 In the last segment, we understood the notion of value by probing into the nature of the commodity. What we saw is that by value, political economy means to capture the amount of socially necessary abstract labour that has gone into producing a commodity. Now, in any commodity producing system where items are produced mainly for exchange, there has to be a social device to express the value in commodities. So, now we want to ask ourselves how is it what social mechanism device is available to a commodity producing system to express the value of commodities and our answer will be money. To understand the notion of money, we will go through a three step argument. The first step of the argument is what Marx calls the elementary form of value. In the elementary form of value, we are looking at the exchange between two commodities. Let us say we are looking at the exchange between bushels of wheat and shirts or let us be more abstract. Let us say we are just looking at the exchange between two commodities A and B. So, commodity A exchanges with half units of commodity B. This is the exchange we are looking at. When we look at this exchange between two commodities, we say that the commodity A occupies the relative position and commodity B occupies the equivalent position. How do we distinguish between the two? Well, the commodity that is in the equivalent position is the commodity that represents the value contained in the commodity that is in the relative position. So, in this case half units of the commodity B represents the value contained in one unit of commodity A. Now, in the world of commodities, there are not only two, but millions of commodities. So, A will exchange not only with B, but with C and D and E. As we move from considering the exchange between two commodities to considering the exchange between all commodities A exchanges with all other commodities. What we have is the second step of the argument which is the expanded form of value. So, the first step was the elementary form of value. The second step is the expanded form of value. In the expanded form of value, we consider the exchange between commodity A and B, commodity A and C, commodity A and D. That is commodity A and all other possible commodities. So, let us say two C. So, A exchanges for half units of B, exchanges for two units of C, exchanges for one-third units of D, exchanges for four units of E and so on. In this form of exchange, the relative position is occupied by A, all these commodities occupy the equivalent position. What does that mean? It means that two units of C express the value contained in one units of A. One-third units of D express the value contained in one unit of A and so on. Now, there is a certain instability to this equation of exchange between A and all other commodities. Why? Because we can flip it around. Let us flip around the relationship that is expressed in this expanded form of value. What do I mean by that? I mean let us flip this two around. So, A now occupies the equivalent position. All other commodities occupy the relative position. That is what I mean by flipping them around. So, now we have half of B, two of C, one-third of D, four of E and so on. All of these exchange for one unit of A. This is what Marx calls the general form of value. So, we started with the elementary form of value. We then expanded it to get the expanded form of value and then we flipped it around to get the general form of value. This is an important step of the argument. Why? Because what is happening here is that now commodity A occupies the equivalent position. All other commodities occupy the relative position. What does that mean? It means that commodity A is used to express the value contained in all other commodities. This is what Marx calls a general equivalent. This is a general equivalent. The commodity A now becomes a general equivalent. Why? Because it is able to express the value contained in all other commodities. We are just one step away from the definition of money. Whenever we have a general equivalent that is socially accepted, we have money. Therefore, we can summarize our argument with this following definition. Money is nothing but a socially accepted general equivalent. What we have derived is a very important step. We have seen the emergence of money from within the logic of commodity production. This should be contrasted with mainstream neoclassical economics, which does not have a way of explaining the emergence of money from within the logic of commodity production. Rather, most accounts of the emergence of money have to introduce it in an ad hoc fashion later on. The classical tradition has this strength. One of its strengths is that it allows us to understand the emergence of money right from within the logic of commodity exchange. Once we have understood money, we can also understand that money can take different forms. There are two important forms that we want to keep in mind. One is the commodity form of money. This was the form of money that prevailed for long periods of time and came to us all the way to the middle of the 20th century. When we are in a commodity money system, one commodity like gold or silver separates out from the world of commodities and becomes the socially accepted general equivalent. For instance, when gold was the commodity, the money commodity, units of gold were used to express the value contained in all other commodities. The pricing was done in terms of units of gold. From the mid 20th century onwards, we have moved away from a commodity money system. Today, we live under a system where what functions as money is the liabilities of the banking system, essentially the central bank and the commercial banking system. So, you can have notes which are pieces of paper but nothing, no gold backs it up. So, therefore, we are today in a non commodity money system. It does not really make a difference, therefore, what form money takes, whether it is a commodity like gold or it is notes, pieces of paper or electronic accounts that we have in our banks. What is important from the Marxian perspective is that any system of production which is organized around exchange needs to have a mechanism to express the value contained in commodities and that mechanism is what money is. Whether it is a commodity money, whether it is pieces of gold or it is pieces of paper without any backing of gold or silver does not really matter conceptually. What matters is that we have a socially accepted general equivalent which is the mechanism to express the value contained in commodities. So, that allows us to understand money very, very easily. Once we have understood money, we will introduce two new concepts. The first concept is the concept of price and the second concept is a little more unfamiliar which is the notion of the monetary equivalent of labour time. So, the first concept is