The "cost of living" poverty crisis is widening and is deepening, and in response the organisations of the working class are stepping forward.
A society’s economic system is characterised by the relationships in which production and distribution of goods and services occur. The economic system of our current society is called capitalism. Under capitalism, goods and services are produced as commodities.
In order to understand capitalism, we must first solve a riddle regarding the commodity.
A commodity is something that is exchanged and satisfies a human want, need or desire. Not everything that is produced is necessarily a commodity. If you grow your own potatoes for your own consumption they would not be commodities, even though the potatoes in the supermarket are, because no exchange takes place. Similarly, if your mate grows their own potatoes and gives some to you without expecting anything in return, the potatoes are still not commodities. However, if they instead sold those potatoes to you, even for mate's rates, that would make them a commodity.
As commodities are produced for profitable exchange in the market, there must be some way to determine in what ratios they are exchangeable for each other. This must be done even though they have drastically different uses and subjective values. Let’s say a pair of slippers costs £20, and a Nintendo Switch costs £280. Somehow we have to say that a Nintendo Switch is worth fourteen pairs of slippers. But how? They are made of different things. They serve different functions. They’re hardly comparable. We must therefore begin by finding something that all commodities have in common. This must be something that can be measured, so that the ratio of it present in different commodities can be determined. What could this be?
What is Exchange Value?
Exchange value is the measure by which one quantity can be said to be equivalent to another. But from where is this equivalence drawn?
The old joke asks: which is heavier, a kilogram of steel or a kilogram of feathers? It’s generally considered poor form to explain jokes, but here it might be illustrative. The point is that although steel is 'heavier' than feathers (steel is more dense) they're both a kilogram (they have the same total mass). A kilogram is a kilogram, but a different quantity of steel vs feathers is required to make up a kilogram. A kilogram of steel can fit in the palm of your hand, but a kilogram of feathers might fill a bin bag.
An economist might pose the question differently: which holds more value, £100 of diamonds or £100 of horse shit? Looking at the jokes side by side gives us some indication of where to begin in our investigation of the exchange value of a commodity. Again, they are both £100 and therefore have the same total exchange value, but £100 of diamond might fit on an earring, while £100 of horse shit might fill a swimming pool. It follows that exchange value is more dense in the diamond than in the horse shit. The question then becomes: what determines this density? What quantity is more concentrated in the diamond and less concentrated in the horse shit?
Crucially, what we learn from this joke is that it is not in the qualities of things that we can compare their exchange values. Exchange value is a quantitative measure.
All commodities have in common that they are produced by human labour. This is something which can be measured precisely, in hours worked to produce a given commodity. Exchange value is therefore determined by the average amount of time it takes to produce a commodity. To oversimplify for a moment: if a Nintendo Switch takes fourteen hours to make, whilst a pair of slippers takes only one, then we have an objective and measurable basis on which to say the former is worth fourteen times the latter. We need to develop this slightly, but this is the basic idea. Let’s look at some problems we need to resolve.
First, what if someone was really bad at making slippers? They can’t charge £80 for their product just because it takes them four times as long as their competitor to make an identical product. This is why Marxists understand value as being determined by “socially necessary labour-time” – in other words, the average amount of time it takes to produce a given commodity across the whole of society, given the widely used knowledge, technology and production processes.
Secondly, what about the costs of machines and raw materials? Machines wear down and require replacing over time. Included in the cost of a commodity is a fraction of the cost of replacing that machine. The cost of replacement is equivalent to the machine’s value divided by the number of commodities it can produce before it needs replacing. The value of that machine is in turn determined by the labour-time required to produce it. When we follow back the chain of value, we always end up with the socially necessary labour time required to produce a commodity.
As commodities, products become stores of exchange value. Their values exist only relationally to other commodities, and are not intrinsic properties of the commodities themselves. What we are really doing, is looking at how much labour is embedded in the production of one commodity relative to another.
Why it Matters: Exchange Value vs. Use Value
We see the contradictions created by exchange value around us in the world every day, and they exist in relation to a commodity’s use value.
Use value means, simply, that a commodity is useful to someone. It matters not in what way it is useful, be it for fulfilling a material need (an apple can be eaten), a social need (buying the latest fashions, or a mobile phone), or some other form of need. Commodities are use values, and they have use values.
The thing is, under capitalism, production is not driven by the requirement to fulfill social needs. Under capitalism, production is driven by the requirements of profitability. Exchange value, not use value, is king. And the two are frequently at odds.
When the production of goods and services to fulfill social needs is only a means to the end of profitability, those social needs will be sacrificed when they do not align with the requirements of capitalists to procure exchange value. Let’s take one example.
Housing, under capitalism, is overwhelmingly produced as a commodity. Sure, some people might build their own Tiny Home™, but the dominant relation in which housing is produced is speculatively, by developers, for the purpose of profitable exchange. In Britain, we can see that even social housing is not immune to being reduced to exchange value, the mass privatisation of former council accommodation beginning in the 1970s rendering those properties tradable as commodities on the housing market.
The production and distribution of housing then, is not driven primarily by the basic fact that all people need housing to survive, that it is not only useful but essential. No. The production and distribution of housing is driven by the profit motive, by exchange value. And what are the consequences? 280,000 homeless in England as of December 2019 – with one in fifty-two people registered as homeless throughout the capital. Meanwhile, the Ministry of Housing reported 479,000 empty homes as of September 2020, and an additional 263,000 dwellings recorded as second homes. We literally have more empty houses than homeless people in Britain. So why are people freezing and dying on our streets? Because our economy is based around commodity production and profit – around exchange value.
- Karl Marx, Value, price and profit
- Karl Marx, Capital, Chapter 1
- David Harvey, A Companion to Marx’s Capital (book) or podcast/video lecture series.
The next article in our Capitalism 101 series, ‘Class, Private Property and Wage Labour’ will explore the primary way capitalists make money from the working class: work.