In earlier chapters we concentrated mainly on the analysis of the qualitative aspect of labor which creates value; now we can turn to a more direct analysis of the quantitative aspect.
As is known, when Marx ascertained that changes in the magnitude of value of commodities depended on changes in the quantity of labor expended on their production, he did not have in mind the individual labor which was factually expended by a given producer on the production of the given commodity, but on the average quantity of labor necessary for the production of the given product, at a given level of development of productive forces. "The labor-time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time. The introduction of power-looms into England probably reduced by one-half the labor required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labor represented after the change only half an hour's social labor, and consequently fell to one-half its former value" (C, I, p. 39).
The magnitude of socially necessary labor-time is determined by the level of development of productive forces, which is understood in a broad sense as the totality of material and human factors of production. Socially-necessary labor-time changes in relation not only to changes in the "conditions of production," i.e., of material-technical and organizational factors, but also in relation to changes in the labor force, in the "ability and intensity of labor."
In the first stage of his analysis, Marx assumed that all exemplars of a given sort of product were produced in equal, normal, average conditions. The individual labor expended on every exemplar quantitatively coincides with the socially-necessary labor, and the individual value with the social or market value. Here the difference between individual labor and socially-necessary labor, between individual value and social (market) value, is not yet taken into account. Thus Marx speaks simply of "value," and not of "market value," in these passages (market value is not mentioned in the first volume of Capital).
In later stages of his analysis, Marx assumed that different exemplars of a given sort of commodity are produced in different technical conditions. Here the opposition between individual and social (market) value appears. In other words, the concept of value is developed further and is defined more accurately as social or market value. In the same way, socially necessary labor-time opposes individual labor-time which differs in enterprises of the same branch of production. Thus we express the property of the commodity economy that the same price is established for all commodities of a given type and quality which are exchanged on the market. This is independent of the individual technical conditions in which these commodities are produced, and independent of the quantity of individual labor expended on their production in different enterprises. A society based on a commodity economy does not directly regulate the working activity of people but regulates it through the value of the products of labor, through commodities. The market does not take into account the individual properties and deviations in the working activity of individual commodity producers in individual economic units. "Each individual commodity, in this connection, is to be considered as an average sample of its class" (C., I, p. 39). Every individual commodity is not sold according to its individual value, but according to the average social value, which Marx calls market value in Volume III of Capital.
All enterprises of the same branch of production can be arranged in a series according to their level of technical development, starting with the most productive and ending with the most backward. Regardless of differences in the individual value of the product in each of these enterprises or in each group of enterprises (for the sake of simplicity, we will follow Marx in distinguishing three types of enterprises: with high, average and low productivity), their goods are sold on the market for the same price, which is determined in the last analysis (through deviation and destruction) by the average or market value: "commodities whose individual value is below the market-value realize an extra surplus-value, or surplus-profit, while those whose individual value exceeds the market-value are unable to realize a portion of the surplus-value contained in them" (C., III, p. 178). This difference between market-value and individual value, which creates various advantages of production for enterprises with different levels of productivity of labor, is the prime mover of technical progress in capitalist society. Every capitalist enterprise tries to introduce the latest technical improvements, to lower the individual value of production in comparison with the average market-value, and to get the possibility to extract super-profit. Enterprises with a backward technology try to decrease the individual value of their products, if possible to the level of market-value; otherwise they are threatened by the competition of more productive enterprises and face economic collapse. The victory of large over small-scale production, the increase of technical progress and the concentration of production in larger and technically more perfect enterprises, are the consequences of the sale of commodities on the market according to average market-value, independent of individual value.
