Okay. I will try to not do a few things in this post:

1. lump in criticisms of Maoism, Leninism, Stalinism, etc with criticisms of Marxist economics

2. strawman the labor theory of value

3. conflate Marx with later Marxists (analytical, neo, etc)

I intend to reconstruct the Smith-Ricardo-Marx lineage faithfully according to Robert Wolff's great book "Understanding Marx" and then show why I think it fails on it's own terms. I intend to be as clear and as understandable as I can. This is only concerned with classical and Marxist economics. Let's begin.

REPRODUCTION, THE BASIS OF CLASSICAL ECONOMY

Human beings live by transforming nature to satisfy their needs. This transformation is repeated periodically so much that one period of production becomes the materials or input for the next period of production. As such, human beings live by a process of reproduction. There are three modes of reproduction:

- Material reproduction: cyclical reproduction of food, clothing, shelter, technical knowledge and craft skill. These are required for human life and the process of production.

- Human reproduction: reconstitution of human powers by means of food, sleep, shelter, mental care, and so on, along with the generational reproduction of the species through conception, birth, and child rearing.

- Social/historical reproduction: daily recreation of society itself as a largely unintended collective human product, along with the historical transmission and transformation of culture.

These are the assumptions at the core of most classical and Marxist economics. We are mostly concerned with material reproduction for now.

Now let us imagine a simple, agricultural economy in which there is only one kind or quality of labor and in which arable land is freely available. In this economy, we will assume there are only two goods produced: corn and iron. They are such that we can distinguish two sectors in each of which only one good is produced. There is the corn and iron sector. Along with these assumptions, let's add that a single technique of production dominates in each sector, and that the following proportionate relationships obtain:

Corn sector: 100 units of labor, 2 units of corn, and 16 units of iron (in the form of tools used up) = 49 units of corn.

Iron sector: 90 units of labor, 9 units of corn, and 12 units of iron combine to produce 47 units of iron.

We measure labor, corn, and iron in physical units; hours/weeks/years of labor, bushels/tons of corn, pounds/tons of iron respectively. Also, assume that all workers have the same needs as well.

In short, anything less than the total input of labor and products from this will result in a diminished scale of production in this simple reproduction economy. If the available techniques are permanently incapable of reproducing themselves, then the economy will contract progressively until it ceases to exist. This kind of economy is known as a "simple reproduction without surplus". This means that there is enough, but only enough, of each output produced to make possible a new cycle of production at the same level of activity. We have no method of valuing or pricing these inputs and outputs, so no prices, wages, or wages or profit; in short, there are no values.

Do note that this isn't intended to correlate with any actual society or stage in history. This is purely for analytical purposes.

When there are improvements in these techniques of production, larger outputs are achieved and a physical surplus is created. This is known as expanded production. Suppose that a person who controls the disposition of the surplus decides to use some portion of it to make a luxury good and import more workers.

We will assume: 20 units of labor + 1 unit of corn + 2 units of iron + 2 theology books (for the sake of an example commodity) will produce 40 new works of theology. We now have the input and output relations of expanded production.

The addition of this surplus raises some questions:

- Who gets the surplus, beyond what is required to reproduce the material inputs of an economy for another cycle?

- How do surplus-getters get surplus? In other words, what institutional arrangements/planned or unplanned interactions and what system distributes the physical surplus?

- What do surplus getters do with the surplus? Do they appropriate some of it? Consume it? Use it to support servants? Expand the scale of production?

These questions would be answered by the person in the next section.

ADAM SMITH

In his book "An Inquiry into the Nature and Causes of the Wealth of Nations", Adam Smith poses and tries to answer 3 questions about the economy; what is the real nature of economic wealth, how is wealth distributed among the several classes of society, and what are the causes of economic growth? These are directly related to the surplus questions posed in the previous section.

In contrast to the mercantilists of his time, Smith said that the real wealth of nations came from "the necessaries and conveniences of life which it annually consumes", not in the gold and silver they hoard. This is to say, from economic activity. His answer to the third question is that the progressive division of labor and the reinvestment of the annual surplus in an expansion of the scale of production will bring about an increase in real, not nominal/monetary wealth. And boldly, he claims that the institutional arrangement through which the wealth of a nation is distributed to the several classes is the market.

Smith theorized that society is a sort of "second nature" instinct, and has an order governed by laws; that is to say, if left to itself it will function regularly and in a governed manner, contra people like Thomas Hobbes. He posits that since there is no telos of individual action, it is essential that each individual act in a self-interested and calculable fashion; acts of beneficence or charity, or acts done by habit or custom spring from a sort of "non-rational" part of the soul, and will be inherently unpredictable and incalculable. The key to understanding of the market, and society, is economic exchange, he said.

There was a paradox of value in Smith's time. The economic question was, "why do we value diamonds more than water when we need water to live?" This stumped economists for a long time, until Smith had found an answer... or so it seemed. He differentiated between use-value and exchange-value; saying water has use-value and not exchange value, and vice versa for diamonds. Hence, diamonds are more valuable.

"The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use,” the other “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to shew.

First, what is the real measure of this exchangeable value; or wherein consists the real price of commodities.

Secondly, what are the different parts of which this real price is composed or made up.

