Much ink has been spilt in responding to the recent New York Times article extolling Marx’s economic, philosophical and historical contributions (Jason Barker: “Marx was Right“). In critically analyzing this article, several authors have, quite rightly, pointed to the practical impossibility of implementing outright socialism due to the problem of economic calculation, and to the enormous death and destruction that all attempts to implement Marx’s ideas have wrought.1
Nevertheless, a very important point made by the author of the NYT article, Jason Barker, has not received the attention it deserves. Specifically, there has, as yet, been no detailed response to Barker’s claim that “Marx’s basic thesis — that capitalism is driven by a deeply divisive class struggle in which the ruling-class minority appropriates the surplus labor of the working-class majority as profit — is correct” (emphasis added).
This article seeks to address this point, and does so by providing a summary of Böhm-Bawerk’s scintillating criticism of the entire economic edifice of Marx, advanced more than a century ago in his Karl Marx and the Close of his System (Böhm-Bawerk 2007).2 As explained in more detail below, Böhm-Bawerk attacks the three main pillars of Marx’s economic system: the labor theory of value, Marx’s law of value and his theory of surplus value as the source of the capitalist’s profits. At the end of his onslaught none of these pillars is left standing, and the entire edifice comes crashing down. Böhm-Bawerk’s critique remains, to this day, one of the most powerful criticisms of the argument that the source of the capitalist’s profits lies in the exploitation of workers.
Marx on the Labor Theory of Value
At the very outset, in the opening chapter of the first volume of Capital, Marx restricts his analysis to the world of commodities, a subset of goods in general. “The wealth of societies in which the capitalist mode of production prevails,” he observes, “appears as an immense collection of commodities.” It thus follows that an economic analysis of capitalist society must begin “with the analysis of the commodity” (Marx 1990: 125).
What, then, are the salient characteristics of a commodity? A commodity must, to begin with, be useful. It must satisfy some “human needs,” either directly as “an object of consumption, or indirectly as a means of production (Marx 1990: 125)” Moreover, it must be produced for exchange on the market. An individual who produces goods to satisfy his (or her) own wants “creates use-values, but not commodities.” To produce commodities he must “not only produce use-values, but use-values for others, social use-values (Marx 1990: 131).”
These two characteristics of a commodity form the foundation of Marx’s theory of value. The use value of a commodity rests on and is completely determined by its usefulness, on the fact that is can be brought into a causal connection with the satisfaction of wants. Value, in this sense, refers to the importance that a commodity has for the well-being or satisfaction of an individual.
But when a commodity enters the nexus of interpersonal exchange it also gains exchange value. Now, according to Marx, “exchange value appears first of all as the quantitative relation, the proportion, in which use-values of one kind exchange for use-values of another kind” (Marx 1990: 126). An act of exchange, in other words, is always characterized by the transfer of two commodities that possess use.
Nevertheless, the exchange value of a commodity is not determined by its value in use. In fact, its precise extent or magnitude bears no systematic relationship with the importance that a commodity has for the well-being of an individual. Disconnected from the subjective wants, desires and perceptions of acting individuals, it is instead an objective property of a commodity. And like other objective properties such as height, weight, etc. it is “intrinsic” to a commodity, “inherent in it,” and is “inseparably connected with it” (Marx 1990: 126).
How does Marx arrive at this conclusion? His analysis rests on an observation made many centuries ago by Aristotle. “There can be no exchange,” the Greek philosopher claimed, “without equality, and no equality without commensurability” (quoted in Marx 1990: 151). Every act of exchange, in other words, involves an equality of value; the units of the two commodities being exchanged possess equal exchange value. And, if this is the case, there must be some “common element” of “identical magnitude” that exists in the “two different things” being exchanged that determines this equal exchange value (Marx 1990: 127).
The puzzle of what governs exchange value will thus be solved if one can identify what this “common element” of “identical magnitude” is. And this is precisely what Marx sets out to do. He does this, not by trying to advance a positive argument for why a certain element or factor is the one that he is looking for. Instead, he attempts to find the common element by winnowing out all the factors that cannot be the one that he is after, leaving him with his Holy Grail in the end.
