Unfortunately, you don’t get to keep it.
This is the first of a series of three essays on Money, Income, and Class.
In July 2021, Heavenly Pizza, a pizzeria in Ohio, had an “employee day of appreciation” — the full profits of the store were distributed to the employees, in lieu of their usual wage. The staff worked a total of 96 hours, and pulled in $7,500, which was split evenly to give the employees $78/hr. The first wave of press coverage was exactly the kind of fawning over the business-owner’s generosity you might expect, but then a much more interesting second wave passed through social media channels. Socialist outlets began posing the question, “what kind of a system is this, where the workers create $78/hr, and then the boss siphons off all but $9-$10 of that value?”
Most socialists simply found the story amusing at face value and seeming to confirm a sort of vulgar theory of surplus-value, i.e. “the boss is keeping most of the income you generate, and you get very little.” However there is actually something much more interesting going on — there is a real significance to the number $78. If the Labor Theory of Value (LTV) is true, then $78 is, in a very real, quantifiable way, the dollar value of an hour of labor, as it is the ratio of the total dollar value of the economy to the number of labor-hours from which that economy was constructed. In this essay we will analyze how this number arises from the definition of money.
Since Marx’s time, socialists have tended to use the LTV in the abstract. You needed to accept the LTV to use Marx’s analysis of capitalism, and so it was sort of weakly adopted, but adherents freely admit it is sometimes wrong (and economists laugh at you if you use it). Some famous socialists even attempt to deny that Marxism requires the LTV! Overall, the point of Marxism was to say, value generally comes from labor, thus the value awarded to people who don’t labor has been extracted from those who do. While Malcolm X may have been no Marxist, he put this better than anyone:
“You can’t operate a capitalistic system unless you are vulturistic; you have to have someone else’s blood to suck to be a capitalist. You show me a capitalist, I’ll show you a bloodsucker. He cannot be anything but a bloodsucker if he’s going to be a capitalist. He’s got to get it from somewhere other than himself, and that’s where he gets it–from somewhere or someone other than himself.¹
Of course, this is still basically right. But the LTV is not primarily some abstract concept about the importance of labor and non-importance of capital. It is also not just a source of agitation for union organizers and socialist cadres, with the message that “of course you can afford to pay us more, we generate the money!” It is much stronger than that. It is a metaphysical statement about value itself. It is to say, the method by which we can compare the value of commodities is according to the abstract, socially necessary labor time contained within them. The words “abstract” and “socially necessary” are nothing more than caveats for the fact that, obviously, labor must go towards making something that someone actually wants. Let us assume that we are looking at production as it actually exists in the modern world, i.e. production is being driven by some mechanism which is minimally responsive to social need. Such a mechanism could be “supply and demand,” as in the neoclassical economic story, or it could be “central planning” by a Socialist state: both have strengths and weaknesses, but in theory they both constrain the labor contained within commodities to be roughly equal to the social necessity for them. With this assumption, we can make the claim that the hours of labor it takes to make a commodity are the basis by which its value is defined relative to other commodities and services on the market.
An obvious question would be, if the hour of labor is the basis for all value (rather than money), what is money, anyways? Money is merely the expression we use for value. However, our claim is that money’s value is itself determined by labor, in one way or another. Let us analyze how money was understood in Marx’s time, and what must be changed in the modern era.
Marxist thinking on the value of money is tied to the existence of a money commodity. This is when a certain commodity (i.e. a thing created with labor) is chosen to serve as money, a universal store of value. Since any two commodities share a basis (their labor-value), any commodity can be expressed in terms of any other commodity. One coat = 20 yards of linen = 2 oz of gold = 11.5 cheeseburgers, etc. Money (here gold) is significant not because it is a special indicator of value, but because it is the commodity which is actually used to measure value, whereas all the other commodities could only potentially be used. It is value-bearing in the sense that it requires labor to make, but it is chosen above all other commodities to serve as money merely for incidental reasons: because it is not subject to decay, and is easily carried around in small units. The use of gold and silver as money was merely a convenient social convention. The value of a (gold-standard) dollar, or a shilling or whatever, is defined in labor-hours without any reference to other commodities. In an equation, this takes the form: Lₘ = ℓ(m), where m is a unit of money, ℓ is a function for the socially necessary labor-value of any commodity, and Lₘ is the value of the money m in labor-hours.
