When writing this post I found myself a bit uncomfortable with terminology like “use value” and “exchange value” and so steered away from them – well also because a production function approach to the question is just so much damned clearer! Exchange value was fine, but use value I found a bit confusing – as I always wanted it to be defined either in terms of the buyer (their utility) or the seller, and even in terms of the seller are we talking about the price they sell at or their full economic cost (which includes the opportunity cost). This especially frustrated me as I know that 13 year old me used these terms all the time.
Now I think I have a clear idea on it all again, so I’m just noting this down so I can look it up in the future!
Use value: Read this as utility Matt. It is the value of the person using it.
Exchange value: Price.
You’ll notice something is missing here when I talked production functions though … the actual supply of goods and services.
Right ok, how does this all fit into a supply and demand graph? Well, the use values are points on the demand curve for each product purchased, the exchange value is the market price. This gives us consumer surplus (the difference between the exchange value and the use value). Cool.
Then we have producer surplus, as the way the exchange value is above the price necessary to get producers to sell the product. At each point on the supply curve/marginal cost curve a producer is willing to sell that product individually (covers their costs – including wages – and opportunity cost, which includes a required rate of return) but they receive the market price. The difference between firm structures (monopoly, perfect competition) is determines where this market price is set – not how the MC curve looks (although X-inefficiency would disagree here).
So producer surplus goes to producers. Is that funamentally unjust, I mean we haven’t actually made a model of how wages are determined here so I don’t think we can describe it. The “marginal cost” function that leads to producer surplus has an embedded wage rate which may – in of itself – involve labour receiving surplus value from the production process. Let us not forget that we need to consider this labour market.
Hence why Marxist factor shares depend on a view about subsistence wages – and sometimes a peripheral view that this surplus is immediately capitalised and can be viewed as a “rent” that is used to accumulate more capital. But to discuss this we need a general idea about how “steep” supply curves are. What happens if supply curves are very flat, something you may expect in a situation with constant returns to scale … well producer surplus will not occur in the long run and the “scale” of the firm is determined by demand.
Matt, overall I still think talking in terms of market imperfects and imbalances of bargaining power is a bit more useful than trying to find a “fundamental law” or “contradiction in capitalism”. Although I know that terminology is popular now (Piketty review, and added notes) lets stay away from it.