If we assume a given level of development of productive forces in a given branch of production (the branch is defined as the totality of enterprises, with very different levels of productivity), the market value is a determined magnitude. But it is erroneous to think that it is given or established in advance, that it is computed on the basis of a given technique. As was pointed out, the technique of different enterprises is different. Market-value is a magnitude which is established as a result of market conflict among large numbers of sellers-commodity producers who produce in different technical conditions and who deliver to the market commodities which possess different individual values. As was already pointed out in Chapter Thirteen, the transformation of individual into socially-necessary labor takes place through the same process of exchange which transforms private and concrete labor into social and abstract labor: "the different individual values must be equalized at one social value, the above-mentioned market-value, and this implies competition among producers of the same kind of commodities and, likewise, the existence of a common market in which they offer their articles for sale" (C., III, p. 180). The market value is a resultant of the market struggle among various producers in a given branch of production (in this we take into account normal conditions on the market, which presupposes a balance of supply and demand and thus equilibrium among the given branches of production and other branches; on this, see below). Similarly, socially-necessary labor, which determines market-value, is a resultant of different levels of productivity of labor in different enterprises. Socially-necessary labor determines the value of commodities only to the extent that the market puts together all producers of the given branch and places them in the same conditions of market exchange. Depending on the extension of the market and the subordination of the separate commodity producers to market forces, the market-value which is created is uniform for all commodities of a given sort and quality. In the same way, socially-necessary labor acquires importance. The market-value is established through competition among producers in the same branch of production. But in the developed capitalist society there is also competition of capitals invested in different branches of production. The transfer of capitals from one branch to another, i.e., "competition of capitals in different spheres... brings out the price of production equalizing the rates of profit in the different spheres" (Ibid.). Market-value acquires the form of price of production.
If market-value is established only as the result of the social process of competition among enterprises with different levels of productivity, then we must ask which group of enterprises determines this market-value. In other words, which magnitude represents the average socially-necessary labor which determines market value? "On the one hand, market-value is to be viewed as the average value of commodities produced in a single sphere, and, on the other, as the individual value of the commodities produced under average conditions of their respective sphere and forming the bulk of the products of that sphere" (C., III, p. 178). If we make the simplifying assumption that for the whole totality of commodities of a given branch of production, the market-value coincides with the individual value (even though it diverges from the individual value of individual exemplars), then the market value of commodities will equal the sum of all individual values of commodities of the given branch, divided by the number of commodities. But in a later phase of analysis we must assume that behind the entire branch of production, the sum of market-values may deviate from the sum of individual values (which, for example, takes place in agriculture); the coincidence of these two sums is preserved only for the totality of all branches of production or for the whole social economy. In this case, the market-value will no longer exactly coincide with the sum of all individual values divided by the number of commodities of a given type. In this case, the quantitative determination of market-values is subject to the following laws. In Marx's view, in normal conditions market-value approaches the individual value of the dominant mass of products of a given branch of production. If a large part of the commodities is produced in enterprises with average productivity of labor, and only an insignificant part is produced in the worst conditions, then the market value will be regulated by enterprises with average productivity, i.e., market-value approaches the individual value of the products produced by this type of enterprise. This is the most frequent case. If "the part of the mass produced under less favorable conditions forms a relatively weighty quantity as compared with the average mass and with the other extreme," i.e., produced under the best conditions, then "the mass produced under less favorable conditions regulates the market, or social, value" (C., III, p. 183), i.e., approaches the individual values of those commodities (completely coinciding with them only in some instances, for example in agriculture). Finally, if commodities produced in the best conditions dominate the market, then they will exert a decisive influence on market value. In other words, socially-necessary labor may approach labor of average productivity (this takes place in the majority of cases) as well as labor of higher or lower productivity. It is only necessary that labor of higher (or lower) productivity deliver to the market the greatest quantity of commodities, i.e., in order to become the average (not in the sense of average productivity, but in the sense of the most widespread productivity) labor of a given branch of production. 
According to the reasoning of Marx which we have presented, he presupposes a normal course of production, correspondence between the supply of commodities and effective demand, i.e., those cases when buyers buy the entire amount of commodities of a given kind according to their normal market values. As we have seen, market value is determined by labor of high, average or low productivity; all these forms of labor may represent socially-necessary labor, depending on the technical structure of a given branch of production, and depending on the interrelations among enterprises with different levels of productivity in this branch. But all these different cases where market values are determined, under conditions of normal supply and demand, must be strictly distinguished from cases of divergence between supply and demand, when market price is higher than market-value (excessive demand) or when market price is lower than market-value (excessive supply). "We ignore here the overstocked market, in which the part produced under most favorable conditions always regulates the market-price. We are not dealing here with the market-price, in so far as it differs from the market-value, but with the various determinations of the market-value itself' (C., III, p. 183). How can we explain changes of market-value which depend on the numerical dominance of one or another group of enterprises (of high, average or low productivity)?