The words “socially necessary” are very mysterious here. Normally, it is when the social need for a commodity is more or less than the actual hours of labor society invests in its production that price diverges from value — if a commodity’s price is higher than its value, then not enough of it was produced, and if its price is lower than its value, too much was produced. This mechanism regulates production. But the money commodity has no use-value besides acting as a symbol of exchange-value, and thus its value merely is its price. (This is why you can have events like Gold Rushes, where far from miners believing that there is an unsatisfied demand for gold, instead one can merely mine more gold and put it in your own pocket, with no concern over its price diverging from its value).²
What does this mean for us, after the end of the gold standard? Precious metals are a form of money we have abandoned, and we have replaced them with a new entity fiat currency — meaning, money which is merely defined by an authority (the State) to be worth its nominal printed value “by fiat”³. Our money is no longer value-bearing, in the sense that it requires negligible labor to physically produce it, and thus its existing supply is determined not by production but by a seemingly arbitrary choice of State officials. However, even though it possesses no value itself, money still represents value, and value still comes from labor. Let us use the American dollar as an example currency. Our formulation of the LTV is the statement that the American economy merely is the hours of labor performed by its people. It is also, equivalently, the total income received by all those people. Fiat currency is the regime where the value of a dollar is defined by this equality. Basically, the value of money is merely a change in units, from labor-hours into an equivalent amount of dollars.
This can be put in an equation as I = L · vₒ, where I is the overall income, i.e value either “taken out of” or “accumulated within” the economy over the course of a year or some other period of time, L is the total number of hours labor “put in” to that economy during that time, and vₒ is the dollar value of an hour of labor. We will next attempt to quantify I and L, and thus solve for vₒ, but for now let them remain loosely defined. This can equivalently be stated as I · Lₘ= L, where Lₘ is, as before, the value of a dollar in labor-hours. Lₘ is thus the inverse of vₒ. In this case, with respect to the divergence of price from value, the situation is exactly the opposite as under the money commodity: price can never correspond with value, because the value is negligible (in the case of paper money) or zero (in the case of electronic account manipulation). But the price of money must be maintained, otherwise it becomes completely useless.
If there is anything we ought to have learned from the removal of the gold standard, it was that there was not a huge shock to the system when switching from a money commodity to fiat currency. This is because these two definitions of Lₘ, one absolutely particular and the other absolutely general, are not really in conflict with one another — they are the two ways in which money is used. As a particular object, money cannot be so static as to be detrimentally hoarded, and thus must always be possible to produce anew. As a general equivalent, it cannot be too easy to produce, because it would not be stable enough to serve as a (convenient) money. Thus both requirements tend to be enforced for either kind of currency. The value Lₘ is overdetermined.
But a single quantity cannot be determined by two separate, independent equations. The difference between a money commodity and fiat currency is that in the first case, the left equation is fundamental, and in the second case it is the right equation. But to function effectively as money, with adequate stability in its form and content, money must satisfy both equations to the best of its ability. This is the real purpose of monetary policy: one equation thus serving as the immutable, “real” value of money, the State will attempt to enforce the other equation by whatever mechanisms are at its disposal. So, under the regime of the money commodity, governments will attempt to restrict or expand the supply of money, to direct the money towards or away from overall income I and thus correct L / I towards the expected value ℓ(m). Under the current regime of fiat currency, the controls are instead attempted to be applied to the “difficulty of creating new money,” i.e. the Federal Reserve lending interest rates and bank reserve requirements. The complexities of these mechanisms are not worth going into here, but suffice it to say the government attempts to keep the cost of creation of new money, in terms of the labor ℓ(m) needed in lawyers, accountants, regulatory inspectors etc, plus the nominal cost of federal interest rates, to a proper level L / I.
