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Marx also explained that the proposed system of labor money was unworkable in practice.The reason is that labor money would destroy the only mechanism that exists in a market economy for determining whether a given product actually meets a social need.Workers sell their labor power to the capitalists at its value.The capitalists then consume the labor power they have purchased from the workers by forcing the workers to perform more labor measured in terms of time than it took to produce the workers’ ability to work.Keynes believed that getting rid of the gold standard was the key to eliminating the problem of inadequate monetarily effective demand and the resulting mass unemployment.
These pre-Marxist socialist advocates of labor money believed, in contrast to Marx, that capitalist exploitation was based on unequal exchange.
Under this proposal, workers would perform a certain amount of work and then exchange the product of their labor at a “labor bank” for a certificate that would state that they had performed X hours of labor.
The certificate would then be “cashed in” at the labor bank for other products that represented exactly the same quantity of labor.
A basic flaw in this proposal was that while at one time the ratio of 16 to 1 more or less reflected the actual relative labor values of gold and silver bullion, by the late 19th century the value of silver was falling sharply relative to the value of gold.
Given a choice of using either silver or gold coins at this ratio, people would have chosen to pay off their debts in cheap silver—which is why bimetallism was so popular among highly indebted small farmers and businesspeople—while using the cheap silver dollars to purchase and hoard the more valuable gold dollars.
This last point was rendered moot when Karl Marx demonstrated starting in the late 1850s that surplus value arises on the basis of exchange of equal quantities of labor, and not through the violation of the Ricardian law of equal exchange as earlier socialists believed.