He begins by throwing use value out the window. The use values of the commodities being exchanged, Marx claims, rest on their qualitative features, their “geometrical, physical, chemical or other natural” properties (Marx 1990: 127). Now, since these properties and the use values that they impart serve to distinguish and differentiate the two commodities being exchanged, they cannot be the “common element” of “identical magnitude” that is being sought.
Having dispensed with use values and the various qualitative properties of the two commodities that underlie it, Marx quickly arrives at his destination. “If…we disregard the use-value of commodities,” he claims, “only one property remains, that of being products of labor (Marx 1990: 128).”
To be specific, however, it is not the “concrete forms of labor” that make up this common element, for they were also excommunicated when use values were sent into exile. From the perspective of exchange value and the common element that determines it, the various distinguishing and distinctive features of the commodities being exchanged disappear from the scene; all their “sensuous characteristics are extinguished.” And since there is “no longer a table, a house, a piece of yarn or any other useful thing,” there is also no longer the “labor of the joiner, the mason or the spinner, or any other particular kind of productive labor (Marx 1990: 128).”
All that remains, then, is “human labor in the abstract;” “homogenous human labor” that is “expended without regard to the form of its expenditure (Marx 1990: 128).” Here lies Marx’s Holy Grail. It is the quantity of abstract, homogenous human labor, “measured by its duration…on the particular scale of hours, days, etc. (Marx 1990: 129)” that is the “common element” of “identical magnitude” that determines the exchange values of the commodities that are being exchanged.
Marx’s Law of Value
The main implication of this theory of exchange value for prices realized on various markets is the following: every realized price reflects the inter-personal transfer of units of two commodities that embody equal magnitudes of homogenous human labor.
Take, for example, the exchange of one shirt for a loaf of bread in a world of barter. Each will, then, require the same amount of labor time to produce and will thus have equal exchange value. The same holds true in a monetary economy where goods are exchanged for units of money. In this case the units of the good and the units of money will embody the same amount of labor time. This, in essence, is Marx’s “law of value,” a law that is “immanent in the exchange of commodities” (Marx 1990: 268).
There are three very important points to note regarding this law. First, the labor time embodied in a commodity includes both the direct and the indirect labor needed to produce. In the case of the loaf of bread, for example, the labor time that governs its exchange value includes not just the labor time of the baker but also of the miller who grinds the flour, the farmer who grows the wheat, etc.
Second, strictly speaking, it is not the absolute amount of homogenous human labor, or “identical human labor power” that governs the exchange value of a commodity (Marx 1990: 129). It simply cannot be the case that a commodity would be more valuable “the more unskilled and lazy the worker who produced it (Marx 1990: 129).” Similarly, the value of a pound of cotton yarn cannot be increased if the cotton used to produce it is “such rubbish as to tear at every other moment (Marx 1990: 303).”
Instead, the exchange value of a commodity only depends on “the socially necessary labor-time” needed to produce it, or “the labor-time required to produce any use-vale under the conditions of production normal for a given society and with the average degree of skill and intensity of labor prevalent in that society” (Marx 1990: 129).
And third, the law of value does not hold at every moment of historical time but only represents a tendency that prevails in the real world. The realized prices from moment to moment fluctuate around their levels as governed by the “law of value.” For example, a shirt may, in the short run, sell either under or over its exchange value. It might embody an hour of socially necessary labor time, as might a gold ounce, but sell at times for half a gold ounce and at other times for two gold ounces. But its price always revolves around that of one gold ounce and always tends towards it.
Thus, “in the midst of the accidental and ever-fluctuating exchange relations between the products, the labor-time socially necessary to produce them asserts itself as a regulative law of nature” (Marx 1990: 168). The law of value is ever-present but forgotten in the rough and tumble of daily events, but like the “law of gravity” it ultimately rearing its head, and “asserts itself when a person’s house collapses on top of him,” reminding everyone of its constant operation (Marx 1990: 168).
Surplus Value, Profits and the Exploitation of the Worker
Marx erects his theory of exploitation on the labor theory of exchange value and the law of value implied in it. The activities of a capitalist, Marx observes, conform to a regular pattern. Each capitalist starts with a capital sum, or a sum of money (M). He (or she) proceeds to invest this sum in various inputs used in the production process, or a bundle of non-money commodities (C). This bundle includes the labor power of workers as well as material capital goods, the latter including less durable raw materials as well as machines and tools of greater durability. These inputs are then used to produce a product, or another commodity, that is ultimately sold on the market for a larger sum of money than initially invested (M’). The M-C-M’ circuit of money and commodities summarizes the ever-repeating activities of capitalists engaged in production.
