In 1949, Ted Grant wrote his seminal “Against the Theory of State Capitalism” , a polemic against Tony Cliff who argued that the Soviet Union was “state capitalist” and that the bureaucracy constituted a new ruling class through their ownership of the means of production. Grant, on the other hand, argued that the Soviet Union was a degenerated workers’ state – the bureaucracy were not a separate class, but an elite section (caste) of the working class that controlled (but did not own) the means of production and distribution of goods on behalf of the wider working class. Drawing on Marx’s theory of bonapartism, Grant described the Stalinist bureaucracy as proletarian bonapartist, as in the last analysis it defended (as of 1928) the planned economy and socially owned means of production.
Deformed workers’ states were defined by the same criteria, except that they were never “healthy” workers’ states in the first place – they were deformed from the outset.
This theory of the deformed/degenerated workers’ states helped Marxists to maintain a level head in relation to world events and, in my view, generally a correct analysis. However, in the light of more recent debates about the class nature of China, it has become important to critically review Grant’s theory.
I believe that Grant made a fundamental error in his economic appraisal of the Soviet Union – that the Law of Value operated in the post-1928 Soviet Union.
What is the Law of Value?
Under the section ‘Does the Law of Value Operate Within the Russian Economy?, Grant begins to makes his case for the Law of Value in the Soviet Union:
“According to the Marxist view, it is in exchange that the law of value manifests itself. And this holds true for all forms of society. […] Therefore, if it was in exchange only between Russia and the outside world that the law of value manifested itself, all that this would mean is that the Russian surplus was exchanged on the basis of the law of value. What consequences that would have for the internal economy is a different question which would have to be worked out.” 
According to Grant, wherever exchange takes place in any form of society, the Law of Value operates. But this is incorrect. The Law of Value is essentially what Adam Smith referred to as the “hidden hand of the market”. It is the series of forces that obey law-like properties (like the “laws of physics”) within a society where the primary mode of production is production for exchange and profit. The Law of Value is thus specific to the capitalist mode of production and is not an eternal category.
Exchange of commodities through money did of course take place in the market in pre-capitalist times, such as in the medieval era. For example, individual furniture makers would sell the tables and chairs they produced. But the primary mode of production was feudal, and so commodity production was not generalised. Thus The Law of Value could not condition the labour-time to produce the goods and the prices they were sold at.
It is important to note that time, and hence labour-time, is a universal category of measurement that applies across all societies. However, it is only under capitalism that generalised value production arises. Value is always measured in labour-time, but outside of capitalism, value does not exist in a generalised form, and therefore The Law of Value does not exist. This is because capital is a social relation between capitalist and worker, and only this can produce value (and hence surplus value) on a generalised scale. At the same time, the production of surplus value also reproduces the capital social relationship:
“Capitalist production, therefore, under its aspect of a continuous connected process, of a process of reproduction, produces not only commodities, not only surplus-value, but it also produces and reproduces the capitalist relation; on the one side the capitalist, on the other the wage labourer.” 
“The production of capitalists and wage labourers is thus a chief product of capital’s realization process. Ordinary economics, which looks only at the things produced, forgets this completely.” 
Capital accumulation both presupposes and reproduces workers and capitalists. Grant is correct that there are no capitalists in the Soviet Union, and is thus completely wrong when he asserts that The Law of Value existed within the planned economy of the Soviet Union post-1928.
In the external relations of the Soviet Union to other countries for the purposes of foreign trade on the world capitalist market, however, The Law of Value did indeed assert itself. The goods produced in the Soviet Union entered market relations for the first time and obtained exchange-value in relation to the other world commodities, and hence exchange-values (prices) were determined by universal socially necessary labour-time, asserting the law of exchange of equivalence. Grant refers to the goods exchanged by the Soviet Union as the “Russian surplus”, although it is important to note that refers to the surplus product. The Rouble was not freely convertible because it was not commodity-money (we will cover this in more detail later).
