigned or ‘imputed’ to the labour and which to the iron? In short, how is the value of the final product distributed between the different means of production that are needed to make it (for example, ‘labour’ and ‘capital’)? The Austrian school has not managed to provide a satisfactory answer to this problem of ‘imputa­tion’ or ‘distribution’. Wieser suggests comparing the value of the given product (the bucket) with the value of some other product made with the help of the same producer goods B and c, but taken in different proportions. With the help of such method we can find, in his opinion, the comparative value of B and c.

Bohm-Bawerk constructs a very complex theory of ‘complementary goods’. He suggests finding first the value of one of the complementary producer goods, B for example. This is possible only in a case where B can be used separ­ately from other means of production and where it thus acquires a separate and ‘isolated’ value, or alternatively in the case where B can be replaced by some other good having a determinate value of 5 for instance. In that case, B also acquires a value equal to 5. Subtracting the value of the ‘replaced member’ B, that is, 5, from the value of the product (the bucket), which is equal to 15, we are left with the balance of 10, which represents the value of c. The invalidity of the theory of ‘imputation’ given by Wieser and Bohm-Bawerck is acknowledged even by certain supporters of the same school.

This teaching, according to which: 1) the value of consumer goods is determ­ined by their marginal utility, 2) the value of producer goods is determined by the marginal utility of the products they are used in making, and specific­ally by the value of the ‘marginal product’, while 3) this value is divided in a determinate proportion between all the producer goods involved in making the product - constitutes the theory of ‘subjective value’.

5 Objective (Exchange-) Value

By this term the Austrian economists understand the possibility of acquiring, in exchange for any given good, a certain quantity of another good, so that the latter represents the price of the first good. The exchange-value of any item is expressed in its price. To understand objective exchange-value is possible only on the basis of subjective use-value, since the market price of a commodity is the result of an encounter between different subjective appraisals on the part of participants in the exchange. First of all, it is obvious that two people can enter

into mutual exchange only given the condition that each of them appraises the value of the good to be received in the exchange as higher than the good they will give up in order to acquire it; that is, if the subjective appraisal by each of the two contracting parties is the opposite of the other's appraisal. Let us now take the case of developed exchange, where a multitude of buyers encounter a multitude of sellers, each of whom competes with the others. For this purpose Bohm-Bawerk provides the following scheme (in which the exchange occurs through money):

The buyers are arranged in a series, beginning with those having the highest evaluations: they are willing to pay a high price and thus enter into exchange sooner and are more ‘exchange-ready'. The series of sellers also begins with the more ‘exchange-ready', that is, those whose subjective evaluations are lower. It is obvious that only 5 pairs of buyers and sellers will enter into exchange, since the evaluations of the remaining buyers are below those of the remaining sellers, thus excluding the possibility of exchange. This means that all the buyers and sellers below the dotted line are excluded from exchange. The seller A_s and the buyer b₅ are the final pair participating in exchange, while A₆ and b₆ are the first pair excluded from exchange. Both of these are called ‘marginal pairs'. They play the decisive role in exchange since the objective market price that is established for all other exchange participants depends upon their subjective evaluations. That price cannot be higher than the evaluation of buyer A_s, that is, 220 roubles, for otherwise A_s will withdraw from the exchange and the demand will turn out to be less than the supply, which will cause a decline in price. Yet the price also cannot be higher than 215, or the evaluation of seller b₆, for otherwise b₆ will also want to sell his horse, and the supply will again exceed the demand. Contrariwise, supply will fall below demand if the price is lower than the evaluation of b₅, that is, 200 roubles, or below the evaluation of A₆, namely, 210 roubles. This means that the market price cannot exceed the subjective evaluation of the last actual buyer or of the first excluded seller, and it cannot be lower than the subjective evaluation of the last actual seller or of the first excluded buyer. In the present case the price will be established between 210 and 215 roubles, since only with such a price will the number of those who wish to buy be equal to the number of those who wish to sell; that is to say, equilibrium will be established between demand and supply. Thus the price of the commodity is determined by the subjective evaluations of the two marginal pairs.

At first sight it may appear that the Austrian school has actually demon­strated that objective exchange-value is determined by subjective use-value. It must be remembered, however, that as soon as the market price of different items is established, the parties to exchange cease to evaluate them according to their marginal utility or use-value. If they wish to determine the subjective value of one or another item for themselves, they start out with its determined price or its objective exchange-value.

