Carchedi and Roberts convincingly show how Marx’s value theory is essential to understanding contemporary capitalism, finds Dominic Alexander

The most essential element of Marx’s economic theory is his concept of value. Its absence from mainstream economics, whether neo-classical or Keynesian, is at the root of the discipline’s failures. Many left-wing economists have deliberately abandoned value, viewing it, like the left-Keynesian Joan Robinson, as merely a metaphysical abstraction. It is not, however, as Roberts and Carchedi point out at the outset of Capitalism in the Twenty-First Century. Value is the direct physical result of the exertion of human labour on nature’s use values, turning them into other use values (p.1).

However, use values cannot be directly exchanged with each other in a market system, since each is qualitatively different the other. Exchange is only possible if there is something they have in common that is commensurable. This common property is labour time, which needs to be taken as the socially average labour time necessary for production, what Marx calls ‘abstract labour’ (p.46). Hence exchange value needs to be distinguished from use value, while the foundation of exchange is the measure of social labour that is required in production. This gives us the labour theory of value at the overall social level of exchange.

It also means that, as Marx said, it ‘is not money that renders commodities commensurable. Just the contrary … Money as a measure of value is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time’ (p.46). The switch from gold to fiat currency does not change the fundamental nature of money (p.54). Thus the proponents of Modern Monetary Theory are wrong to see money as something created simply by the state to enable to payment of taxes; ‘the state merely validates the money form – it doesn’t invent it, as MMT claims’ (p.53). The authors carefully dissect MMT, showing why it doesn’t stand up, and go on to critique enthusiasm for digital currencies (which are not money, they are vehicles for financial speculation). Proponents of digital currency also fail to grasp the nature of money under capitalism.

Orthodox economic theory does not recognise the distinction between use value and exchange value, and attempts to find the determination of prices at the level of utility, hence the neoclassical ‘marginal utility’ theory. Here the marginal cost of each extra unit of production depends upon its utility to a potential customer. As Carchedi and Roberts argue, this approach rests economic analysis on a basis of pure subjectivity, and is, in reality, the metaphysical abstraction, which the labour theory of value is not.

Where bourgeois economics takes its starting point from ‘common sense’ assumptions, that is, the immediate appearance of things, Marx, as always, delves beneath the surface to reveal the hidden workings of the system. In investigating the nature of value, he is therefore able to show the exploitative heart of capitalism. On the surface, a worker receives a fair wage according to the value of labour in the market, but in reality, that wage is less than the total value a worker produces. It is this difference, surplus value, which alone is the source of profit. Once these hidden realities of value are laid bare, the full dynamics and contradictions of the system follow.

The puzzle of inflation

The subtitle of this book, Through the Prism of Value, is very apt, since the authors are able to use Marx’s value analysis to explain and illuminate a huge range of the economic and technological issues of the present, from recurring crises and global inequality, through capitalism’s inability to deal with climate change, to robotics and AI, digital currencies and more. Perhaps the most startling failure of the different schools of orthodox economics lies in their inability to explain the pattern of the rise and fall and rise of inflation over the last fifty years. Here, Carchedi and Roberts offer their own theory of inflation, based on Marx, while showing the one-dimensional nature of the standard explanations.

The monetarist theory of inflation, dominant in the 1980s, restricts its analysis solely to the supply of money; if there is too much money injected into the system (by governments or central banks), then inflation goes up, if there is too little, then there is deflation. However, ‘the empirical evidence for the monetarist view is weak’ (p.80), and has in effect been proven wrong by the behaviour of inflation over the last twenty years. Most recently, during the pandemic, credit injections did not stoke inflation, partly because there was ‘an unprecedented fall in the velocity of money’. The lines of causation drawn by monetarism between money supply and inflation can just as easily be reversed; for example, if inflation is slowing, or there is an economic downturn, the money supply is reduced (because these factors encourage hoarding), rather than the other way around. In essence, monetarism takes too narrow a focus to be able to explain anything successfully.

Other orthodox approaches to inflation are the ‘demand-pull’ theory and the ‘cost-push’ theory, both of which rest on ‘supply and demand but from different ends’ (p.77). In the former, if wages fail to keep up with the production of goods, then there is disinflation, and conversely, if wages outstrip output, demand increases beyond supply, and this causes inflation. On the ‘cost-push’ side, it is increasing costs of production, mainly wages, which cause the rise in prices. This is the Keynesian approach, which makes it ‘a wage-push theory. Inflation depends on the relative demand for and supply of labour forcing up wages’ (p.78).

There is thus in Keynesian economics a relationship between the unemployment rate and inflation, with falling unemployment leading to higher wages, and the result being rising inflation (this is represented statistically as the Phillips curve). Like monetarist theory however, empirical evidence suggests that this line of causation does not hold true; plotting unemployment against inflation from US data shows a virtually flat line, where it should be steep (figure 2.5, p.79). Just as historical experience belies monetarism, so it does the supply-and-demand based theories; after the 2008 crisis, when unemployment was historically low, so was inflation.