Grant on Labour-Time and Value
Grant further elaborates on the Law of Value within the Soviet Union:
“We have seen that if the law of value only applies because of the existence of capitalism in world economy, then it would only apply to those products exchanged on the world market. But Cliff argues two contradictory theses in relation to the Russian economy. On the one hand he says:
“This does not mean that the price system in Russia is arbitrary, dependent on the whim of the bureaucracy. The basis of price here too is the costs of production. If price is to be used as a transmission belt through which the bureaucracy directs production as a whole, it must fit its purpose, and as nearly as possible reflect the real costs, that is, the socially necessary Labour absorbed in the different products…” (Cliff, page 94)
Two pages later, Cliff describes as the central point he intends to prove:
“…that in the economic relations within Russia itself one cannot find the autonomy of economic activity, the source of the law of value, acting.” (Cliff, page 96)
In the first quotation, Cliff shows precisely the way in which the law of value manifests itself internally in Russian society. Even if one abstracts from the world market, leaving aside the interacting effect which it undoubtedly has – when Cliff says that ‘the real costs, that is the socially necessary labour absorbed in the different products’ must reflect the real prices, he is saying that the same law applies in Russian society as in capitalist society. The difference is that whereas in capitalist society it manifests itself blindly by the laws of the markets, in Russia conscious activity plays an important role. In this connection the second quotation crushingly refutes Cliff’s argument that it is capitalism which exists in Russia under these given conditions because the law of value does not operate blindly, but is consciously harnessed. In capitalist society, the law of value, as he says, manifests itself through the ‘autonomy of economic activity’, ie, it is the market which dominates. The first quotation shows clearly that the market – and this is the point – is within given limits controlled consciously and therefore it is not capitalism as understood by Marxists.” 
In this instance, Tony Cliff is basically correct in his argument. Grant’s problem is that he equates the measurement of (socially necessary) labour-time with value.
Due to social, cultural and historical reasons, the bureaucracy used the rouble as a proxy measurement for labour-time. In order to accurately direct a plan of production that utilises the total labour at the disposal of society to produce the necessary products, the labour-time to produce each product must be measured as accurately as possible. However, since the time taken to produce a product varies, it becomes pertinent to measure the average labour-time per product, or the “socially necessary labour-time” in Marxist parlance. This constituted the “real cost” of production from an accounting point of view. In this light, it makes sense that the Stalinist bureaucracy would favour piecemeal “payment” to workers (“payment” per good produced) – it allows them to maintain a direct relationship between socially necessary labour-time expended and share in the social product allocated per worker.
We will now see what Marx and Engels had to say on this and Grant’s curious idea that a post-capitalist society would “consciously harness” the Law of Value.
Marx and Engels on Labour-Time and Value
In his reply to Storch, Marx says:
“In the first place, it is a false abstraction to regard a nation whose mode of production is based upon value, and furthermore is capitalistically organised, as an aggregate body working merely for the satisfaction of the national wants.
Secondly, after the abolition of the capitalist mode of production, but still retaining social production, the determination of value continues to prevail in the sense that the regulation of labour-time and the distribution of social labour among the various production groups, ultimately the book-keeping encompassing all this, become more essential than ever.”  (my emphasis)
In the first sentence, Marx says that it is wrong to consider a society whose mode of production is value (i.e. capitalist) produces for social use. Therefore, it would also be incorrect to consider a society that produces for use-value produces value (and hence surplus value). Yet this is exactly what Grant does.
In the second sentence Marx makes it clear that after capitalism is abolished, the determination of “value” will still exist only in the sense of calculating labour-time to apportion labour according to a plan. I have put “value” in quotes here before Marx does not mean value in the usual sense. For example:
“In actual fact, the concept “value” presupposes “exchanges” of the products. Where labour is communal, the relations of men in their social production do not manifest themselves as “values” of “things”. Exchange of products as commodities is a method of exchanging labour, [it demonstrates] the dependence of the labour of each upon the labour of the others [and corresponds to] a certain mode of social labour or social production.”  (my emphasis)
Engels also concurs in Anti-Duhring:
“From the moment when society enters into possession of the means of production and uses them in direct association for production, the labour of each individual, however varied its specifically useful character may be, becomes at the start and directly social labour. The quantity of social labour contained in a product need not then be established in a roundabout way; daily experience shows in a direct way how much of it is required on the average. Society can simply calculate how many hours of labour are contained in a steam-engine, a bushel of wheat of the last harvest, or a hundred square yards of cloth of a certain quality. It could therefore never occur to it still to express the quantities of labour put into the products, quantities which it will then know directly and in their absolute amounts, in a third product, in a measure which, besides, is only relative, fluctuating, inadequate, though formerly unavoidable for lack of a better one, rather than express them in their natural, adequate and absolute measure, time. […] Hence, on the assumptions we made above, society will not assign values to products.[…] It is true that even then it will still be necessary for society to know how much labour each article of consumption requires for its production. It will have to arrange its plan of production in accordance with its means of production, which include, in particular, its labour-powers. The useful effects of the various articles of consumption, compared with one another and with the quantities of labour required for their production, will in the end determine the plan. People will be able to manage everything very simply, without the intervention of much-vaunted “value”.” 