Consider first a buyer or consumer. Is he really inclined to assign a very high evaluation to his coat, which protects him from the cold? Not at all. The Austrian economists themselves recognise that if the market price of a coat is 100 roubles, then its owner, in the event that he loses it, will buy another coat and will then evaluate it not according to its own marginal utility, which is very high, but according to the ‘substitution utility' of those items that he could buy for the 100 roubles if he did not have to use that money to buy a coat. But in order to determine this ‘substitution utility' it is first necessary to know the precise quantity of other items that can be purchased for the 100 roubles; that is to say, a determinate price for those other items is presupposed.

Now consider the seller or producer. For him, the marginal utility of his com­modities is nil because he personally has no demand for them. He evaluates them not according to their use-value but according to the magnitude of their production costs. If the price of the commodity does not cover the costs of production (plus the average profit), the producer will either cease or curtail production. If cotton or textile machinery becomes less expensive, the cloth producer, in order to expand his sales, will lower the price for cloth even when its marginal utility remains unchanged in the eyes of the purchaser. The produ­cer always has to deal with objective exchange-value. Even if, for some reason, he wants to determine for himself the subjective value of a given lot of cloth, which can be sold for 1,000 roubles, he will evaluate it not according to its mar­ginal utility but in terms of the utility of those items he could purchase with the 1,000 roubles acquired by selling the cloth. He will evaluate the cloth (as Bohm-Bawerk recognises) according to its ‘subjective exchange-value', which will be higher, the higher is its objective value or price. Consequently, in a com­modity economy it is not prices that are determined by subjective evaluations, but rather the latter emerge on the basis of prices that are determined before­hand. Even if the Austrian theory had correctly explained the laws governing the subjective evaluation of goods in a natural economy, and of the formation of prices in the transition from natural economy to one of exchange - which is also doubtful for a whole number of reasons, particularly since the general pos­sibility of comparing and measuring utilities has not been established - [the theory] would still not apply to the phenomena of an exchange economy. The position of the Austrian school is especially problematic when it attempts to explain the phenomena of a capitalist economy, and this is clearly evident in its theory of profit.

6 The Theory of Profit

If product A, having a value of 110, is produced with the help of producer goods B and c (for example, labour and the material means of production that the Austrian economists call ‘capital'), then the value of B and c, taken together, is also equal to 110. The Austrian school considers this to be beyond dispute, even though it cannot resolve the problem of ‘imputation' or ‘distribution' of the value of 110 between B and c. However, capitalist reality demonstrates that B and c, taken together, in fact have a value not of 110 but of something less, say 100. The capitalist pays 100 roubles altogether for the labour of workers (b) and the means of production c, and after a year he receives product A with a price of 110 roubles. The surplus of ten roubles represents his profit. Does not the fact of the existence of profit contradict the position of the Austrian school, which says that the value of producer goods is equal to the value of the consumer goods made with their help? In order to resolve this contradiction, Bohm-Bawerk constructed his theory of profit.

It is enormously important for an economic subject to know not only the marginal utility of goods but also when the goods are acquired. A pound of bread that is acquired today and a pound of bread subject to a year's wait have different subjective values for the individual. The future good has a lower value than the same good acquired today. The higher evaluation of today's goods is explained by the fact that: 1) the subject calculates that in future he will have a more abundant supply of goods, which therefore have a lower marginal utility for him than today's goods; 2) as a result of insufficient consciousness or lack of will, he cares too little about satisfying his future needs and mistakenly evaluates them as less than current needs; 3) or finally, the third and most important cause of a high appraisal of current needs involves higher technical productivity.

Suppose that a fisherman, having virtually no means of production, acquires with some difficulty the two poods of fish required to sustain himself weekly, or 100 poods in the course of a year. If he had an inventory of 100 poods, he could devote part of the year to making means of production or ‘capital’ - for example, he could collect wood and iron ore for 3 months, spend 3 months working them up, and 3 months using them to make a boat and instruments - in order to devote the final 3 months of the year directly to fishing. As a result of this ‘capitalist’ or ‘roundabout’ production, which is technically more advanced, he would acquire 110 poods of fish by the end of the year, whereas if he occupies himself throughout the year with fishing, but not having the benefit of these means of production, he will have difficulty in acquiring 2 poods weekly or 100 poods in the course of the entire year. Since the current availability of 100 units of the given good makes it possible to acquire, by means of ‘roundabout’ production, 110 such units in the course of a year, it is clear that the 100 current units have the same value as the 110 future units expected after a year has transpired.