price. Once we have money, we know that all commodities can be exchanged for different units of money. So, the price of a commodity is the number, the magnitude of the money commodity or if it is a non-commodity system, the magnitudes of money that is needed to purchase one unit of the commodity. So, for instance let us say 100 dollars is required to produce 1 kg of tea. In that case, the price of tea which is the commodity in question is 100 dollars. So, once we have money in the picture, the units of money that is needed to purchase one unit of the commodity is the price of a commodity. The second concept we want to introduce is the notion of what is known as melt. Melt stands for monetary expression of labour time. This is an important concept and we are going to be using it in the later part of the class. So, let us try to understand this. What is the melt? Let us take all the commodities that are newly produced in a country over a period of time. Those commodities have absorbed the total productive labour of society. Now, those commodities also express their value in terms of prices using money. What is melt? Melt is the equivalent factors which brings together on the one hand the total labour time that has gone into the production of the new commodity bundles and on the other hand the monetary expression of the value contained in those commodities. The monetary value of the newly produced commodities is what economists call the gross domestic product. The total value added created during a process of production. So, if we take the total value added created during the process of production over a period of a year and divide it by the total amount of labour time that has gone into its production. What we get is known as the melt, the monetary expression of labour time. Notice that this will be measured in terms of dollar and the item in the denominator will be measured in terms of hours. Therefore, the melt has a unit of dollar per hour. Let us take an example. Let us say the GDP of the US economy in a particular year is 10 trillion. So, that is 10 times 10 to the power 12 dollars. Let us say the total labour time involved in production counting up all the workers who have been involved in producing the GDP is 1 trillion. So, that is 110 power 12. This is measured in terms of hour. In that case, the melt comes out as 10 dollar per hour. So, what does this tell us? It tells us that one hour of productive labour on average in the US economy for that particular year was expressed in terms of 10 units of money that is 10 dollars. So, the monetary expression of labour time is a way to capture the key intuition of the labour theory of value. Remember, the labour theory of value says that the total value added created in all the commodities is just an expression of the total labour time that has gone into its production. So, the labour the key intuition of labour theory of value is that what is on the numerator and what is on the denominator are essentially the same thing expressed in two different units. The numerator in terms of money that is dollars and the denominator in terms of hours labour time. Since these two are of different units, we need a conversion factor to bring hours into dollars and dollars into hours. The monetary expression of labour time is precisely that. So, the monetary expression of labour time is a way to capture the key intuition of the labour theory of value. The theory of value that we developed in the last segment which says that it is labour which creates value. And by defining the monetary expression of labour time in this way, we can bring the equivalence between the total labour time of society and the total value added created. Now, notice that there is one important implication of having the monetary expression of labour time. The monetary expression of labour time once we have that will allow us to move freely between quantities expressed in terms of dollar and quantities expressed in terms of hours. Let us say the monetary expression of labour time in our economy is so, the melt is 10 dollar per hour. Now, if we had 100 dollars, how many hours of labour is that 100 dollar worth? Well, to do that we need to divide it by 10. If we divide it by 10, we will get 10 hours. So, 100 dollars is worth 10 hours of labour in this society. On the other hand, let us say we have 15 hours of labour. We want to convert it back to dollars. How do we do that? We multiply it with the melt. So, this will give us 150 dollars. So, what this means is that once we have the monetary expression of labour time, we can freely convert between quantities measured in terms of dollars and quantities measured in terms of hours. This will be important for us as we move along, but this is something that we want to keep in mind. The last thing that we want to know is that sometimes we take the reciprocal of the melt. The reciprocal of the melt is known as the value of money. The melt, the monetary expression of labour time gives us the dollar equivalence of one hour of social labour. We can flip it around and ask how many hours of labour does one dollar count for? Well, it will just be the reciprocal of melt and that quantity is what we will call the value of money. So, for our example that we are working with, the monetary expression of labour time is 10 dollars per hour and therefore, the value of money is 1 over 10 that is 0.1. So, let me summarize what we have understood in this segment is the notion of money. Money is the social device that is necessary to express the value contained in commodities. We understood Marx's argument about the emergence of money in a commodity system going through a three step argument. Once we have understood money, we can introduce two important concepts. The concept of price which is the units of money needed to purchase one unit of the commodity and the much more important concept of the melt. The melt is the monetary expression for labour time. It captures the key intuition of the labour theory of value because it is a way in which we can assert the equivalence at the aggregate level between on the one hand the total monetary value created during the production process and on the other hand the total amount of labour time measured in terms of hours that has gone into producing that total bundle of commodities. The monetary expression of labour time allows us to define the equivalence between these two quantities. It is measured as dollar per hour and it captures the intuition that it is the amount of it answers the question how many dollars is one hour of social labour time worth. And if we take the reciprocal of the melt what we get is the value of money meaning how many hours of labour is equivalent to one dollar. With that let me stop and in the next segment we will build on the concept of commodity and money to try to understand the concept of surplus value and capital.