The answer to this question can be found in the mechanism of distribution of labor and equilibrium among different branches of social production. Market-value corresponds to the theoretically defined state of equilibrium among the different branches of production. If commodities are sold according to market values, then the state of equilibrium is maintained, i.e., the production of a given branch does not expand or contract at the expense of other branches. Equilibrium among different branches of production, the correspondence of social production with social needs, and the coincidence of market prices with market-values - all these factors are closely interrelated and concomitant. "For the market-price of identical commodities, each, however, produced under different individual circumstances, to correspond to the market-value and not to deviate from it either by rising above or falling below it, it is necessary that the pressure exerted by different sellers upon one another be sufficient to bring enough commodities to market to fill the social requirements, i.e., a quantity for which society is capable of paying the market-value" (C., III, pp. 180-181). The coincidence of prices with market values corresponds to the state of equilibrium among the different branches of production. Differences in the determination of market value by labor of high, average or low productivity become clear if we concentrate our attention on the role of market-values in the mechanism of distribution and equilibrium of labor. If enterprises with high productivity are dominant, more accurately, if masses of products produced in the best conditions are dominant, the market value cannot be regulated by the value of production in average or poor conditions, since this would bring about an increase of surplus profits in enterprises of higher productivity and would lead to significant expansion of production in these enterprises. This expansion of production (in the case of the dominant role of this group of enterprises) would lead on the market to excess demand and to the gravitation of prices to the level of value in enterprises of high productivity. Similar reasoning can be applied to cases of numerical predominance of another group of enterprises, namely those with average or low productivity. Different cases of regulation of market-values (or, which is the same thing, the determination of socially-necessary labor) call be explained by the different conditions of equilibrium of the given branch of production with other branches. This equilibrium depends oil the dominance of enterprises with different levels of productivity, i.e., in the last analysis, it depends on the level of development of productive forces.
Thus socially-necessary labor, which determines the market value of commodities in a given branch of production, can be labor of high, average or low productivity. Which labor is socially-necessary depends on the level of development of productive forces in the given branch of production, and first of all on the quantitative dominance of enterprises with different levels of productivity (as was already mentioned above, we are not considering the number of enterprises, but the mass of commodities produced in them).  But this is not all.
We suppose that two branches of production have completely equal quantitative distributions of enterprises with different levels of productivity. Let us say that enterprises of average productivity compose 40 percent, and enterprises with higher and lower productivity 30 percent each. However, there is the following essential difference among the two branches of production. In the first branch, production in enterprises with better equipment is open to quick and significant expansion (for example, because of particular advantages in the concentration of production: because of the ability to receive from abroad, or quickly to produce domestically, the necessary machines; because of the abundance of raw materials, the availability of a labor force fit for factory production, and so on). In the other branch, large-scale production can be expanded more slowly and to a smaller extent. It can be said in advance that in the first branch the market value will tend to be established (obviously if other conditions are the same) at a lower level than in the second branch, i.e., in the first branch the market-value will be closer to labor expenditures in enterprises with higher productivity. However, in the second branch the market-value may rise. If the market-value in the first branch rose as high as in the second branch, the result would be a quick and significant expansion of production in enterprises of higher productivity, an oversupply on the market, the breakdown of equilibrium between supply and demand, the fall of prices. For the first branch of production, the maintenance of equilibrium with other branches of production presupposes that market-value approaches expenditures in enterprises with higher productivity. In the second branch of production, the equilibrium of the social economy is possible with a higher level of market value, i.e., when prices approach labor expenditures in enterprises with average and low productivity.
Finally, cases are also possible where the equilibrium of the social economy takes place in conditions when market-value is not determined by individual labor expenditures in a given group of enterprises (for example of high productivity), but by the average amount of labor expenditures in the given group plus those in the group nearest to the given group. This can take place frequently if, in the given branch of production, enterprises are not divided into three groups according to their productivity, as we have assumed, but into two groups, of high and low productivity. It is obvious that the "average value" is not here considered as an arithmetic average: it can be closer to the expenditures of the group with higher or lower productivity, depending on the conditions of equilibrium between the given branch and other branches of production. Thus L. Boudin simplifies the problem excessively when he says that in the case of introducing technical improvements and new methods of production, "the value of the commodities produced...will not be measured by the average expenditure of labor, but either by that of the old or that of the new method." 