The labour of a worker (b) and means of production (c), purchased by the capitalist, actually represent ‘future goods’, for only after completion of the production process, which may continue perhaps for an entire year, do they turn into consumer good A, which has a value of 110 roubles. b and c currently have a value that does not exceed 100 roubles, but after a year they ‘mature’ into consumer good A, whose value is 110 roubles. The capitalist acquires the profit of 10 roubles not from exploiting the labour of workers, but because he has ‘waited out’ the time required for the ‘maturation’ process whereby future goods become current goods.

Bohm-Bawerk’s theory of profit has been criticised on several grounds. It has been pointed out to him that in capitalist society the work of acquiring the iron, making the boats and nets, catching the fish, etc., is divided up between sep­arate enterprises. Each of them works throughout the year and continuously sends its product to market; the iron, the nets, the fish etc. Since the sequential phases of production are completed simultaneously by different capitalists, not one of them has to ‘wait out’ the time between first acquiring the raw material and then making the final item for consumption. The bankruptcy of Bohm- Bawerk’s theory is recognised even by some Austrian economists: Wieser offers a theory of the ‘productivity’ of capital; Schumpeter denies the possibility of profit as a continuous income and acknowledges only the possibility of profits being temporarily received by owners of enterprises that surpass the average in terms of their level of technical perfection (differential profit, or super-profit).^[784]

7 Method

A summary appraisal of works by the Austrian school comes to this: it has worked out a more or less complete theory of subjective value in terms of logic (although it is psychologically contentious and sociologically barren); in its efforts to deduce the laws of objective exchange-value from subjective value it encounters a number of contradictions; and it has been unable to resolve more or less satisfactorily the problems of distribution in general or of the profit of capital in particular. The failure by the Austrian school to explain the basic phenomena of a commodity economy, and especially of a capitalist economy (exchange-value and money, capital and profit), is the inevitable consequence of the method it adopts. Political economy does not study the technical side of the economy but rather its determinate social form, namely, commodity-capitalist economy. It begins with the existence of objective-social and historically changing relations between people, which correspond to a given state of the productive forces. The Austrian school begins not with the objective-social relations between people but with the psychology and motives of separate individuals (the subjective-psychological method); it studies ‘economic activity' in general, independently of the historical form of the economy; it looks for the economy's motive force not in the sphere of people's productive activity but rather in the sphere of consumption.

The Austrian school takes a single individual, isolated from the entire social environment and confronting nature alone, and asks how this person will sat­isfy his needs with the aid of the material goods on hand and depending upon their greater or lesser scarcity. Insofar as it studies the psychology and ‘apprais­als' of such an isolated subject, it cannot possibly construct abridge from him to a person whose economic activity occurs in a determinate social environment and who occupies a determinate social position in the social production pro­cess. Even in its own special sphere, which deals with the motivation and psy­chology of economic subjects, the Austrian school has been unable to provide fruitful results, since it studies the psychology of ‘natural' man, which has noth­ing in common with the psychology of members of a commodity-capitalist society. In the representations of the Austrian school, the latter appear as Robinson Crusoes, and all social-economic phenomena are converted into natural-technical elements of consumption and production that are subject to psychological ‘appraisal’; value is the significance of the item for consumption, capital is the means for its production, and so forth. Depriving the production process of its given social - namely, capitalist - form, the Austrian econom­ists thereby dismiss the question of the latter’s historically transitory character. They are willing to introduce into capitalist economy modest improvements that alleviate the class struggle, but they respond negatively to any idea of the possibility of eliminating capitalism and the capitalists, in whose initiative and energy they see the sole impetus for powerfully developing the productive forces (Schumpeter).

Certain doctrines of the Austrians have the character not so much of theoret­ical explanation as of justification for capitalist society (the theory of imputa­tion and especially of profit). These explicit social sympathies on the part of Austrian economists, together with the fundamental peculiarities of their the­oretical position - replacement of the capitalist form of economy with ‘pure economic activity’ in general; transformation of a society consisting of specific classes into an aggregation of individual Robinson Crusoes; the idea that the moving forces of the economy are the psychological experiences and motiva­tions of separate individuals as consumers; transfer of the research focus from the sphere of production to the sphere of consumption; ignoring the dynamic of the economy and its tendencies of development - all of these attributes characterise their doctrine as a theoretical tendency that corresponds with the ideology of the bourgeoisie in the epoch of capitalism’s decline, a time when any objective study of the tendencies of social development leads to the con­clusion of capitalist economy’s inevitable destruction.

