Value and distribution

The division of labor and exchange

The theory of market self-regulation is arguably the central achievement of the classical approach to political economy and the key to understanding how a classically influenced economist might understand the interrelation of the economic and the political.

The division of labor has a very close association with exchange. In the absence of a market for the product, it makes very little sense for an otherwise isolated individual to specialize in the way demanded by the division of labor. At the same time, participation in the division of labor requires the individual producer to exchange in order to acquire those elements of subsistence he or she does not produce. Adam Smith places this two-sided relationship between the market and the division of labor at the center of his analysis. With the division of labor every man “becomes in some measure a merchant” (1937:22). Our participation in a division of labor forces us to exchange. The type of mutual dependence associated with division of labor gives rise to the system of exchange. At the same time “the division of labor is limited by the extent of the market” (1937:17). The market also plays a part in stim­ulating the development of the division of labor.

The division of labor occupies a position in the classical treatment of exchange analogous to that played by utility maximization in neoclassical theory.

Smith, Ricardo, and Marx cut a direct path between the division of labor and price by arguing that prices depend on the relative quantities of social labor used in the production of commodities.^[9] The reproduction of the goods that make up the social product is thought of as a set of “labor processes” (Marx 1967a:ch. 7) linked by inputs and outputs. The sum of the labors of individuals provides society with its productive resource. The sum of labors must be allocated to the various processes that produce the goods needed as inputs into social reproduction. This classical framework encourages us to visualize a single pool of social labor divided among particular tasks and reunited by exchange. The proportions defined by the needs of social repro­duction taken as a whole determine the appropriate rates of exchange. These rates assure that each producer will receive in the sale of his output a value adequate to renew his means of production.

This idea has a simple and direct interpretation if we assume that the price of a commodity measured in terms of another commodity equals the ratio of the amounts of labor used in their respective production. Thus, if it takes twenty hours of labor to produce a chair and ten hours to produce a jacket, then the jacket price of chairs (the number of jackets required to purchase a chair) must equal two. In this case, the exchange of jackets for chairs brings about an exchange of jacket-producing labor for chair-producing labor.

The labor theory of value provides a direct link between the division of a pool of social labor and the exchange of commodities. The theory runs into a number of analytical difficulties, however, which have convinced modern economists working in the classical tradition to build a materialist basis for exchange by employing a distinct starting point also present in the classical theories: price of production. These authors, rather than rooting price in the division of a pool of social labor, root it in the technical specification of a production structure.^[10]

Consider the set of commodities that make up the social product during a given period. The production of each commodity requires the use of a subset of the remaining commodities as productive inputs. We can charac­terize the method or technique of production for a given commodity as an equation relating the number of each required input to the product. The technique is, in effect, a kind of recipe for producing a particular commodity. The set of such recipes constitutes a summary of the overall technology for reproduction of the set of products. It depicts the production structure within which material reproduction takes place. The production structure relates inputs to outputs quantitatively. Commodities appear both as the output of their own production process (captured in the appropriate equation) and as inputs into the production processes of other commodities.

For reproduction to take place, the set of outputs produced must be ap­propriate in form and sufficient in magnitude to provide the inputs needed for their own production. If the output set is just appropriate in this sense to replace inputs used for its production, the economy may be said to produce a surplus equal to the excess of the set of products over the inputs needed for reproduction.

When an individual producer specializes in production of a single com­ponent of the social product, the market value of his output determines his ability or inability to acquire needed inputs given their market prices.

The classical method effectively eliminates individual choice and decision making from playing a part in determining economic affairs (Nell, 1967). Individuals may make decisions, but ultimately the material-technical rules of reproduction govern the outcome. The method attempts to replace choos­ing agents with objective rules.

One area in which the classical method contrasts most sharply with the neoclassical is in its treatment of consumption, especially workers’ con­sumption. Application of the classical model to wage determination has led to the treatment of labor on the basis of the idea that its price is determined in relation to costs of production. Otherwise the prices of products employing labor as an input cannot be uniquely determined by technical rules for trans­forming inputs into outputs. In order to solve this problem, the classical method determines the composition and magnitude of workers’ consumption on the basis of rules independent of the desires and choices of individual workers. The term “subsistence” designates consumption needs determined in this way.

The simplest approach to subsistence appeals to costs of reproducing work­ers. As Piero Sraffa puts it, the notion of subsistence places workers’ con­sumption “on the same footing as the fuel of the engines or the feed of the cattle” (1960:9).

More recently, the notion of subsistence has moved away from the narrow idea of costs of production.⁶ Contemporary classical models treat workers’ consumption as a given for the market. Subsistence means that the needs the market must satisfy do not depend on the market, and in particular, do not vary with the prices of commodities. Consumers have needs, and they have recourse to the market to acquire the means to satisfy those needs. However those needs may be determined (and the theories do not address this issue), they do not involve trade-offs and do not vary with prices (at least in the short run). By contrast, consumers making decisions on the basis of preferences will vary the composition of their consumption with variations in relative prices of its elements.