The total income I to be quantified here ought to represent the total value “received” within the economy. The most conventional account of this value is known as the Gross Domestic Product (GDP) or Gross National Income (GNI)⁴, which is equal to the sum of all individual incomes by nationals of a country. This is calculated to be the total income, i.e. wages + rent + interest + profits. These don’t all need to be “taken home” by individuals or removed from the economy per se — corporate profits which are retained by the corporation are still “owned” by someone, even if they can’t “spend” it. The creation of value happens when laborers, either within or outside the US, perform work. That value is later distributed into this or that income category, and in order to reconstruct the initial value thus created, we will need to keep track of all of these categories together. For consistency with the establishment of L, we will choose the GNI value calculated by the Organisation for Economic Co-operation and Development (OECD). The GNI of the US in the year 2019 is $21.67 trillion.
The total labor L is straightforward to calculate. One can reconstruct it from the tables for average labor-hours per worker per year (1,777) times the total number of workers in the US (157.5 million) to get a total of 279.9 billion hours worked in 2019.
The labor theory of value is merely the statement that, in the regime of fiat currency, these two numbers, 21.67 trillion dollars and 279.9 billion hours represent the same value in different units, just as 6 miles and 31,680 feet represent the same distance. They are both units of value, and it is for primarily ideological reasons that we maintain the two values as separate at all. Where two different units can express the same thing, one can always determine a unit conversion between them. In the case of a mile,
In the case of economic value,
This is exactly the same value generated by the workers at Heavenly Pizza.⁶ We claim that $77.48 is the approximate dollar value of an hour of labor, seeing as both the dollar and the hour of labor are different unit representations for an equivalent quantity, value.
Exploitation (of a worker) is the scenario where a worker is paid less than the value they create — on average $78. This is abstract, average labor — it is important to recognize the complications Marx, or any economist, will introduce: labor which requires “skill” and/or “intensity.”⁷ These complications mean that some hours of concrete, individual labor may well be worth more than others. But this has no impact on our conclusion, which is based on a totally general, abstract, and therefore average hour of labor. The average hour of labor is just that — average. Some “armchair economists” claim that “skill” is enough to explain inequality⁸. What they are really claiming is that your humiliating, exhausting, or demeaning service job is, not just below-average, but substantially below. They are telling you you do not generate even half the value of the average person ($38.74/hr). Not even a quarter ($19.37/hr). To make a radical Socialist assertion here, no one’s job generates less than half of the average value per hour. The market proves this: if a job really was worth so little, it would not be worthwhile to hire someone to do it. Human beings, their basic operating capacities, and the general functional powers of their attention are just too similar to one another. The gap between this minimal value you necessarily generate and your (lower) wage, no matter how “unskilled” and “easy” your job, is surplus-value which you generate for someone else.
If you work the average number of hours in a year (34.48 hrs/week, not accounting for vacations or time off), a wage of $78/hr translates to a salary of $137,000/yr. For context, the median household income, where a household has an average of 1.3 workers, is $68,703. This is about 1/2 the value generated by the average worker. By the definition of median, this shows conclusively that the majority of workers are exploited. On the other side, the average member of the top 1% makes $758,434/yr, or $427/hr, roughly 5.5x the average. I think we can say, admittedly mostly due to an affinity for powers of two, that no kind of labor generates more than twice the average value per hour. Those that make more than that are merely using their job and investments as a vehicle for absorbing the surplus-labor of others.
Marx argues that the reason that the natural unit of value, the labor-hour, could not serve as the actual measure of value, money, was primarily a practical one.
“The question why money does not itself directly represent labour-time, so that a piece of paper may represent, for instance, x hours’ labour, comes down simply to the question why, on the basis of commodity production, the products of labour must take the form of commodities.” (Capital, Volume I, Penguin Classics Edition page 188)⁹
But in the era of fiat currency, we really do have just pieces of paper which represent value, and the issue could thus be resolved — yet, it appears that those in charge of defining money have still found it useful not to connect money directly to the (labor-)value it functionally defines.
