Marx and Marxism

Eugen von Boehm-Bawerk’s Critique of Karl Marx

Marx and Marxism 1988
Richard M. Ebeling

Recorded 15 October 1988.

[Transcript (provided by Mr. Kaan Dişli. The text is also available in Turkish.)]

100 years ago If you are an economist living in the United States you might have subscribed to a journal called the “Quarterly Journal of Economics” and you might have gone out to the mailbox one day in October 1888 and found the latest issue and if one found the latest issue of the Quarterly Journal of Economics October 1888 you would have opened it to its lead article and its lead article was by a man named James Bonar. 100 years ago this month, and the title of the article was the “Austrian economists and their view of value”. 100 years ago this month was the first English exposition in detail of the Austrian school.

In this exposition James Bonar, an admirer of Menger and Böhm-Bawerk, offered to the English-speaking world the first systematic, thorough, methodical understanding of how the Austrians viewed value, how from value they explained the emergence of price and market processes. Now what Bonar enabled the reader in America and England to see was that the Austrians were developing an alternative way of understanding the economic process. One that on the other one hand challenged the classical economists ,including Marx as a labor theorist, and offered a new vision of how to construct economic theory for an understanding of the real world. Right there the first English exposition this month 100 years ago

Now what Böhm-Bawerk did was more in his writings than just present a positive theory, he was a brilliant economist who had mastered all of the economics literature up to his own time and he proceeded to first criticize and attack his opponent before he went on to present his positive theory. In fact, it was Böhm-Bawerk who opened the first clash that the Austrians had with the socialists.

In the 20th century we are most familiar with the Austrian challenge to socialism through the works of Ludwig von Mises, his challenge against the socialists, how would a central planning system work where the planners had overthrown private ownership of the means of production and eliminated therefore the price mechanism ,for as I’m sure most of you are familiar with, Mises argued that where there is no private property there is nothing to buy and sell, when there is nothing to buy and sell, there is nothing to make offers or bids for, when there are no bids and offers there are no agreed-upon terms of trade, when there are no agreed-upon terms of trade there are no prices, and when there are no prices, there is no way for agents in the market to form estimates concerning the value that individuals are placing upon the means of production as a calculative device to determine how to an efficient and economizing manner apply the means of production to alternative uses in a society of scarcity.

But that was really the second challenge, the first one was Böhm-Bawerk’s. He first made this challenging criticism in Volume one of “Capital and Interest”, his history and critique of interest theories, in 1884 the year after Marx passed away. He had a chapter on the exploitation theory, in which he criticized another German named Rodbertus and Marx. Then he had another opportunity to extend and elaborate on his criticism and that was in 1886, shortly after volume 3 of ” Das Kapital” had appeared posthumously. Böhm-Bawerk was asked to give a contribution for a German economist. And his contribution was a hundred page monograph called “Karl Marx and the close of his system” in which he attempted to update his criticism in the light of the second and third volume coming out and showing that there were insoluble problems in Marx’s system.

In fact, the interesting thing that one can understand historically is that if one looks at most accounts today on Marx and his economic system and his social system and his conception of the social order, most proponents will present a conception of Marxist theory of exploitation, his notion of alienation, his idea of superstructure, his idea of exploitation and potential search for imperialist capture of markets via the Leninist interpretation… But there is one thing that they tend to brush over now, one thing that they devote little attention to in their expositions of Marx and that is the “Labor theory of value”. They usually devote the least amount of time to it, they give short expositions, they mention that it was essential to Marx’s conception but they basically brush over it. They go on to other aspects of Marx’s critique of the capitalist order. Now this is in contrast to earlier in this century, at that time the heart of Marx’s system was considered the labor theory of value. It was only with the labor theory of value, it was argued, that one could have a scientific analysis to explain why capitalism inherently was exploitive. Now why has the labor theory of value fallen into the background? Why has it become an embarrassment, something that is briefly talked about rather than made the center of the exposition and the discussion? I would like to suggest that it’s precisely because of the critique that Böhm-Bawerk made a hundred years ago.

Because through this critique, Böhm-Bawerk raised questions about the logic of the labor theory itself and the inconsistencies of Marxist theory with the empirical workings of real market processes. But before one can understand Marxist criticisms, it is useful and important to briefly summarize Marxist system itself.

Marx begins volume one by emphasizing that no commodity can have exchange value unless it has use value, unless it is wanted by someone for some purpose. In other words, unless it has use value it cannot have exchange value. But it is not sufficient for a commodity to have use value to have exchange value, he argues that one has to search for something else than just its usefulness if one wants to understand from whence exchange values between commodities arises. He argues that use values are of a qualitative and diverse nature and therefore cannot be compared, there is no common denominator from which one can look at them and evaluate them. One has to look for what is it that commodities have in common other than their quality of being useful because uses are so diverse. He therefore says we have to look beneath it and to ask what quality do all commodities have in common other than their diversity of their uses and he says the quality that they share in common is a quantitative dimension and that is, they all share the common attribute that they are produced by labor. He therefore argues that one has to abstract from the use values of commodities to that more general quality of merely having been the product of quantities of labor input. Only when one has understood the nature of labor as a physical input in the production of commodities can one then return to the surface of the analysis and understand why useful things have exchange ratios in the ways they do in the market. He therefore is looking for a common denominator among all commodities and he argues that when one strips it away what one finds therefore is that all commodities are produced by labor.