“As long ago as 1844 I stated that the above-mentioned balancing of useful effects and expenditure of labour on making decisions concerning production was all that would be left, in a communist society, of the politico-economic concept of value. (Deutsch-Französische Jahrbücher, p. 95) The scientific justification for this statement, however, as can be seen, was made possible only by Marx’s Capital.” 
The only difference with what Engels outlined above with the Soviet Union is that labour-time was not assigned directly, but indirectly via the rouble. The rouble acted as a proxy for labour-time, a bit like Marx’s “labour certificates” . The difference between them, however, is that the rouble could be exchanged with other people, whereas Marx’s “labour certificate” would be assigned directly to individuals and would therefore be non-exchangable. In practice, however, accumulation of roubles by workers was kept in check by the state. Also, many consumer goods were rationed, so having an accumulation of roubles did not automatically imply greater “purchasing power” because one simply could not “buy” them.
Grant on Capital Accumulation and Wages
One of Grant’s misconceptions of the Soviet economy is that he confuses the use of the rouble as a measurement of labour-time with the use as commodity-money. This leads him to make all sorts of assertions:
“Now, in any capitalist society in which the reserve fund is in the hands of the capitalist class, as Engels explained:
“… if this production and reserve fund does in fact exist in the hands of the capitalist class, if it has in fact arisen through the accumulation of profit…then it necessarily consists of the accumulated surplus of the product of labour handed over to the capitalist class by the working class, over and above the sum of wages paid to the working class by the capitalist class. In this case, however, it is not wages that determine value, but the quantity of labour; in this case the working class hands over to the capitalist class in the product of labour a greater quantity of value than it receives from it in the shape of wages; and then the profit on capital like all other forms of appropriation without payment of the labour product of others, is explained as a simple component part of the surplus value discovered by Marx.” (Anti-Dühring, Progress Publishers, Moscow 1969, page 233)
This indicates that where there is wage labour, where there is the accumulation of capital, the law of value must apply, no matter in how complicated a form it may manifest itself.” 
Grant doesn’t seem to appreciate the irony of his quote from Engels. Engels is of course referring to how profit arises under capitalism: through the accumulation of capital via the exploitation of workers by capitalists who own the means of production! If this is analogous with the Soviet Union, then one can only conclude that the Soviet Union was capitalist!
Workers did not sell their labour-power in the Soviet Union because they owned the means of production – they could not “exploit themselves” as a social-relation like labour is to capital. Grant appears to adopt the viewpoint of the economist John Kenneth Galbraith, who said “Under capitalism, man exploits man. Under communism, it’s just the opposite.”
Workers were not paid wages but rather were allotted a portion of the total social product according to their work, in the form of the rouble. Since the “price” of consumer goods was determined primarily by labour-time, workers could then redeem their expended labour-time for goods of an equivalent labour-time. Marx described this in Critique of the Gotha Programme:
“Within the co-operative society based on common ownership of the means of production, the producers do not exchange their products; just as little does the labour employed on the products appear here as the value of these products, as a material quality possessed by them, since now, in contrast to capitalist society, individual labour no longer exists in an indirect fashion but directly as a component part of total labour. The phrase “proceeds of labour”, objectionable also today on account of its ambiguity, thus loses all meaning.