All these theories leave out one important factor, of course, and this is the role of profit. The authors are clear that this is a highly ideological omission. It is not accidental that following mainstream economics, it rapidly appears that whatever the cause of an economic crisis, the answer is always that it is the workers who must bear the burden; profits not so much. However, in order to explain inflation fully, it is necessary not just to add profits into the picture, but to take a wider and deeper view of the whole economy, and that means going back to the issue of value, and how its movements operate across the historical long term.

Value and profitability

Where classical economics largely assumed that the value of a commodity derived from a combination of invested capital, raw materials and labour, more or less equally, Marx showed that labour was the key that enabled new value, that is profit, to be created. However, in order to realise the surplus value, capitalists must compete with each other in the market to sell their commodities. Those that can sell more cheaply stand a far better chance of realising the highest amount of the potential surplus value in their output. This drives capitalists to invest in labour-saving machinery, which makes their workers more productive, but gradually new technology spreads across the whole economy.

Over time, the effect is for the quantity and capital cost of the means of production to increase relative to the labour required to produce goods. Marx calls this shift in the balance of machinery compared to labour, a rise in the organic composition of capital. The problem for capitalism is that machinery can only transfer the value already embedded in its own production. It cannot create surplus value; only labour can do that. This means that overall, capital becomes less profitable the higher the organic composition of capital. This is the tendency for the rate of profit to fall. Carchedi and Roberts discuss this law, and the various countervailing factors which act against it, in detail, but also refer to the increasing volume of evidence showing its empirical validity across economic history.

The law of profitability has a host of implications, but to return to inflation, it provides the basis for the authors to construct a new Marxist theory of inflation. To begin with, they show that, due to the long-term rise in the organic composition of capital, there is in fact a tendency towards disinflation. This is because the mounting accumulation of total value in the economy increases relative to the total purchasing power of labour and capital (wages and profits) combined.

Capitalism changes shape as it develops, and the economy develops a greater mass of constant capital (machinery, infrastructure and so on) over time, relative to what can circulate within the economy. That this deflationary tendency is a reality is borne out by the data over the period 1960-2018 which shows ‘a long-term secular decline in the US consumer price index (CPI) inflation’, even despite inflationary periods, such as that of the 1970s (p.76).

A Marxist theory of inflation

Explaining changes in the inflation rate involves combining the measures of purchasing power, including both profit and wages, as well as the quantity of money. For monetarism, the latter is the active factor: if there is more money, then prices go up. However, Carchedi and Roberts argue that in fact, ‘the prices of commodities, that is, their value, determines the quantity of money in circulation and not vice versa’ (p.84). Money isn’t just a token, produced by governments at will, as MMT theorists will have it (p.52), but ‘is the manifestation of value’ and so ‘a certain quantity of new value, to realise itself, needs and determines a certain quantity of money’ (p.85).

Applying all this to the post-war period, the inflationary period of the 1970s was therefore not caused by a ‘wage-price spiral’, as the mainstream insists. Rather, the cause lies in the interaction of constant capital growth and combined purchasing power growth (CPP, including profits and wages). While ‘total value rises at 8.7 per cent, constant capital grows by 19.2 per cent and the CPP by 8.5 per cent … Thus, the CPP falls as a percentage of total value, but given that total value grows strongly, the CPP rises percentage-wise. This explains inflation’.

Conversely, in the second period of decelerating inflation (1980-2019), ‘total value falls percentage-wise’, yet the growth of constant capital accelerates. That is to say, higher levels of investment are needed to fuel growth, which is slowing down. The result is that ‘there is less space for the CPP to grow and the CPP growth decelerates from 8.5 per cent to 4.7 per cent. This explains disinflation’ (p.86).

The relationship between constant capital growth and CPP is the primary driver of the rate of inflation, but in modern conditions, money quantity also plays a role. However, over the period 1960-2019, the ‘weight of the CPP is five times more (0.50) than that of M2 (0.10) in the determination of CPI inflation’ (p.88). Here M2 is the money supply adjusted to apply to the productive sector of the economy only, excluding finance. However, since disinflation ‘is due to the shrinking share of new value (wages and profits) within slowing total value growth’ (p.88), monetary policy has totally failed to influence inflation rates through interest rates, or the loosening or tightening of monetary policy.

One handicap to understanding inflation is the tendency to assume that it is a sign that something has merely become unbalanced in the economy, as if it can be fixed by judicious policy. This goes back to mainstream economics’ view that capitalism is an inherently stable system that produces the best outcomes possible for people at large. Carchedi and Roberts’ analysis here shows that bouts of inflation are an integral product of the contradictory dynamics of capitalist growth. Capitalism produces crisis, one way or another.

The present post-Covid period of inflation comes at the end of several decades where the labour share of income has been falling, which by 2019 ‘was at an all-time low’ (p.88), and it has fallen ‘sharply’ since, despite a fall in unemployment. Rather than the Keynesian wage-price spiral being the issue, inflation ‘has been driven by higher corporate profit margins and supply-chain bottlenecks’ (p.89). While 53.9% of the rise in US prices had been due to rising profit margins, with non-labour costs also being significant, only 8% can be attributed to labour costs.

