The law of the value of commodities (German: Wertgesetz der Waren), known simply as the law of value, is a central concept in Karl Marx's critique of political economy first expounded in his polemic The Poverty of Philosophy (1847) against Pierre-Joseph Proudhon with reference to David Ricardo's economics. Most generally, it refers to a regulative principle of the economic exchange of the products of human work, namely that the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labor-time which are currently socially necessary to produce them (See also Socially necessary labour time) within the capitalist mode of production. Thus, the fluctuating exchange value of commodities (exchangeable products) is regulated by their value, where the magnitude of their value is determined by the average quantity of human labour which is currently socially necessary to produce them (see labor theory of value and value-form). Theorizing this concept and its implications preoccupied Marx for more than two decades. When Marx talked about "value relationships" or "value proportions" (German: Wertverhältnisse), he did not mean "the money" or "the price". Instead, he meant the ratio of value (or 'worth') that exist between products of human labour. These relationships can be expressed by the relative replacement costs of products as labour hours worked. The more labour it costs to make a product, the more it is worth and inversely the less labour it costs to make a product, the less it is worth. Money-prices are at best only an expression or reflection of Marx's value relationships—accurately or very inaccurately. Products can be traded above or below their value in market trade and some prices have nothing to do with product-values at all (in Marx's sense) because they refer to tradeable objects which are not regularly produced and reproduced by human labour, or because they refer only to claims on financial assets.
Theorizing the value of labour-products The "law of value" is often equated with the "labour theory of value", but this is strictly speaking an error, for five reasons.
The law of value only states a general regulative principle about the necessary and inevitable relationship between the trading values of commodities, and the socially average labour-time required to supply them. It is simply a law governing commodity exchange. The labour theory of value in economics aims to explain how that determination actually work, what kinds of causal relationships are involved, how the law of value interacts with other economic laws, etc. For Marx himself, the "labour theory of value" referred only to the theory of value upheld by some of the classical political economists from William Petty to David Ricardo, who regarded human labour as the real substance of product value. Marx's own value theory is not a theory of all value, but only of the value-system involved in commodity production and commodity trade. Marx never referred to his own theory as a "labour theory of value"; his own critique of the political economists was, that they all failed to explain satisfactorily how the determination of product-value by labour-time actually worked—they assumed it, but they did not explain it consistently (see below). Thus, Marx often regarded himself as perfecting a theory which had already existed for a long time, but which had never been consistently presented before. Nevertheless, in the Marxist tradition, Marx's theory of product-value is conventionally labeled "the labour theory of value"—while controversy persists about how much Marx's theory actually differs from that of the classical political economist.
Gold referent In Das Kapital Marx normally thinks of the quantity of labour that determines product-value as the ratio between the average total amount of labour-time required to produce a reproducible good, and the corresponding average amount of labour required to produce a unit of gold (see also gold standard). Already in 1844, long before he wrote Das Kapital, Marx was very aware of credit money. Whereas "commodity money" (coinage or bullion) played an important role in the earlier stages of capitalist development, the growth of integrated capital markets meant increased use of credit money. Marx felt that the initial assumption of gold-money as a standard of value was justified, in analysing the capitalist relations of production and distribution. Thus, as follows:
For Marx, the value of a commodity is determined by socially necessary labor time, or the amount of time "required to produce an article under the normal conditions of production, and with the average degree of skill and intensity". Marx rejects contra-classical political economy, any notions of the "value of labor" or "price of labor". Instead, it is labor itself (more specifically, abstract labor or general human labor) which is constitutive of value, the substance of value. Consequently, it is not labor, but labor-power (the general human capacity for labor) which has value —a value determined, as in the case of every other commodity, by the labour time necessary for the production, and consequently also the reproduction, of this special article." The importance of labour is its ability to preserve capital value, increase already existing value, and create wholly new value. How any individual happens to regard a particular product normally cannot change that social valuation at all; it's simply a "social fact" in the same way as "the state of the market" is a social fact, even though particular products can at any time trade at prices above or below their socially established value. Marx realized very well, that the assumption of gold-money was a simplification—there might not be such a stable relationship between price-levels, average commodity values, and gold quantities — but he regarded the assumption as helpful, in explaining the basic laws of motion [Bewegungsgesetze] of the capitalist mode of production "in its ideal average".
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