This was written in May 1895 for the Neue Zeit (Marx 1991: 1027, n.), which is available as the “Supplement and Addendum” to Volume 3 of Capital in Marx (1991: 1027–1047).
This supplement was partly inspired by the critical reviews of volume 3 of Capital by Werner Sombart and Conrad Schmidt and the private (and more hostile) letters of these men to Engels, but also by the need to defend Marx’s theory of value from other critics and the perception that it was incoherent.
The essence of Engels’ conclusion is expressed here:
To sum up, Marx’s law of value applies universally, as much as any economic laws do apply, for the entire period of simple commodity production, i.e. up to the time at which this undergoes a modification by the onset of the capitalist form of production. Up till then, prices gravitate to the values determined by Marx’s law and oscillate around these values, so that the more completely simple commodity production develops, the more do average prices coincide with values for longer periods when not interrupted by external violent disturbances, and with the insignificant variations we mentioned earlier. Thus the Marxian law of value has a universal economic validity for an era lasting from the beginning of the exchange that transforms products into commodities down to the fifteenth century of our epoch. But commodity exchange dates from a time before any written history, going back to at least 3500 B.C. in Egypt, and 4000 B.C. or maybe even 6000 B.C. in Babylon; thus the law of value prevailed for a period of some five to seven millennia. We may now admire the profundity of Mr Loria in calling the value that was generally and directly prevalent throughout this time a value at which commodities never were sold nor could be sold, and which no economist will ever bother himself with if he has a glimmer of healthy common sense!” (Engels 1991 : 1034–1038).So, according to Engels, the law of value in volume 1 was empirically true until about the 15th century. Elsewhere, however, Engels implies that it continued until the 19th century in Germany (Engels 1991 : 1035, 1044; Howard and King 1989: 49). At any rate, it is clear that Engels envisaged this as being prior to the emergence of prices of production in modern capitalism.
Now what, according to Engels, overthrew the “law of value” in pre-capitalist commodity production?
It was the following factors:
(1) the rise of money as a medium of exchange and in particular foreign imported gold whose socially necessary labour time was unknown;For Engels, the merchant traders of the early modern period came to have an average or equal rate of profit, and this was often high (Engels 1991 : 1039–1040). Engels even saw the guild-like merchant traders as engaging in a type of “monopoly trade with monopoly profit” and competitive forces equalised the profit rate inside and between nations (Engels 1991 : 1040). This continued with the discovery of the new world and the rise of trading companies.
(2) the rise of the international merchant trader and merchant capitalism, and
(3) the rise of manufacturing capitalism.
With the rise of industrial capitalism, handicraft production and independent workers owning their own means of production gave way to capitalism. Up until this point in domestic retail trade commodities produced by independent handicraft workers still tended to exchange at their labour values (Engels 1991 : 1041).
This began in shipping, mining and textiles, but continued as merchant traders also came to hire artisans and other independent workers as contractors (Engels 1991 : 1042–1044).
Large-scale industrial capitalism put the handicraft and independent workers out of business and so became universal (Engels 1991 : 1044). This new capitalism was also characterised by intense competition and so there was a tendency to the equalisation of profit rates (Engels 1991 : 1044). It was at this point that prices of production became universal too, and a tendency to an average profit rate (Engels 1991 : 1044).
Engels ended his thoughts with the observation that the stock market had by the 1880s taken on a fundamental and overwhelming role in modern capitalism, and allowed the growing class of idle rentiers to soar, and the rise of limited liability corporations and banks (Engels 1991 : 1046).
Engels, F. 1991 . “Supplement and Addendum” to Volume 3 of Capital,” in Karl Marx, Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London.
Howard, Michael Charles and John Edward King. 1989. A History of Marxian Economics. Volume I, 1883–1929. Princeton University Press, Princeton.