Exchange Value vs. Use Value

Money functions as a medium of exchange, a unit of account, and a store of value. The functions are interrelated but worth considering separately. To measure exchange value, we need a unit - call it a dollar, a peso, a franc, or a yen. If the unit is stable of time (no inflation or deflation), then money automatically serves as a store of exchange value. To function as medium of exchange and let us escape the inconvenience of barter, money must hold its value at least long enough to effect both sides of the transaction, which in barter, of course, are simultaneous. A moment's reflection shows how tremendously ineffecient barter is, and consequently how efficient money is. In barter there must be a coincidence of wants - it is not enough that I want what you have to trade; you also have to want whatever it is that I have to trade, and we have to find each other. Money provides a common denominator that everyone wants simply because everyone else is willing to accept it. It is a standard, well-defined commodity (or later a token) that breaks the two sides of a difficult barter arrangement into two separate and easy transactions.

Karl Marx analyzed transactions as follows. First we have simple barter, which he denoted as:

C - C*

Commodity C is exchanged for commodity C*. You have C and prefer C*. I have C* and prefer C. We are both better off after the transaction. We both increase the use vaue of what we own. Exchange value is not separate from use value. No money is needed, but we were lucky to to have found each other.

Next for Marx comes "simple commodity production":

C - M - C*

Now we have money functioning as a medium of exchange. Exchange value, the sum of money, M, is entirely instrumental to bringing about an increase in use values by facilitating the exchange. The process begins and ends with commodity use values. The goal is to increase use value, not exchange value.

For Marx the critical change comes in the historical shift from simple commodity production to "capitalist circulation," which he symbolized as:

M - C - M*

The capitalist starts with a sum of money capital, M, uses it to make commodity C, and then sells C for the amount M*, presumably greater than M. Thus:

M* minus M = △M

△M is profit, or surplus value in Marxist terms. For us the important thing is not Marx's notion of surplus value, which is ties up with his very problematic labor theory of value, but the simple observation that in moving from C - M - C* to M - C - M* the driving motive has shifted from increasing use value to increasing exchange value.

Use value arises from the actual use of commoditites, it is concrete and physically embodied. Exchange value is abstract and inheres in money. It has no necessary physical embodiment.¹ Real wealth - commodities - obey the laws of thermodynamics. Money, a mere symbolic unit of account, can be created out of nothing and destroyed into nothing. There is a physical limit to the accumulation of use values. There is no obvious limit to the accumulation of exchange value. Fifty hammers are not much better than two (one and a spare) as far as use values are concerned. But in terms of exchange value, fifty hammers are much better than two, and better yet in the form of fifty hammers' worth of fungible money than can be spent on anything, anywhere, and at any time.

A hoard of hammers takes up space is subject to rust, termites, fire, and theft. Fifty hammers' worth of money is not subject to rust, rot, and entropy, and far from costing a storage fee will earn interest from whomever gains the privilege of "storing" it for you. Production for use value is self-limiting. Production for the sake of exchange value is not self-limiting. Since there is no limit to the accumulation of abstract exchange value, and since abstract exchange value is convertable into concrete use value, we seem to have concluded the there must not be any limit to concrete use values either. This has perhaps led to the notion that exponential growth, the law of money growing in the bank at compound interest, is also the law of growth of the real, or material, economy.

Virtual Wealth

Frederick Soddy summarized all of this by carefully distinguishing wealth from debt.² He noted that "a weight, although measured by what it will pull up, is nevertheless a pull down. The whole idea of balancing one thing against another in order to measure its quantity involves equating the quantity measured against an equal and opposite quantity. Wealth is the positive quantity to be measured and money as the claim to wealth is a debt."³. Monetary debt, the measure of wealth, is negative wealth, say minus two pigs. It obeys the laws of mathematics, but not physics. Wealth, on the other hand, plus two pigs, obeys the laws of thermodynamics as well as mathematics. Postive pigs die, have to be fed, and cannot reproduce faster than their gestation period allows. Negative pigs are hyper-fecund and can multiply mathematically without limit. As soddy put it, "you cannot permanently put an absurd human convention, such as the spontaneous increment of debt (compound interest), against the natural law of the spontaneous decrement of wealth (entropy)" (p. 30).

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¹ Though, of course, exchange value is only real if something exists for which money can actually be exchanged.

² F. Soddy, Wealth, Virtual Wealth, and Debt, London: George Allen & Unwin, 1926.

³ When banks create money by providing someone with a loan (see below), they actually create a bedt as the first step. On the asset side of the accounting books, the banker enters a debt for the amount of money borrowed (to be paid off with interest). The borrowed money is then placed in a bank account, which is listed in the bank's as a liability.