What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges. Accordingly, the individual producer receives back from society — after the deductions have been made — exactly what he gives to it. What he has given to it is his individual quantum of labour. For example, the social working day consists of the sum of the individual hours of work; the individual labour time of the individual producer is the part of the social working day contributed by him, his share in it. He receives a certificate from society that he has furnished such-and-such an amount of labour (after deducting his labour for the common funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another.”  (my emphasis in bold)
The Soviet Bureaucracy
Because the Soviet bureaucracy was “unproductive” (i.e. they did not produce necessary products) and largely unaccountable, their allotted share of the social product (via the roubles they received) was determined largely by themselves and was much greater than the average worker. But they were not a separate class because they did not privately own the means of production.
After Stalin’s death, there were attempts to introduce incentives into the Soviet economy. For example, allowing managers of state enterprises to retain some of the “profits”. However, “profits” in this sense simply meant the difference between allocated labour-time according to the plan (costs) and labour-time redeemed for the enterprises products (income). This contrasts with profit under capitalism/The Law of Value, which derives from surplus value. If we assume that demand was constant, the main way therefore to increase “profits” in the Soviet Unionwas to reduce costs. Thus, assuming the plan was fulfilled, any “profits” made would represent productivity gains where labour-time expended was reduced. As a reward, the enterprise manager and/or wider bureaucracy would receive part of this “profit”, reflecting yet another “unfair” claim on the total social product that the bureaucracy did not produce.
These “profit”-oriented reforms undermined the accounting of the economy according to labour-time. Roubles allocated by the state for investment became “profit” and thus allocated for consumption without corresponding expended labour-time. This led to inflation since the proxies used to redeem spent labour-time exceeded actually expended labour-time in production, and an ideal plan must balance them in equilibrium in order for “prices” to reflect expended labour-time accurately. Additionally, the cost-cutting exercises sometimes reduced the quality of the products, such that they became useless and thus the labour-time was wastefully expended, further misbalancing the plan.
The Black Market
There is no doubt that illegal consumer markets developed in the Soviet Union due to the shortage of (quality) goods. Speculators hoarded goods and waited until shortages in order to “sell” them at higher “prices”. However, both the goods being “sold” (illegally) and the roubles being exchanged would have been originally allocated as part of the plan. Market traders exchanged goods at higher than usual “prices” in order to gain more roubles and hence a greater share of the social product, much in the same way the bureaucracy gained a greater “unfair” share of the product. But there was no market in capital goods or labour. The black market in consumer goods was, essentially, a zero-sum game, a reallocation of goods already produced.
NEP and the Soviet Union 1922-1928
Based on our remarks above, it is clear that the economy of Russia prior to the implementation of the First Five Year Plan was on the basis of the capitalist mode of production. Lenin referred to it as “state capitalism”. State ownership existed side by side with private ownership, and therefore production and exchange was disciplined by the Law of Value. Private capitalists were allowed to employ up to 20 workers.  Peasants sold their agricultural products to the state and on the private market. State interference could at best modify the operation of The Law of Value within the context of a commodity economy.
Such an arrangement between the various classes could only exist temporarily on the basis of a “workers’ state”. As the capital social relation expanded, so did the reproduction of wage workers and capitalists. The kulaks (capitalist peasants) became increasingly hostile to the Soviet state and withheld their grain in 1928, leading to a crisis. In panic, Stalin adopted the policies of the Left Opposition in distorted fashion, carrying out forced collectivisation of the peasant farms, nationalisation of the economy and the institutions of the first Five Year Plan. This marked the end of the capitalist mode of production (and hence the Law of Value) in Russia and the beginning of planned production for use, however brutal its implementation.
The Law of Value in China
Some Marxists uphold China as an example of a deformed workers’ state, and often make comparisons between China today and Russia during the NEP. Yet these comparisons are mistaken. The NEP was carried out before the capitalist mode of production had been abolished. This is because the Bolsheviks originally sought to maintain a state-directed form of capitalism until the socialist revolution had spread to other countries such as Germany. As a result, the capitalist class and the capitalist mode of production existed until the first Five Year Plan in 1928.
We would still describe the Bolshevik state from 1917 as a workers’ state (and later a degenerated one) because the Bolsheviks represented the working class and their aim was to abolish the capitalist mode of production, even though they did not do so (after being forced by the growing capitalist class) until 11 years after taking power. The Chinese state has moved in the opposite direction, away from planned production for use and has reintroduced the capitalist social-relation, and hence The Law of Value. The Chinese Stalinists no longer defend planned production for use and therefore no longer represent the working class even in a bonapartist fashion.