Thus, the authors conclude, raising interest rates will have a negligible impact on inflation, and risks stagnation and slump. Since they wrote this, the prediction appears to be coming true, with a banking crisis breaking out in addition, as a direct consequence of higher interest rates. The further lesson is that workers must not be browbeaten into accepting pay rises less than inflation; in fact, the authors point out, the true rate of inflation tends to be higher than CPI, and alternatives should be the benchmark instead.

Conventional inflation theory, and therefore policy, relies on simplistic analysis of supply and demand in various guises, and therefore misses the real causes and cycles behind changes in inflation. There is also a persistent attachment to seeing inflation as a purely monetary phenomenon, so that attention is fixed upon factors in the financial sector, whereas it is instead still very much the productive part of the economy which drives the rest of the system. As in the present period, the result of these misconceptions, all of which exempt profit from consideration, means that policies to deal with inflation are actively harmful, without having a major effect on inflation either way.

Development and imperialism

Just as it cannot adequately explain or deal with inflation, so the ‘falling rate of GDP growth for the G20 countries is puzzling to conventional macroeconomics’ (p.118). The answer, of course, lies in Marx’s value theory; the rising organic composition of capital, and the falling rate of profit. The latter has bounced up and down since 1950 in the G7 countries, but has had a marked downward trajectory; from a height of 10.3% in the mid-1960s, to a low of 6.4% during the financial crisis of 2007-8, and barely recovering thereafter. One factor, however, that has slowed the deterioration in growth in the core imperialist countries is the ‘inflow of surplus value … from the rest of the world’ (p.120).

Carchedi and Roberts are quick to point out that their chapter on imperialism and value is not meant to cover all aspects of imperialism, but just one important element, unequal exchange. Unequal exchange is the result of the effects of the accumulation of capital, and disparities in the organic composition of capital between the imperialist and developing world. The discussion clarifies many things, but one important aspect is the place of exploitation in imperialist dynamics. Exploitation happens between capital and labour, while the movement of surplus value in favour of the capitalists of the imperialist countries is the result of relations between capitals, with those of the developing world losing out. The greater organic composition of capital in imperialist countries lowers profitability there, but enables international transfers of value. Higher levels of technology enable mostly imperialist countries to siphon surplus value produced by lower-technology companies in the developing world (p.124).

To be clear, workers in the developed world are not party to the exploitation of the workers in the Global South in this analysis, as it is a function of the relationship between different capitals that is at issue. Capitals in developing countries do, however, tend to raise the rate of surplus value, that is exploit their workers more, in order to compete with imperialist capitals. However, in developing countries’ efforts to compensate for the effects of unequal exchange, the pressures mean that, for example, ‘Mexico and other dominated countries can never achieve equality in technical composition with the US’ (p.142). Other developing countries can, like China with its massive state sector, show signs of catching up technologically.

There are, of course, many differentials in the flow of surplus value internationally between different countries. Thus, Taiwan benefits from a relation of unequal trade against Turkey, while suffering negatively in trade with the US (p.143). This example does emphasise that unequal exchange is only one component of imperialism, and does not describe the totality of it. Nevertheless, China, for the authors, is not an imperialist power, on the basis that it is overall a victim rather than a beneficiary of unequal exchange.

Since imperialism cannot be defined only by this one criterion, as the authors admit at the outset, to close the analysis there would seem to be incomplete. The country is surely a great power, with ambitions to carve out a stronger position for itself in the world, and its military ranks first to third, depending on the criteria used, among the most powerful in the world. Whatever their effects upon the calculation of unequal exchange, China’s expanding interests in the Middle East and Africa are the foundation, at least, of imperialist economic relations.

This is not to say that it isn’t the US and its allies whose aggression is driving conflict with China at present. The authors do provide a great deal of interesting and valuable comment on the nature of the Chinese economy. They are clear that China ‘is not socialist by any Marxist definition’ (p.215), and that in an important respect ‘the state sector is capitalist in character’ (p.224). Nevertheless, they reject the characterisation of China, and other ‘socialist’ states as state capitalist. It would be possible to disagree with this judgement, but that would require another discussion entirely.

Equally deserving of a much longer discussion is the chapter on ‘Robots, Knowledge and Value’. The authors are convincingly sceptical of the wilder claims made for robotics and AI, and demonstrate that any likely developments in those technologies will not change the fundamental character of capitalism. Rather, new technology of these kinds will ‘intensify the contradiction under capitalism’ between the drive for profits through increasing productivity, and the consequent rise in the organic composition of capital, which leads to further decline in the rate of profit. Claims for the future of ‘immaterial labour’ are also thoroughly debunked, and some important philosophical arguments advanced about the material nature of all labour, both mental and physical.

This is a very rich and rewarding book, which manages to cover a huge range of contemporary issues in economics within a quite readable length, but it is the ‘prism of value’ which pulls all the different discussions together. The picture of capitalism that emerges overall is one of a relentless process geared towards profit to the exclusion of actual human needs. As a system, it can never be subject to any lasting amelioration, but its contradictions can only drive us into crisis after ever deeper crisis.