When viewed through the prism of the law of value, however, the presence of this M-C-M’ circuit presents the following puzzle: the capitalist “must buy his commodities at their value, sell them at their value, and yet at the end of the process withdraw more value from circulation than he threw into it at the beginning (Marx 1990: 269).” All the inputs purchased by the capitalist are bought at prices that reflect the socially necessary labor time embodied in them, as is the price of the product that is ultimately sold. Yet, this process results in the exchange value of the product exceeding those of the inputs used to produce it. What is the source of this “surplus value” generated by the capitalist?
The first step to resolving this puzzle is to take a closer look at how the prices of the inputs reflect the socially necessary labor time embodied in them. Take, for instance, the production of cotton yarn. Let us assume that it takes a capitalist ten pounds of cotton, the use of a machine for a couple of hours, and six hours of labor-time to produce to produce ten pounds of yarn.
The cost of the ten pounds of cotton is ten gold ounces. Assuming that one gold ounce requires two hours of socially necessary labor time to produce, the ten pounds of cotton embody twenty hours of necessary labor time. Assume, moreover, that the two hours of machine-time used to spin the ten pounds of cotton into yarn is worth two gold ounces. Thus, machinery that embodies four hours of labor time is also consumed in the production process, and altogether twelve gold ounces worth of material inputs that require twenty four hours of labor time are used up in the production of the cotton yarn.
Let’s turn our attention now to the case of the labor power used in the production of yarn. Just like every other commodity, “the value of labor power,” Marx declares, “is determined by the labor-time necessary for the production, and consequently also the reproduction, of this specific article” (Marx 1990: 274). The worker, to work and place his labor power at the disposal of the capitalist, needs to consume some “means of subsistence,” a bundle of commodities that are “sufficient to maintain him in his normal state as a working individual” (Marx 275).
The exchange value of labor power, which is reflected in the wages that must be paid to hire it, is determined by the socially necessary labor time required to produce these means of subsistence that are necessary to produce and reproduce labor power. Assume now that the capitalist producing the cotton yarn can buy a day’s labor power for three gold ounces. It follows, since the law of value prevails, that the means of subsistence required to produce a day’s labor power, in this given instance, absorb six hours of necessary labor time.
Adding up the amount expended on all the inputs, the capitalist lays out a total of fifteen gold ounces, a sum that embodies thirty hours of socially necessary labor time. Similarly, the output of ten pounds of yarn also embodies an identical thirty hours of labor time: twenty four hours for the ten pounds of cotton and the machinery consumed, and a further six hours for the labor power employed. It follows that the ten pounds of yarn will also sell for thirty gold ounces, and there will be no profits for the capitalist to take home.
Why were no profits generated from this production process? Because there was no surplus value generated while the yarn was being produced. The exchange value of the inputs was identical to that of the output and, as a result, so was the cost and the revenue of the capitalist.
In fact, no surplus value was generated because the capitalist producing the yarn only makes the worker engage in “necessary labor” (Marx 1990: 324). Since he only makes the worker provide six hours of labor power, the number of hours worked by the laborer is equal to the socially necessary labor time that is embodied in the means of subsistence needed to sustain him for a day.
Most importantly, the worker takes home the value that he generated. He combined his labor power with material inputs that embodied twenty four hours of labor time, and added the value of his necessary labor to this. And he was paid six gold ounces for this, which is equivalent in value to the value added to the product by this necessary labor. Thus, when the capitalist fails to earn a profit, the worker is not exploited.
Let us now assume a slightly different scenario. The capitalist still hires a worker for a day, giving him three gold ounces in exchange. But now he makes him work, not for six, but for twelve hours, and combines these twelve hours with twenty pounds of cotton and four hours of machine-time to produce twenty pounds of cotton.
His outlay on inputs now is twenty seven gold ounces: twenty for the cotton, four for the machine-time and three for the day’s labor power. And the socially necessary labor time that these inputs embody is now fifty four hours in total: forty hours for the cotton, eight for the machine-time, and six for the labor power.