There are two reasons for this, one ideological, one functional. Ideologically, it is useful to retain the veil of separation between the source of value (labor) and its expression (money) — people would become far too aware of their surplus-labor time if they worked for 8 hours and received money with the express worth of “4 hours of labor.” This way, money can be a basically mysterious thing, and your income in money can be broadly compared to that of your neighbors and co-workers on a totally relative basis, rather than compared to the actual value you generate, which remained (until now) uncalculated. The second reason is that practically, this allows the value of money to change, and specifically to be reduced over time. They can release more dollars, more easily, in some year and thus make all dollars, including those already in circulation, worth less on average. This is known as inflation, and we will return to the question of inflation and why it is to the benefit of capitalism more specifically in a later work.
Our task as Socialists is to overcome the ideological mystification of money, and identify money with the real amount of labor-value it represents. We invite the reader to stop evaluating their income on a relative scale, i.e. seeing if you make more than other “similar” workers, or the “median” worker. You are a human being, we are all similar. If you perform labor of average intensity and skill, you generate $78/hr. It might end up in your bosses pocket, or accumulate to a bank, or get pumped into the stock market, but it doesn’t matter — it really ought to belong to you, and the system of capitalism strips it from you. Under Socialism, you would either keep this full value, or you would get to democratically choose to what causes your surplus goes. As it is now, it goes to the already rich and powerful, and the causes they care about are stupid, self-serving, and may well get us all killed.
¹ https://teachingamericanhistory.org/library/document/at-the-audubon/
² This is totally disconnected from any assumption about the constancy of this value itself, otherwise known as inflation or deflation. If it becomes substantially easier to find and process gold, the value of gold will decrease (i.e. there are less hours of labor in a [new] ounce of gold), but this decrease in value will always correspond to a proportional decrease in price.
³ This can and should be interpreted to mean that our governments indeed have a much stronger ideological hold on their citizens than they did in Marx’s time.
⁴ The GDP and GNI are not exactly equal, though they are very close. GNI subtracts and adds payments to and income from foreign nationals, which are otherwise not counted. In most countries, besides tax shelters (e.g. Ireland) and migration sources (e.g. Mexico), GDP and GNI are nearly identical. We will elect to use GNI for the US both for resonance with Thomas Piketty’s Capital in the Twenty-First Century and because I find it likely that a nation’s currency is defined for the population of its nationals, rather than by production within its borders.
⁵ vₒ is used instead of v to reflect the approximation we are using, that all commodities are purchased at their value. We will attempt to solve for the corrected value v instead next time.
⁶ Of course, this perfect coincidence is a fluke — both because as we will show next time this is a slight overestimate of the dollar value of labor when material income is accounted for, and because under capitalism, labor-intensive industries (like restaurants) tend to sell commodities at prices less than their values, to equalize rates of profit throughout the capitalist economy. And, the headline slightly misrepresented the story — this value was total revenues for the day, not profits. But the point is the similarity, and not exact coincidence, of the number.
⁷ We will show later that “intensity” is a real, useful category. “Skill,” on the other hand, is more or less a scam which justifies both the income of the wealthy and the exploitative cost of college tuition. But the reader is invited to retain skepticism on this claim for now.
⁸ Serious economists do not believe this — they believe the much more plausible, but still wrong, theory that while labor creates some value, capital creates the rest. Thus, while wages do reflect the value created by workers, non-wage income categories (profit, rent, interest) are created by the owner’s capital and thus accumulate to owners. A billionaire, in this formulation, doesn’t work “100,000x as hard” as a worker, just maybe “100x as hard, and his capital does the rest”.
⁹ Or, if you prefer, page 91, footnote 1 of https://www.marxists.org/archive/marx/works/download/pdf/Capital-Volume-I.pdf