But what kind of labor? Well he argues that if we are to strip away the particular concrete attributes of commodities that make them useful for particular purposes, we need to strip away the concrete types of labor that go into their production and to understand labor purely as an abstraction, quantities of labor in abstract form. He argues that therefore what determines the value of commodities in their specific forms are their more generic aspect of having been the product of labor of an abstract type. Now how shall one measure the amount of labor that goes into a product and therefore to determine what the value of one commodity should be in relation to another? Marx argues that measurement should be the duration of labor time entering into its production.

However, he then emphasizes that it is not going to be a conception of concrete labor time but a thing that he calls “socially necessary labor”, that is labor necessary to produce an article under normal conditions of production, an average degree of skill and intensity prevalent at the time. It is these values set as an average sampling of the class that determines what shall be the measurement of labor. Now as an extension of that, one says that the amount of labor that is going into a product is going to be a socially necessary amount of labor, that is that time duration raised another question. Well what does one do with the fact that there seems to be a great diversity of types and qualities of labor, that is simple labor and complex labor, skilled labor and unskilled labor? Marx argues that is not a difficult matter one merely has to realize that skilled labor is a multiple of simple labor; such as a doctor is ten times the labor of a simple worker digging a ditch.

Now Marx argues that with these basic concepts one can understand that on the basis of socially necessary labor that the value of a skilled professional is merely a multiple of unskilled labor of this more abstract type, that one should easily see that individuals would trade and exchange commodities in terms of their labor values. But this then brings him to his notion of the relationship between the worker and the social system in which he resides.

He then makes a distinction between “necessary labor” and “surplus labor”. Necessary labor is the amount of time duration that an individual has to incur sufficient to produce enough products or the value of enough products to sustain himself and his family. Necessary labor is therefore enough for the worker to be able to maintain oneself.

Surplus labor would be the amount of product or value of product produced during a period of time in excess of what is required for one’s own sustenance and it is this conception of the amount of labor necessary just to maintain yourself and extra labor during a day beyond that, that would go in excess of that amount in terms of products made or value of products made that takes Marx to his conception of exploitation. He argues that under capitalism the workers do not have direct access to the means of production that they require to be able to produce the products necessary for their own survival, rather the means of production are monopolized in the hands of the owners and therefore the worker has to go to the owners and negotiate in contract to have access to that which is essential for them to do the work required to maintain their own lives and here enters Marx’s conception of exploitation.

He argues that the capitalist by having this monopoly control over the means of production has the capacity to force the worker (one presumes by threatening denial of access to the means of production) to work more hours for him than would be necessary just to produce product or value of product sufficient to maintain himself but not pay the individual for that surplus. In other words, the worker is only paid a value equivalent to his subsistence and the excess is then garnished by the capitalist owner of the means of production.

Thus Marx argued through this method the worker is exploited. He only receives a fraction of that which he has produced, the mere ownership of property gives the owner the opportunity to live without effort and therefore the injustice of the system.

Now Marx then tries to analyze the workings of the economic system and he argues that on the one hand based upon his labor theory of value commodities should exchange based upon their labor values but what he notices is that in the market this is not always the case, in fact generally in the capitalist economy this is not always the case. He also notices that commodities do not exchange in terms of their percentages of surplus values but through an equality of the rate of profit and this is seen as an anomaly also, and why?

Marx says that there are two aspects of the capital that a producer or capitalist uses, there is what he calls” constant capital” and “variable capital”. Constant capital is merely the amount of capital equipment that the capitalist has purchased from other producers, variable capital is the amount of labor that he employs to work with that capital equipment in a particular productive endeavor. Now Marx argues that for the constant capital he pays its full value. Why does he pay its full value? Because commodities are expected to trade at their full value. He as a producer has bought equipment from some other capitalist, that other capitalist has exploited his workers, but that other capitalists in fact charges the other capitalists the full labor value of the product and therefore there is no exploitive gain from the capital equipment purchased from other capitalists, they are really just paid from their full value. The only source of surplus value is the workers he hires to work with the capital he has employed in garnishing a part of the value of what they have produced. Now Marx points out that there is an anomaly here and that anomaly is that one could imagine a situation in which many companies or firms in an industry have the same rate of surplus-value but each of them are experiencing different rates of profit. But Marx realizes that the market tends to equate rates of return and therefore how can this jive with the labor theory of what will determine the value of commodities?