And, lastly, what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below their natural or ordinary rate; or, what are the causes which sometimes hinder the market price, that is, the actual price of commodities, from coinciding exactly with what may be called their natural price." [Wealth of Nations, Book 1, chapter 4]

This brings us to Smith's doctrine of natural price. This is to say he attempted to put forth a theory of the factors that regulate and determine this natural price. Natural price is important as the central social and economic issue is how the annual surplus will be divided up, and what shall be done with it when its divided. In a capitalist society, the social product is distributed to the 7 classes in the forms of wages, rent, and interest, and some of what is distributed is at the existing level of output activity. The rest is surplus and may be wasted, consumed unproductively, and/or invested.

Smith puts forth that wages, profit, and rent are naturally regulated by the general circumstances of the society and their conditions; "When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price." [Ibid, Book 1, chapter 7] So, smith identifies the natural price of a commodity with the sum of the amounts the entrepreneur must lay out in order to produce the good, plus the profit which he himself is to reap.

It may seem odd to include profit in "natural price". Smith justifies it as such: it is worth what it costs the person who brings it to the market. If he sells it at a price which doesn't allow him the ordinary rate of profit, he is a loser by the trade. Each entrepreneur is presumed to be engaged in a rationally self-interested pursuit of profit in which an economy permits him to "change his trade as often as he pleases", and good (if not perfect) information that allows them to learn of opportunities for greater profit in other lines of production, unhindered by any law or custom to move their capital freely.

To Smith, the actual price that any commodity is sold is called its market price. It is dictated relatively by supply and demand, and as such, fluctuates widely. Entrepreneurs move capital to and fro to flee from sectors of production where an excess of supply drives market price below natural price and to sectors where an excess of demand drives up market price. Market price, to Smith, is the central price to which all the prices of all commodities are continually gravitating. In simple terms, natural prices = the causal efficacy, or have causal efficacy in a theoretical model designed to articulate the underlying structure of the market. This becomes more explicit with Ricardo, who we'll get to later.

By conceiving of natural prices like centers of gravity, he thinks of them as objectively real determinants of the economic system. However, this begs the question, what are the determinants of natural price? Moreover, he takes it for granted that labor is unpleasant and painful, and only something one would engage in from a form of necessity. "Equal quantities of labor are of equal value to the laborer."

A problem for Smith is that the price of a commodity expresses how much of that commodity one will give in the market for other commodities, or, to say the same thing, how much of other commodities one can obtain with the given commodity. This is to say, the price of a commodity is actually a relation between it and other commodities. This relation or ratio changes when either of its term changes, or in special cases when both terms change.

Smith, and later Ricardo, said a satisfactory theory of natural price tells us which of two commodities have changed in value when the rate of exchange between them alters. This means, to Smith, finding one special commodity whose value would serve as a standard agent against which all other commodities could be measured. The question was what was to be this value? Many in Smith's time thought metals like gold and silver were the answer, but Smith thought that the influx of them from the new world in the 16th-17th centuries had depressed their value. So, instead, he inputs labor as a commodity with constant values to its owners. Since labor never varies in value to Smith, he advanced 3 different answers to the question of what determines the value of other commodities;

1. Goods exchange in the market in proportion to the quantities of labor required to produce them. (Smith considers this correct only in the primitive stage of society, but Ricardo jumped on this point later on.)

2. Commodities exchange in proportion to the amount of labor which they can command. What is actually meant by this is unclear. Perhaps Smith is claiming that commodities will exchange in proportion to the quantities of labor each will buy, or he's claiming a commodity can be said to command a quantity of labor in the sense of commanding or purchasing or exchanging for another commodity into whose production a certain quantity of labor has gone. Either way, "appropriation of land and accumulation of stock" is why goods fail to exchange in proportion to the labor time directly required for their production.

3. The adding-up theory. "When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price." This, however, is not a theory of natural price, but rather a definition.

PROBLEMS

Smith makes a number of mistakes that would go on to be inherited by Ricardo and Marx and many other classical economists. Firstly, his differentiation between use and exchange value as an answer to the diamond-water question is entirely arbitrarily, and more pressingly, just wrong. Water having higher "use-value" doesn't at all account for the situations where water WOULD be scarce, and thus could have "exchange-value". For example, if you had a lot of water, and I had a lot of diamonds in a desert with no water, the use/exchange-value distinction would collapse; as I would probably be thirsty and want to exchange some of my diamonds with your water because they more immediately fulfill a need I have. What does explain value? Subjectivity; I subjectively valued that water more than my diamonds, and marginal utility; I subjectively valued that water more because I had less of them to fulfill a need.

Second of all, his inclusion of natural profit as a component of the natural price of a commodity. This is disastrous. His reasoning implies that the ordinary rate of profit would be the same across every entrepreneur in a society. This makes no sense. He admits later that the "actual price" is dictated by the supply and demand; so why does this not apply to the natural price? The answer is that there would be no natural price at all, as price is just what people subjectively value and the supply of what those people value. Even if we take this doctrine seriously, we get into the questions of what counts for the entrepreneur's cost. Labor? Money to produce it? Money to pay wages? This begs the question, then, of how wages are formed. Furthermore, the assumption that entrepreneurs are in a rationally self-interested pursuit of profit with an economy that entirely permits them to change their trades as often as they please presupposes money, knowledge, wealth, and resources. This ignores risk as well. There is also no real reason to assume that a satisfactory theory of this natural price (which, as we just saw, has no real reason to exist or be taken seriously) must have a special commodity whose value would serve as a standard. We value such commodities subjectively; we don't value, say, meat, water, toys, computers, or horses against some object that is some standard of value in our heads. We instead value them based on what they provide to us as individuals. Not only does this just not reflect how people think realistically, it doesn't even make sense as a theoretical model, and certainly doesn't explain natural price.

See the full critique here.