How many hours of necessary labor time does the product, the twenty pounds of cotton yarn, embody? Sixty hours in total: forty eight hours embodied in the material inputs, with twelve additional hours of labor power absorbed during the production process itself. These twenty pounds of cotton thus sell for thirty gold ounces, and the capitalist now earns three ounces as profit.
The profit stems from the surplus value generated in the production process: the inputs embody fifty four hours of labor time but the product embodies sixty hours, leaving a surplus of six hours of labor time that is worked into the exchange value of the product. And let us now ask again: what is the source of this surplus value? Its roots lie in the fact that the laborer now provides more than the necessary labor. Instead, the capitalist extracts “surplus labor” from him, labor time in excess of the six hours needed to produce his means of subsistence.
Most importantly, the worker is no longer compensated for the value that he adds to the production process. He works for twelve hours, and adds twelve hours’ worth of value to the material inputs that he works with. And yet he is only paid a wage that embodies six hours of labor time. Not being paid for his surplus labor, the worker is exploited, is mulcted by the capitalist. The latter’s profits stem from this act of daylight robbery.
Marx on the Labor Theory of Value: Böhm-Bawerk’s Criticism
Böhm-Bawerk begins his critique of Marx’s theoretical edifice by taking aim at the proposition that serves as its foundation: the labor theory of exchange value.
His first criticism addresses the proposition that Marx borrowed from Aristotle, that goods of equal value are traded in an act of exchange. This, to Böhm-Bawerk, “seems…to be a wrong idea,” for, he notes, where there is equality of value there is no incentive to exchange. “Where equality and exact equilibrium obtain, no change is likely to disturb the balance” (Böhm-Bawerk 2007: 68). The transfer of commodities that characterizes an act of exchange, on the other hand, results from the prevalence of an inequality of value, where what is valued less is traded for what is valued more.
But even if one were to set this objection aside, and assume for the moment that exchange is characterized by an equality of values, does Marx do a good job of showing that it is the quantity of labor that is the “common element” of “identical magnitude” that determines these equal exchange values? Böhm-Bawerk answers this question in the negative, and does so for three main reasons.
First, Böhm-Bawerk notes, in his quest to find this common element Marx restricts his analysis to only “those exchangeable things which contain the property which he desires finally to sift out as the “common factor,” while leaving “all the others outside” (Böhm-Bawerk 2007: 70). In fact, Marx, throughout his analysis, implicitly (and sometimes explicitly)3 assumes that a commodity must be the product of labor. This, right at the outset, implies that scarce gifts of nature cannot be commodities.
But goods “such as the soil, wood in trees, water power, coal beds, stone quarries, petroleum reserves, mineral waters, gold mines, etc.” are often the subjects of exchange (Böhm-Bawerk 2007: 70). And they embody no labor time! How then can Marx explain the exchange value of these goods? Surely the common element that governs the exchange values of these goods cannot be the amount of labor time embodied in them.
As Böhm-Bawerk rightly, and sarcastically observes, by leaving such gifts of nature out of his analysis by assumption, Marx “acts as one who urgently desiring to bring a white ball out of an urn takes care to secure this result by putting in white balls only” (Böhm-Bawerk 2007: 70).
Second, Böhm-Bawerk objects to how Marx eliminates use value as the possible common element that determines exchange value. The use values and the various properties of the commodities that give rise to these values, Marx argues, serve to differentiate and distinguish the two commodities. But, Böhm-Bawerk notes, beneath this heterogeneous exterior there lies a homogeneous substratum. For both commodities in an exchange possess use value; they both bear a causal connection to satisfaction.
And, just as in the case of labor, “one can compare values in use of different kinds according to the amount of the value in use” (Böhm-Bawerk 2007: 76). Why must one focus exclusively on the qualitative aspects of use value that serve to differentiate commodities and ignore the possible quantitative aspect that renders them homogenous? Marx never even addresses this question.
And third, and most egregiously, Marx, while noting that labor power has qualitative aspects as well as a quantitative aspect, proceeds to ignore the former while concluding that the latter is the common element that he is after. But why the different treatment of labor power and use value?