Thus the different cases of determination of market-value (namely the determination of socially-necessary labor) are explained by the different conditions of equilibrium between the given branch and other branches of the social economy, depending on the level of development of productive forces. The growth of the productive power of labor in a given branch of production, which changes the conditions of equilibrium of this branch with other branches, changes the magnitude of socially-necessary labor and the market-value. Labor-time "changes with every variation in the productiveness of labor" (C., I, p. 40). "In general, the greater the productiveness of labor, the less is the labor-time required for the production of an article, the less is the amount of labor crystallized in that article, andthe less is its value; and vice versa, the less the productiveness of labor, the greater is the labor-time required for the production of an article, and the greater is its value" (Ibid.). In Marx's theory, the concept of socially-necessary labor is closely related to the concept of the productive power of labor In a commodity economy, the development of productive forces finds its economic expression in changes of socially-necessary labor and changes of market value of individual commodities, which are determined by socially-necessary labor. The movement of value on the market is a reflection of the process of development of the productivity of labor. A striking formulation of this idea was given by Sombart in his well-known article dedicated to Volume III of Capital. "Value is a specific historical form in which is expressed the productive power of social labor, which governs, in the last analysis, all economic phenomena."  However, Sombart was mistaken in seeing in the theory of socially-necessary labor the entire content of Marx's theory of value. The theory of socially-necessary labor encompasses only the quantitative, not the qualitative aspect of value. "The fact that the quantity of labor contained in commodities is a quantity socially-necessary for the production of commodities, and thus labor-time is necessary labor-time - this definition refers only to the magnitude of value" (Theorien uber den Mehrwert, III, pp. 160-161). Sombart restricted himself to the aspect of Marx's theory which examined the dependence of changes in the magnitude of value on the movement of the material process of production, and he did not notice the most original part of Marx's theory, namely the theory of the "form of value." 
Above it was pointed out that the different cases of determination of market-value which we examined must be strictly distinguished from cases of deviation of prices from market-values which result from excessive supply or excessive demand. If market value is determined by average values in normal conditions, then, when there is excessive demand, the market price will deviate from market-value in an upward direction, approaching the expenditures of enterprises with low productivity. The opposite will take place in the case of excess supply. If the quantity of products on the market "besmaller or greater, however, than the demand for them, there will be deviations of the market-price from the market-value" (C., III, p. 185). Marx strictly distinguished those cases when market value is determined, for example, by the expenditures in enterprises with high productivity due to the fact that the greatest quantity of commodities is produced in these enterprises, from cases when market value is normally determined by average value, but because of oversupply, the market price is higher than the market-value and is determined by expenditures in enterprises with high productivity (See C., III, pp. 182 and 185-186). In the first case the sale of goods according to labor expenditures in enterprises with high productivity signifies a normal state of affairs on the market and there is equilibrium between the given branch of production and other branches. In the second case the sale of commodities according to the same expenditures is caused by an abnormal oversupply on the market, and unavoidably causes a contraction of production in the given branch, i.e., it signifies an absence of equilibrium among the individual branches. In the first case, commodities are sold according to their market-values. In the second case, the price of commodities deviates from market values determined by socially-necessary labor.
In this context we can see clearly the mistake which is made by those interpreters of Marx who say that even in cases of oversupply (or shortage of commodities) on the market, commodities are sold according to the socially-necessary labor expended on their production. By socially-necessary labor they not only understand labor which is necessary for the production of one exemplar of a given commodity under a given level of development of productive forces, but the entire sum of labor which society as a whole can spend on the production of a given kind of commodity. If, with a given level of development of productive forces, the society can spend 1 million working days on the production of shoes (yielding one million pairs of shoes), and if the society spent 1,250,000 days, then the 1,250,000 pairs of shoes produced represent only one million days of socially necessary labor, and one pair of shoes represents 0.8 days of labor. One pair of shoes is not sold for 10 roubles (if we assume that the labor of one day creates a value of 10 roubles) but for 8 roubles. Can we say that because of excessive production the quantity of socially-necessary labor contained in one pair of shoes changed, even though the technique for producing shoes did not change in any way? Or perhaps we should say: even though the quantity of socially-necessary labor required for the production of one pair of shoes did not change, because of the excessive supply the shoes are sold according to a market price which is below the market-value determined by the socially-necessary labor. The interpreters of Marx mentioned above answer the question in the first sense, thus establishing an "economic" concept of necessary labor, i.e., recognizing that socially-necessary labor changes not only in relation to changes in the productive power of labor, but also in relation to changes in the balance between social supply and demand. Defining the dependence of socially-necessary labor on the productive power of labor, we have answered in the second sense. It is one thing when, because of the improvement of technique, the time necessary for the production of a pair of shoes decreases from 10 to 8 hours. This means a decrease of socially-necessary labor, a fall of value, a general fall of the price of shoes, as a permanent, normal phenomenon. It is quite another thing when, due to the oversupply of shoes, one pair of shoes is sold for 8 roubles, even though 10 hours are needed for the production of shoes, as before. This is an abnormal state of affairs on the market which leads to the contraction of shoe production; it is a temporary fall of prices, and they will tend to return to the earlier level. In the first case we have a change in the conditions of production, i.e., changes in the necessary labor-time.  In the second case, "even though every part of the product cost only the socially necessary labor-time (here we assume that other conditions of production remain the same), in this branch an excessive quantity of social labor was spent, a quantity which is larger than that necessary on the general mass." 