In this epoch the objective, social and historical method (the nucleus of which was established by the classics, as the leading ideologists of a young and progressive bourgeoisie) becomes the exclusive property of Marxist economic theory, while bourgeois science appeals to the subjective, psychological and anti-historical method. The allegedly unchanging psychological ‘nature’ of man comes to serve as the starting point for theoretical research and as an argument for the impossibility of a socialist economy. It is not surprising that the Austrian school has come out with a zealous polemic against Marxism and has enjoyed rapid and clamorous success amongst bourgeois scholars, who have seen in it - following the long period during which the historical school predominated, with its narrow empiricism and abandonment of theory - an acute theoretical weapon for the struggle against Marxism and socialism.

Literature: The most important works by the Austrian economists are: Menger, Grundsatze der Volkswirtschafslehre (Russian translation: Osnovaniya politi- cheskoi ekonomii, 1903); Bohm-Bawerk, Grundzuge der Theorie des wirtschaf- lichen Guterwerts (Russian translation: Osnovye teorii tsennosti khozyaistven- nykh blag, 1904); Bohm-Bawerk, Capital und Capitalzins, 2 volumes (Russian translation of the first volume: Kapital ipribyl^,, 1909); Bohm-Bawerk, KarlMarx and the Close of his system (Russian translation: Teoriya Marksa i ee kritika, 1897); Wieser, Der naturliche Wert (1889); Wieser, Theorie dergesellschaftlichen Wirtschaft (in Volume I of Grundrisse der Socialoekonomie, 1914); Criticism of the Austrian School; Bukharin, N., Politicheskaya ekonimya rante, 1923 (English translation: The Economic Theory of the Leisure Class); the collection Osnovnye problemy politicheskoi ekonomii, 1924 (edited by Sh. Dvolaitsky and I.I. Rubin); Hilferding, Bohm-Baverk kak kritika Marksa, 1923 (English translation: Bohm- Bawerk’s Criticism of Marx).

I. Rubin

Appendix

In his Essays on Marx’s Theory of Value, Isaak Rubin includes a chapter on ‘Value and Social Need' that elaborates several of the issues posed in his entry on the Austrian school for the Great Soviet Encyclopaedia. Since Marx treats value as the essence of price phenomena, the issue that concerns Rubin is how value relates to social need and demand: ‘the value of commodities does not only depend on the productivity of labor (which expresses that quantity of labor necessary for the production of commodities under given, average technical conditions), but also on the volume of social needs or demand’.^[785]

Marx frequently pointed out that demand is determined both by effective demand and by changing commodity prices, with the volume of demand being more or less elastic (i.e. more or less responsive to price changes), depending upon the commodity’s position on the scale of subsistence needs.^[786] The result, Rubin said, is the familiar demand ‘schedule’, or curve of social demand. In Volume iii of Capital, Marx wrote that demand ‘moves in the opposite direction to price, expanding when it falls and vice versa’.^[787] ‘It is evident... that the expansion or contraction of the market depends on the price of the individual commodity and stands in an inverse relationship to the rise or fall in this price’.^[788]

But if we assume constant technology, together with ‘a given structure of needs and given purchasing power’,^[789] then Rubin said the conclusion of mar­ginal utility theorists is refuted: value is what determines the volume of demand, not the reverse.^[790] ‘The real volume of demand is determined by the magnitude of the productivity of labor ;^[791] and equilibrium entails all commod­ities selling at their values (or prices of production), which in turn presupposes equilibrium between the various branches of production (i.e. all commodities selling at a price that yields the social average rate of profit).

Rubin acknowledges that an upward shift in demand ‘can take place because of an increase of purchasing power of the population, or because of increased requirements for a given product’.ⁿ If the production technique is still assumed not to have changed, a higher market price will give producers a ‘superprofit’, causing an expansion of production and possibly a movement of capital from other industries. Production will then expand until equilibrium between the various branches of production is restored?² The value of the commodity, and thus its price of production will remain constant, but a larger volume of the commodity will be produced due to the increased capacity of producers.