The following example may help to illuminate the link between production structure and price (see Sraffa 1960). Consider a simple economy whose reproduction entails the use of only three inputs: iron, wheat, and labor. We may think of iron as representing inputs of means of production and wheat as representing inputs of materials and means of subsistence. This simple economy may be depicted as a set of production relations that together con­stitute a production structure (t = tons, bu = bushels, hr = hours):

Each line represents the relation between the inputs (on the left-hand side) and a component of the social product (on the right).

The simplest classical theories treat labor as a produced commodity that has a cost of production like all other produced commodities. The third

Garegnani (1984) reinterprets the classical notion of subsistence in this direction. production relation expresses this idea. The consumption of a given amount of wheat (presumably in the form of bread) renews the worker’s capacity to labor for a given period of time. In effect, then, when labor enters as an input, it is really so much wheat, which went to produce the labor, and enters as input through its product, the laboring capacity of the worker. By making this explicit, we can simplify our depiction of the production structure into only two production relations:

In the case assumed, of an economy that is just viable and produces no surplus, there is one rate of exchange that allows (1) for the wheat producer to acquire the iron needed to produce wheat while retaining sufficient wheat to feed his workers and use as raw material and (2) for the iron producer to acquire the wheat that he needs while retaining the iron needed for the production of iron. As can be seen from the production relations, 150 bushels of wheat must exchange for 10 tons of iron. The wheat price of iron must be 15. This example makes vivid the manner in which the production struc­ture and the needs of reproduction determine relative price.

Consider now production with a surplus. We can depict this case with the following modifications of the production relations:

We now have production of a surplus consisting of 100 bu wheat and 10 t iron. Simplifying again to eliminate the explicit statement of the third rela­tionship (production of labor by wheat):

In the case of production with a surplus, we can no longer determine price directly from the production structure. Indeed the wheat price of iron may settle at any point between 7.5 and 25 bushels of wheat and still allow reproduction to take place. Although differences in price within this range do not affect the ability of the economy to reproduce itself, they do affect the way in which the surplus is distributed between the wheat producer and the iron producer. If the wheat price of iron is 7.5 bushels of wheat, all the surplus accrues to the wheat producer. In other words, at that price, the wheat producer can (1) retain the 550 bushels of wheat needed as productive input for the next period, (2) retain an additional 100 bushels of wheat, and (3) have 150 bushels of wheat left, which at a price of 7.5 bushels allows the

wheat producer to purchase 20 tons of iron. The entire surplus consisting of 100 bushels of wheat and 10 tons of iron ends up in the hands of the wheat producer. It can be easily verified that with a wheat price of iron of 25 bushels, the entire surplus will end up in the hands of the iron producer. Thus, in the case of production with a surplus, price must be determined (1) within the range consistent with reproduction and (2) on the basis of a rule for allocating the surplus.

As we have seen, in the classical framework, the possibility exists that the subsistence needs of workers will fall short of the amount of subsistence those same workers (together with the needed inputs) can produce in a given period. More generally, the possibility exists technically that the use of the current output as inputs into production will generate an amount of output in excess of that needed for continuing production at the current level. Society then faces the problem of what to do with this surplus. This means that society must allocate the surplus to particular activities (consumption and produc­tion) according to some rule. For different societies, the use of the surplus will vary and thus its material form and magnitude will also vary. Indeed, according to Marx:

The specific economic form, in which unpaid surplus-labor is pumped out of direct producers, determines the relationship of rulers to ruled, as it grows directly out of production itself and, in turn, reacts upon it as a determining element. Upon this, however, is founded the entire formation of the economic community which grows up out of the production relations themselves, thereby simultaneously its specific political form. (1967, Vol. 111:791)

In a capitalist society,^[11] the surplus primarily adopts the form of profit - the difference between the value of output and its costs of production. This profit accrues to the owners of the capital stock as their private incomes.

As we have seen, when society produces a surplus, the costs of production (including the subsistence wage) cannot fully determine prices. The margin between price and cost is the surplus measured in value and allocated to the producer as his profit or income. Put the other way around, the prices of commodities depend both on their costs (employment of other commodities as inputs) and on the profit that accrues to their producer, normally in relationship to those costs. The price of a commodity equals the sum of its cost of production and of the surplus that accrues to the producer as his profit.

This conclusion has a striking interpretation. Market prices, connected to the social institutions of property and contract, express a deeper reality shared with nonmarket forms of allocation and distribution. According to the clas­sical view, all societies must reproduce themselves by reproducing the sub­sistence of their workers, and they must also distribute their surplus in accordance with the requirements of their particular social institutions. What varies across societies is the form that these processes adopt. The market is one among a number of social mechanisms for meeting a material necessity of life. This means that the economic (in the sense of material provisioning) exists whether or not the market exists, and therefore whether or not our economic activities take place together in a separate sphere we might call an economy.