As Böhm-Bawerk asks, doesn’t Marx see that “the same evidence on which Marx formulated his verdict of exclusion against the value in use also holds good with regard to labor?” (Böhm-Bawerk 2007: 76). Why, in the case of labor alone, is he willing to overlook the “concrete forms” of it, “the labor of the joiner, the mason, or the spinner” and focus instead on the “abstract human labor” that is present in all commodities (Marx 1990: 128)? To ask such questions, however, is to uncover the “dialectical hocus pocus” that is Marx’s argument in support of the labor theory of value (Böhm-Bawerk 2007: 77).
The Composition of Capital, the Rate of Profit and Surplus Value: The Contradictions of Marx’s Law of Value
So much for Marx’s justification of the labor theory of value. Let us assume, for the moment, that it is true, and turn our attention to the law of value that is implied in it. Do prices, the exchange ratios of commodities for money, actually fluctuate around and tend towards amounts that reflect their respective exchange values as determined by the amount of socially necessary labor time embodied in them? Does the labor theory of value, via the law of value, provide an accurate explanation for the price phenomena that we see around us?
To answer these questions Böhm-Bawerk subjects Marx’s theory of surplus value and exploitation to greater critical scrutiny. Turning once more to our example of cotton yarn production, let us focus on the relationship between the surplus value and the profits that it gives rise to and the various components of the capital expended by the capitalist.
Note that during the production process the exchange value of the material inputs, the twenty pounds of cotton and the four hours of machine-time, simply passes over to the twenty pounds of cotton yarn that is produced. “The value of the means of production,” which in this case is forty eight hours of necessary labor time: forty hours for the cotton and eight for the machine-time, “is maintained” and “reappears in a different form in the value of the product, but adds no surplus value” (Böhm-Bawerk 2007: 16).
Given the unvarying exchange value of the material inputs during the production process, Marx calls the capital invested in them “constant capital” [denoted by c] (Marx 1990: 317). In our example, it amounts to twenty four gold ounces.
The case of the capital invested in labor power is entirely different. This part of capital, which Marx terms “variable capital,” [denoted by v] “does undergo an alteration of value in the process of production,” reproducing both “the equivalent of its own value” as well as an “excess, a surplus-value” (Marx 1990: 317). In our example, when the capitalist extracts twelve hours of labor time from the worker, it includes both necessary labor of six hours and surplus labor of six hours, with the latter giving rise to the surplus value that is source of the capitalist’s profits. The amount of variable capital is therefore three ounces, giving rise to three ounces worth of profits.
Based on these concepts, Marx defines the “rate of surplus value,” (Marx 1990: 326) which is “the ratio of the surplus value [denoted by s] to the variable capital” (Marx 1990: 327). This ratio, which always equals the ratio of the amount of surplus labor to the amount of necessary labor, serves as a measure of the degree of exploitation suffered by the worker at the hands of the capitalist. In our example, this ratio [s/v] stands at 1, or 100%, since both the surplus value and the variable capital amount to three gold ounces.
Now, whereas the rate of surplus value does not depend on the amount of constant capital, the rate of profit earned by the capitalist is found by dividing the amount of surplus value by the sum of the constant and variable portions of the capital [s/c+v]. This rate is thus not equal to the rate of surplus value. In our example, for instance, the rate of profit is 11.1%, which is significantly lower than the rate of surplus value.
Consider now a different production process; that of baking bread. The baker, in order to bake ten loaves of bread must, just like the yarn manufacturer, pays three gold ounces and hire the services of a worker for a day. And he too extracts six hours of surplus labor from this worker in addition to six hours of necessary labor. Thus, his variable capital is also three gold ounces, as is his surplus value, with a rate of surplus value equal to 100%, just as in the case of the yarn manufacturer.
But, unlike the yarn manufacturer, the baker needs to combine these twelve hours of labor time with constant capital worth only six gold ounces to produce the ten loaves of bread. His rate of profit is thus higher [s/c+v= 3/9], and stands at 33.3%.
An important point follows from these two examples: capitalists with the same rate of surplus value may earn differing rates of profit owing to their differing compositions of capital. The yarn manufacturer, for example, had a much higher ratio of constant to variable capital [c/v] as compared to the baker. Despite the same rate of surplus value [s/v] he had a lower rate of profit. This point, as Böhm-Bawerk emphasizes, has significant implications for the empirical relevance of the law of value and therefore for Marx’s theory of surplus value and exploitation, which is merely the logical extension of this law.