Those who propose extending the concept of socially-necessary labor commit the following fundamental methodological errors:
1) They confuse a normal state of affairs on the market with an abnormal state, the laws of equilibrium among different branches of production with cases of breakdown of equilibrium which can only be temporary.
2) By doing this they destroy the concept of socially-necessary labor which presupposes equilibrium between the given branch of production and other branches.
3)They ignore the mechanism of deviation of market prices from values, inaccurately treating the sale of goods at any price in any abnormal conditions on the market, as sale which corresponds to value. Price is confused with value.
4)They break the close relation between the concept of socially-necessary labor and the concept of the productive power of labor, thus allowing the first to change without corresponding changes of the second.
We move on to a detailed analysis of the "economic" version of socially-necessary labor in the next chapter.
 K. Diehl inaccurately claims that Marx considers only labor expended in enterprises of average productivity as socially necessary labor. But if, in the given branch of production, the mass of products produced in the worst conditions is dominant, the market value will be determined by labor of lower productivity. "Here, as a result of determined conditions of supply, socially necessary labor-time is not the decisive factor, but rather a greater magnitude" (K. Diehl, Uber das Verhaltnis von Wert und Preis im okonomischen System von Marx, Jena, 1898, pp. 23-24). Such a view could only be relevant to cases of divergence between supply and demand which cause the deviation of prices from market-values: in such cases socially-necessary labor is not decisive, but rather a magnitude which exceeds it or which is lower. But Diehl grasps the fact that Marx's reasoning does not refer to such cases of deviation of prices from market-values (on this, see below), but refers precisely to the "correspondence of the general mass of the products with social needs" (Ibid., p. 24), i.e., equilibrium between the given branch of production and other branches. But if this equilibrium appears when the market-value is determined by labor of lower productivity, precisely this labor is considered socially-necessary.
If Diehl considers only labor of average productivity as socially-necessary, other authors are disposed to recognize only labor of higher productivity, expended in the best technical conditions, as socially-necessary. "The actual exchange value of all values depends on the labor-time necessary with the most developed technical methods of production, on 'socially-necessary' labor-time" CW. Liebknecht, Zur Geschichte der Werttheorie in England, Jena, 1902, p. 94). As we saw from the text, this idea also disagrees with Marx's theory.
 "Which group of enterprises (with different levels of productivity - I.R..) will, in the last analysis, determined the average value, depends on the numerical interrelations or the proportional quantitative interrelations among the class of enterprises in a given branch" (Theorien uber den Mehrwert, Vol. II, Book I, PĚ 56).
Louis B. Boudin, The Theoretical System of Karl Marx, Chicago: Charles H. Kerr & Co., 1907, p. 70.
Werner Sombart, "Zur Kritik des Oekonomischen Systems von Marx," Braun's Archiv fur soziale Gesetzgebung u. Statistik, 1894, Vol. VII, p. 577.
This basic shortcoming of Sombart's interpretation was noted by S. Bulgakov in his article, "Chto takoe trudovaya tsennost" (What is Labor Value), Sborniki pravovedeniya i obshchestvennykh znanii (Essays on Jurisprudence and Social Science), 1896, Vol. VI, p. 238.
Marx, Theories of Surplus Value [Russian translation by V. Zheleznov, Vol. I, p. 151; Russian translation by Plekhanov, Vol. I, pp. 184-185].