Friday Philosophy

Can the Concept of Exploitation Be Saved?

I ended my article last week with a rash assertion. Marx says that capitalists exploit workers, and I countered that this claim depends on the false labor theory of value. It is vital to bear in mind that when Marx talks about exploitation, he has a technical sense of the concept in mind, rather than the popular sense, in which “exploitation” means unfair treatment. To claim that capitalists exploit workers in this sense need not rest on the labor theory of value.

The technical sense arises from a deep question that Marx asks: Why do capitalists earn profits? He does not mean here “profit” as Austrian economists use the term but rather what we would call “interest.” Marx’s question, then, is: Why does capital earn interest? The capitalist starts out with money, which he invests in a business. In the production process of the business, his money turns into commodities. These he sells for money, and he winds up with more money than he had at the start of the process. (This is the famous M—C—M’ formula, where M is money, C is commodities, and M’ exceeds M.)

To specify Marx’s question, what he wants to know is how it is possible, given that in equilibrium all commodities exchange at their labor values, that the capitalist ends up with an increase in money. To reiterate, Marx is talking about equilibrium. Sometimes, capitalists can take advantage of fluctuations in supply and demand to earn more than the going rate of return, and other capitalists earn less than this; but Marx’s question is why there is a rate of return on capital at all.

His answer is ingenious. He says that workers sell their labor power, that is, their ability to produce commodities once given access to the means of production, to the capitalists. The worker is putting himself at the disposal of the capitalist for a certain number of hours each day. Because each commodity sells at its labor value, and labor power is a commodity, a new question arises: What is the labor value of labor power? Marx’s answer is that it is the cost of labor, i.e., the costs of the goods the laborer needs for subsistence and, Marx adds, reproduction. This is in turn determined by the labor values of these goods. Suppose the cost of labor, understood in this sense, is eight hours per day, but the worker has contracted to work for the capitalist for ten hours per day. The extra two hours are “surplus value” and are the source of interest. In Marx’s account, workers are not paid below their value, as measured by the labor theory of value, but the gain to the capitalist comes from the workers’ extra hours; and this is Marx’s technical sense of “exploitation.”

As Wolff realizes, Marx’s account of profit is wrong. I won’t go into the details of Wolff’s mathematical argument for this, but he concludes, “I proved an extremely important theorem that shows that Marx was wrong to impute the exploitative capacity of capitalism to the labor/labor power distinction.” (Unfortunately, he later discovered that someone else had proved the same theorem two years before he did.)

Despite his proof, Wolff remains convinced that Marx was right. Capitalists do exploit workers and this is the most important fact required to understand capitalism. He thinks that where Marx failed, he has succeeded; he has a new proof of exploitation.

His proof is in essence the following. In the capitalist system, all the factors of production have a profit markup. If a capitalist earns below the going rate of return, he can cash out his investment and reinvest in something that pays better. But workers cannot do this. They own nothing besides their own bodies, and they cannot detach themselves from these. They cannot, then, cash out their bodies and invest them more productively elsewhere if they are earning below the profit markup for labor. They thus earn below what the equilibrium price of labor would be if they could make this switch, and this corresponds to the extra profits that capitalists make. In this way, workers are exploited.

Wolff explains his argument in this way:

Now, in a free market, a competitive market, a capitalist market—so all the classical Political Economists agreed—there is a single ruling rate of profit which is adjusted and regulated by the free choices that capitalists make to move their capital from sector to sector in pursuit of the largest return on their investment. If a capitalist who owns a factory that weaves woolen cloth observes that capitalists in the furniture business make a higher rate of return (and, let us recall, that in the classical school perfect information is assumed), then over time and with some adjustment that capitalist can cash in his investment in the woolen factory and shift it  to a furniture factory. To be sure, this is not a switch that can be made overnight for there is a problem with what is called “fixed capital,” but over time and more or less bumpily, the capital gets transferred to the new sphere of production. This has the double effect of increasing the amount of woolen cloth available in the market and decreasing the amount of furniture available for sale. Changes in the relative size of demand and supply alter the prices at which these goods sell which in turn reduces somewhat the rate of return in the cloth industry and increases it in the furniture industry. So by an unceasing series of such individual capitalist decisions and actions the profit rate is perpetually equilibrated. This is the familiar picture painted by Ricardo and his lesser contemporaries. The system of price equations representing the operations of a capitalist economy provides a mathematical model for this story of what goes on in the normal functioning of capitalism…. Ah, but the labor producers, unlike the furniture producers and the cloth producers, cannot shift their capital to a different line of production when they observe that it pays a higher rate of return, for their capital is nothing other than their bodies and the only way they can cash in their investment in their bodies is by… cashing it in, which is to say dying. This is nothing against capitalism, of course. Capitalism places no legal or other constraint on the choices of the workers. It is just an unfortunate metaphysical accident, perhaps laid at the door of Descartes if someone must be blamed, that the workers’ body and soul are inseparable this side of the grave…. Suppose we were to write a system of equations for an economy in which the workers genuinely are treated as free petty commodity producers of the commodity labor. And suppose we were to express mathematically this unfortunate constraint on the workers’ ability to move their capital into other lines of production, thus in a manner of speaking—and only in a manner of speaking—building the ironic treatment of capitalism as a free market system into the equations. Well, because of the unfreedom of those condemned to produce labor, the rate of return in that sector may not be equal to the rate of return in the other sectors and so it must be represented by a different variable…. Without troubling you overly with the mathematics, and, I might say, hardly surprisingly, it turns out that the total profit appropriated in the system by all of the capitalists exactly equals the profit forgone by the workers on their capital—their bodies—by the fact that they cannot shift that capital about in pursuit of a better rate of return and hence are forced to sell their output below what would otherwise be its equilibrium price.

I do not doubt the details of Wolff’s mathematics; his competence in such matters far exceeds my own. But he has not given us a sufficient reason to accept his analysis as a good account of either wages or interest. Marx’s account of interest fails, but at least he asks the right question: Why is there a rate of interest? Wolff does not ask this question but just postulates a profit markup for all factors; he then inquires why workers earn less than this markup. Austrian economics, by contrast, tries to account for the prices of all the factors of production. It is easy to assume what you should be trying to explain, but, as Bertrand Russell long ago said, “The method of ‘postulating’ what we want has many advantages; they are the same as the advantages of theft over honest toil.”

Note: The views expressed on are not necessarily those of the Mises Institute.
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