In the Soviet Union the rouble was non-convertible because it was used as a proxy for labour-time in relation to the plan, not as money. In China, the Renminbi performs the role of money as capital:
“From 1997 to 2005, the Chinese government pegged the Chinese Yuan Renminbi to the US Dollar at approximately 8.3 CNY to 1 USD. In 2005, a flexible mechanism of exchange rates was phased in, with the RMB being re-evaluated to 8.1 Renminbi per US dollar. The Chinese government launched a pilot program in 2009, allowing some businesses in Guangdong and Shanghai to execute business and trade transactions with counterparties in Hong Kong, Macau, and select nations. The program has since expanded to all areas of China and all international counterparties. China has also made agreements with Australia, Japan, Thailand, Russia, and Vietnam to allow for direct currency trade, instead of converting to the US Dollar. As a managed float, the Renminbi’s value is determined by a basket of foreign currencies.” 
The Chinese Renminbi currency is fully convertible on the world-market, and is therefore the universal commodity of equivalence as required under the capitalist mode of production. As Marx said, “real money is always world-market money, and credit-money always rests upon world-market money.” 
The Chinese State
Furthermore, some Marxists accept that The Law of Value operates in China, but they still claim China to be a deformed workers’ state because control of the state has not passed to the capitalist class. But what does this mean?
Lenin very honestly described the Soviet state as a “bourgeois czarist machine…barely varnished with socialism”, and said that as long as distribution of goods had to be rationed (such as via the rouble) , a “bourgeois” state (minus the bourgeoisie) would continue to exist even under socialism to maintain bourgeois norms of distribution. Without the existence of workers councils, there was little difference between the Soviet state instrument and the traditional bourgeois state instrument. If the pro-NEP wing of the bureaucracy (e.g. Bukharin) had defeated Stalin in 1928, then Russia would have continued on a capitalist basis with a pro-capitalist bureaucracy and would have never implemented the planned economy. Of course, the workers would probably not have accepted this without a fight, hence why Trotsky claimed that the two classes could not share the same state because the result at this time would have been civil war.
However, in China the opposite has occurred, where the pro-capitalist bonapartists have defeated the proletarian bonapartists. The working class did try to fight back as symbolised by the events of Tiananmen 1989, but were literally crushed. Since then, the Chinese state has restored the capital social-relation, but in a way that has avoided the economic collapse the Soviet Union faced as a result of the discontent and political situation at the time of Perestroika in the late 1980’s.
 Grant, Against The Theory of State Capitalism https://www.marxists.org/archive/grant/1949/cliff.htm
 Marx, Capital Volume 1, Chapter 23 https://www.marxists.org/archive/marx/works/1867-c1/ch23.htm
 Marx, Grundrisse, Chapter 9 https://www.marxists.org/archive/marx/works/1857/grundrisse/ch09.htm
 Marx, Capital Volume 3, Chapter 49 https://www.marxists.org/archive/marx/works/1894-c3/ch49.htm
 Marx, Theories of Surplus Value, Chapter 20 https://www.marxists.org/archive/marx/works/1863/theories-surplus-value/ch20.htm
 Engels, Anti-Duhring, Chapter 26 https://www.marxists.org/archive/marx/works/1877/anti-duhring/ch26.htm
Engels, Anti-Duhring, Notes https://www.marxists.org/archive/marx/works/1877/anti-duhring/notes.htm
Marx, Critique of the Gotha Programme, Chapter 1 https://www.marxists.org/archive/marx/works/1875/gotha/ch01.htm
 Grant, Against The Theory of State Capitalism https://www.marxists.org/archive/grant/1949/cliff.htm
 Marx, Critique of the Gotha Programme, Chapter 1https://www.marxists.org/archive/marx/works/1875/gotha/ch01.htm
 Siegelbaum, Soviet State and Society, p97–116.
 XE.com article on Chinese Yuan Renminbi http://www.xe.com/currency/cny-chinese-yuan-renminbi
 Marx, Capital Volume 3, Chapter 33 https://www.marxists.org/archive/marx/works/1894-c3/ch33.htm