the labor theory of value and fiat

Let's go over my qualifications before you read this one. I am 22 years old, I have read two chapters of Capital, I have two degrees but neither of them are in philosophy (unless you think mathematics is philosophy, which it kinda is), and I failed the AP Macroeconomics exam in high school because I had a full year between the class and the exam and didn't remember how aggregate supply curves worked. This is not theory, this is not a place of honor, and this is not credible. I am also not going to summarize much of Capital for you.

So. If you want to not listen to me, read this essay by Matthjis Krul which helped me make this opinion, or the essay collection Marx's Theory of Money: Modern Appraisals which uses significantly more formal terms than I do and has differing and even conflicting opinions on this topic.

Marx's theory of money centers around the notion of a commodity, which he intuitively defines to be "a thing whose properties satisfy human wants or needs of any kind" (p. 13, Reitter's 2024 translation). Okay. He then proceeds to establish the dichotomy between use-value and exchange-value, where use-value is the intuitive usage of an object, and exchange-value is the value in exchange to other commodities. In Chapter 1, Section 3 of Capital, he then develops an analytical framework of how money is built from the simple relation x commodity A = y commodity B, where A has relative-value and B has exchange-value (noting that B only has exchange-value at all in the process of exchange). He then builds on this simple relation until he eventually settles on everything being exchangeable for a singular "money-commodity" (in this case gold). This is the fundamental thing underpinning Marx's theory of money: that money is a commodity like any other, set aside to be the universal exchange-value, so as to not tautologically define its own value.

To Marx, value is expressed as a congealed mass of socially necessary labor-time (hereby referred to as SNLT). An important thing about SNLT is that it exists as "the average worker with the average equipment", and is impossible to mathematically define as such; it's dependent on the societal context of the time. The labor theory of value, then, insists that for anything to have value, it must have labor put into it.

With the gold standard for money, this is relatively simple to understand. Gold, as a precious metal, is mined out of the ground and takes significant labor to get it out of there, purify it, put it into a bar, whatever. With fiat currency, however, this becomes much more nebulous. The supply of money is now almost entirely dictated by the action of somebody pressing a button on a computer, and the SNLT required to create money seems... nebulous, if it exists at all. It feels almost as if the SNLT required to create money is approaching zero. If we think about it this way, it seems like the notion of fiat currency pokes a hole in the labor theory of value, which would be bad since that is the theoretical underpinning of all Marxism.

As a result, I had a really hard time wrapping my head around this. Marx implicitly assumes the gold standard at the beginning of Chapter 3 of Capital, and then goes from there. But even before that, he seems to assume the notion of money being a commodity, which under the labor theory of value requires it to have SNLT. So what's going on?

Well, for a long time, we haven't actually carried around literal gold to do our business. Even under the gold standard, money operated under the premise that you could exchange it for gold. Under Marx's theory of money, gold is the real money-commodity in that sense, and the thing that you'd hold in your wallet as papers and coins are simply a representation of it. Without the gold-backing, we still have the paper, but no backing commodity, so it would appear initially that there would be no SNLT to substantiate money as anything. I thought for a time that this was some perverted notion of surplus value driven by money fetishism (which is itself a form of commodity fetishism as in Chapter 2), but then...

Take the following thought experiment. If the US were to fall prior to the abolition of the gold standard, USD would likely still hold for some amount of time, because there would still technically be a vault full of gold that nobody had access to. If it were to fall now, USD would fail significantly faster as a currency, because, being fiat, it is based entirely in the trust of the other person accepting it, and no state is there to uphold that. As a result, we have not switched from gold backing to no backing, we have switched from gold backing to state backing.

Therefore, the commodity underpinning fiat money is the state itself and the trust in it. Building trust requires labor, and therefore the congealed SNLT embedded into fiat money is the labor required to uphold trust in the state. (Notably: trust is not equivalent to labor, but to build trust requires labor.) This means that when you print new fiat currency, you depreciate trust, and you need to expend SNLT to rebuild that trust in the state. In that way, fiat currency assumes that the state has been commodified. You can see this in government bonds, where you purchase a bond and then can redeem it at a later date under the assumption that new currency can be produced, thereby making a bond an instrument that the state uses to represent trust and stability.

So, while there is no physical commodity underpinning money, there is a commodity, and that commodity is the state itself. You could probably talk about what Marx has to say about credit in relation to crisis theory in Capital Volume III here but I have not read that because I am a hack on the Internet. Regardless, this train of thought restored my faith in the labor theory of value being an appropriate model, so I wrote about it.

Capital is pretty good you should go read it. It's not nearly as complicated as people make it out to be. You should go read the 2024 translation of it, and you can find an EPUB of it on Anna's Archive if you're broke and don't want to spend 40 dollars on Capital, which is kind of ironic but whatever.