In fact, as Böhm-Bawerk notes, Marx, in the posthumous third volume of Capital, concedes two crucial points. First, that for technical reasons, the proportion of constant to variable capital, and therefore the composition of capital, “differs greatly in different spheres of production, and frequently even in different branches of one and the same industry” (Marx 1894: 112). Thus, assuming that the law of value holds, and commodities do sell at prices that reflect the labor time embodied in them, this implies that the rates of profit will also differ across industries; and this despite the same rate of surplus value prevailing in these industries.
Second, Marx acknowledges that a scenario where different industries do not earn the same rate of profit is one that leaves room for the forces of competition to act. Starting with the observation that “if commodities are sold at their values,…very different rates of profit arise in the various spheres of production,” he goes on to add that “capital withdraws from a sphere with a low rate of profit and invades others, which yield a higher profit” (Marx 1894: 142). And as a result of this “incessant outflow and influx” of capital (Marx 1894: 142), the rates of profit in the different branches of industry tend to be equalized.
It is vital to note, however, that the prices at which the rates of profit in the various production processes are equalized are not the prices that conform to Marx’s law of value. In fact, at prices which do conform to this law, and do reflect the relative amounts of labor time embodied in the commodities and money exchanged, there can only be an equalization of the rate of surplus value and not of the rates of profit.
This point, as Böhm-Bawerk argues, undercuts the entire Marxian economic edifice. For, in the first volume of Capital, he notes, “it was maintained, with the greatest emphasis, that all value is based on labor and labor alone,” and that, “apart…from temporary and occasional variations…commodities which embody the same amount of labor must on principle, in the long run, exchange for each other” (Böhm-Bawerk 2007: 29, 30).
This, as emphasized earlier, was what gave empirical significance to Marx’s law of value and to his theory of exploitation. It is precisely this proposition which implies that the actual, realized prices fluctuate around and tend towards amounts dictated by this law; that this law, like the law of gravity is an ever-present determinant of the prices that we see in the real world.
But “in the third volume (of Capital),” Böhm-Bawerk adds, “we are told briefly and dryly that what, according to the teaching of the first volume must be, is not and never can be; that individual commodities do and must exchange with each other in a proportion different from that of the labor incorporated in them, and this not accidentally and temporarily, but of necessity and permanently.”
The prices of commodities do not then, in the real world, tend to those dictated by Marx’s law of value, but instead to amounts that reflect the underlying costs of production, where, “besides working time, investment of capital forms a coordinate determinant of the exchange relation of commodities” (Böhm-Bawerk 2007: 89).4
Thus, the empirical irrelevance of the entire kit and caboodle of the labor theory of value, law of value and the theory of exploitation is laid bare. The entire system runs aground on the shoals of the forces of competition, the existence of which cannot be disputed. The profits earned by the capitalists are, after all, not determined by the surplus value squeezed out of workers and by the forces of exploitation and daylight robbery. For a correct and empirically valid explanation of the phenomena of interest and profit one must look elsewhere.
References
Böhm-Bawerk, Eugen v. 2007. Karl Marx and the Close of His System. Auburn: Mises Institute.
Marx, Karl. 1990. Capital: Volume 1. Penguin Books (Penguin Classics edition)
Marx, Karl. 1894. Capital: Volume 3. Available online at Marxists.org.
- 1See, for example, the erudite article by Richard Ebeling, “Marx and Marxism at Two Hundred.”
- 2First published in 1894 as Zum Abschluss des Marxschen Systems.
- 3As, for example, in the first chapter of the first volume of Capital, where he claims: “A thing can be a use-value without being a value. This is the case whenever its utility to man is not mediated through labor. Air, virgin soil, natural meadows, unplanted forests, etc. fall into this category” (Marx 1990: 131).
- 4Marx tries to rescue his law of value by claiming that, while prices don’t tend to the amounts dictated by this law and instead fluctuate around and ultimately gravitate to prices that reflect the costs of production, the rate of profit ultimately determined by the forces of competition, which he terms the “average rate of profit,” is equal to the average rate of surplus value that prevails in all the branches of industry considered as a whole. Thus, he argues, the law of value actually determines this average rate of profit and thus also retains its empirical relevance. Bohm Bawerk presents an in-depth criticism of these arguments as well in the third chapter of Bohm Bawerk 2007 (p. 28-63).