The question changes, however, if technology and labour productivity no longer remain constant. Ricardo saw, for example, that an increase of output in agriculture brings diminishing returns and raises the value of agricultural products. If the total output of a manufactured commodity likewise comes from enterprises with differing levels of productivity, then the market value of commodities is ‘determined by the value of commodities produced in average or less favorable conditions’, which are now the ones that define ‘socially neces­sary’ labour.1³ When the price rises, ‘production will attract enterprises with average or low productivity’.^{[792] [793] [794] [795] [796] As a result, value will increase at the same time as supply. This means demand will influence value, but only indirectly, ‘namely by changing the volume of production and thus its technical conditions’45 Rubin writes that ‘the extension of production to worse enterprises changes the aver­age magnitude of socially-necessary labor per unit of output, i.e. changes the value (or price of production). These changes are explained by the technical conditions of a given branch'd6}

The difference between Rubin’s interpretation and that of the ‘Anglo-Ameri­can and mathematical schools in political economy, including Marshall’,1⁷ is that the latter do not ask Why prices change’ but only show ‘how simultaneous changes in price and demand (or supply) take place’?⁸ This relation between demand and supply, which Rubin calls ‘functional’, is illustrated in the following diagram.

DIAGRAM 1

The diagram appears to show that price is determined ‘exclusively by the demand and supply curves’. In the present case, the change of demand causes a rise in price (measured on the horizontal axis) from 3 roubles to 5 roubles and an increase of output from 300,000 units (iii) to 450,000 units. Alternatively, a fall in demand might cause production to contract, say, to 150,000 units selling at 1.5 roubles per unit. The diagram implies that any level of supply is con­ceivable, depending upon changes in demand. ‘It seems', says Rubin, ‘as if the price is not determined by the conditions of production, but exclusively by the demand and supply curves'.^[797] However, Rubin objects that ‘Such a supply curve is possible [only] if we are dealing with a market situation at a given moment’.^[798] In extraordinary conditions, and for brief periods, an unusual increase in prices may force some producers to sell at ‘catastrophically' low prices or ‘to deliver to the market all stocks and inventories and to expand production immediately, if this is possible'.21

But such a state of affairs cannot long continue. The problem with the diagram is that it ‘only gives us a picture of a momentary state of the market but does not show us a long-range, stable equilibrium between demand and supply, which maybe theoretically understood only as the result of equilibrium between thevarious branches of production’^ Thus, ‘from the accidental price of one day we [must] pass to the permanent, stable, average price which determines the constant, average, normalvolume of demand and supply.2³ Over a longer period of time, catastrophically low prices would drive capital elsewhere in search of the normal average rate of profit, or extraordinarily high prices would attract new capital to the industry in question?⁴

The result is that, given no significant technological change, and with ‘an average, long-range volume of supply and demand', the long-run supply ‘curve' would simply be a vertical line, which Rubin represents in a second diagram. Now, ‘The magnitude of the value (3 roubles) determines the volume of effect­ive demand for a given commodity and the corresponding volume of supply (300,000 units of output.)'?⁵ A permanent increase in demand may result in increased supply - for instance, from 300,000 to 600,000 - as new capitals are attracted from other sectors, but the price of production, with no change of labour productivity, would remain constant. ‘This price is determined exclus­ively by the productivity of labour or by the technical conditions of produc- tion'.2⁶

Finally, Rubin reintroduces the additional fact that enterprises within a par­ticular sector will normally have differences in their levels of productivity, a

In this case, the most efficient enterprises can produce 200,000 units at a price of 2.5 roubles; if the pressure of demand causes average enterprises to add to total output, raising it to 300,000, the price will rise to 3 roubles per unit; and if least efficient enterprises then also become involved, supply will rise to 400,000 units at a price of 3.5 roubles. ‘Curve ACB is the supply curve. The point of intersection of this supply curve with the demand curve (at point c) determines

the actual volume of supply and the corresponding value or center of price fluctuations’.^[799] If the new schedule of demand were to become permanent, then, once again, the supply would permanently increase, in this case through a vertical movement upward of the schedule AC B, and the new level of c would be the point of intersection with the new demand curve.

The salient point of Rubin’s analysis is that there is, indeed, a demand curve, reflecting an inverse relation between quantity and price. Marx understood this, and so, for that matter, did Adam Smith. The demand curve was no unique discovery by marginal utility theory. Secondly, Rubin concluded that there is also a supply curve, albeit limited within a predetermined range by the exist­ing state of labour productivity and the corresponding price of production?⁸ Rubin’s argument upheld the view that Marx first stated in the Grundrisse and ultimately repeated in Volume iii of Capital: that is, that price is ‘nominal’ but value is ‘real’, and the law of the latter ‘appears as the law of motions which the former runs through’?⁹