Now the reason why he argues that there can be different rates of profit while having the same surplus value is because he argues that surplus value is merely a percentage of the amount of excess of one’s variable capital invested, in other words if a workers subsistence is 20 and he produces 40, surplus value is 100 percent. But one calculates total profit on investment not on the basis of just surplus value but on all capital invested, constant and variable. The larger one’s proportion of constant capital, the smaller one’s rate of profit on the total capital investment. How does Marx attempt to overcome this? Well he argues that competition will handle this. He says the competition will tend to assure that capitalists will shift the types of products they make and that they will then by shifting into different lines of production assure that there is a common rate of profit but how does this jive with his labor theory of value that commodities are to exchange at their labor inputs? Well he argues that the market does it by creating what he calls “prices of production” and what he says is that the market will do the following thing: it will average out the rate of surplus-value throughout all sectors of the economy. When one works out an average of what has been constant capital, one works out what has been an average of surplus capital that tells us what is the average rate of surplus value and the market will then assure through competition the equating of that. Now we’ll come back to that when we look at Böhm-Bawerk’s criticism. Now Marx tries to defend this and present a number of different expositions and numerical examples but in a nutshell that is his explanation. He argues that labor is the basis of value, commodities based upon labor should exchange in terms of their labor inputs, labor input is measured by socially necessary labor, complex labor is reduced to simple labor and one then sees in the market a situation where anomalies may occur between the rate of surplus-value and the rate of a profit, competition by averaging out the rate of return, guarantees that while not directly commodities exchange at their labor values they do so indirectly.

Now Böhm-Bawerk approaches this by wanting to take up two criticisms: One is does Marx’s theory fit with the facts? And second of all what is the basis of his theory of value? Before I discuss this I want to suggest the different approach that Böhm-Bawerk comes with. Böhm-Bawerk argues in his critique of Marx and in his positive theory of capital, in which he has a long section on value and price, is that there are two starting principles that one has to begin with in analyzing all market phenomena and that is “methodological individualism” and “methodological subjectivism”

Methodological individualism argues that if we are to understand the nature and structure and emergence of social phenomena we must begin with those elemental components from which all social phenomena arises and that is the individuals of which the society is constructed and composed. It is individuals who act, individuals who choose, individuals who decide, Böhm-Bawerk clearly says that all economic processes begin with man and his purposes and it is from man and his purposes that emerge the evaluations of commodities and their actions that bring about market phenomena. The second if statement is that commodities only have value, not only because individuals are the actors but precisely because it is only in terms of how the actors evaluate, decide, conceive, determine, perceive that anything occurs in the social world. In other words: if we are to understand social phenomena in general and economic phenomena in particular, we must always do so from the actors point of view. Now this means that for Böhm-Bawerk one cannot abstract from the nature and qualities of the use value of commodities as perceived by the actor, it is precisely because of the concrete attributes or possibilities to serve ends that an individual sees in a commodity that he assigns value to it and wishes to do various productive activities to bring that commodity into existence. So therefore Böhm-Bawerk is saying that we must begin with the individual, we must begin with his evaluations and that one has to think not in the abstract of use-values in general but the specific purpose and ends in mind for which an individual would want a commodity.

Now on the basis of this, Böhm-Bawerk begins to look at Marx’s theory of value. First of all he says that Marx has proceeded to try to glean what is the basis of the value of commodities in a peculiar fashion and that peculiar fashion is that he defines commodities precisely in a way that the only thing that he will be left with in his analysis is the presumption that only labor can be the common denominator. For example, Böhm-Bawerk points out that Marx does not discuss things given to us by nature that have value, commodities that cannot be reproduced with labor that have value and therefore Marx guarantees that he will have the result that he wants precisely because he defines a commodity in a way that when he reduces all commodities to a common denominator, the only common denominator that he is left with is that which he is looking for. He also argues that the same problem exists with the reduction of skilled labor to unskilled labor. Because Böhm-Bawerk argues that just as one evaluates commodities in terms of the concrete purposes and usefulness as they have for the individuals, we evaluate labor on the same basis. We are not interested in labor in the abstract but we are interested in labor of particular kinds, qualities, attributes and skills precisely because those are the types of labor that can serve the purposes in mind to create the product we desire.

There is also a reasoning in a circle, Böhm-Bawerk argued in the same way here. Because Marx says that skilled labor is merely a multiple of unskilled labor and how does Marx attempt to show that? Well he says look in the marketplace. Skilled labor is offered a wage or a price many times the value of an unskilled labor and therefore the fact that the skilled labor is given in terms of its market value a multiple of unskilled labor demonstrates that skilled labor is merely a multiple of unskilled labor. In other words, he presumes that which he is to prove rather than trying to show how one multiplies unskilled labor into skilled labor and then derive an analysis that shows why the market then generates these differences in remuneration. He argues that the evidence that there are differences in remuneration and how much the differences of remuneration are, demonstrates that his premise is correct.

Now Böhm-Bawerk argues in contrast to Marx’s analysis of the discrepancy between his theory of value and surplus value and a tendency for rates of profit to be equalized in the following way: and that is he says that Marx suffers from methodological holism. Marx suffers from treating an abstract concept that is a construction of Marx’s own mind as if it is an expression and a theoretical framework to understand the real world. Now why does Böhm-Bawerk argue that? Because Böhm-Bawerk explains that when Marx attempts to explain the equality of rates of profit across industries Marx says “Well let us imagine that the economy was a single firm and we’re averaging out the amount of return each division has individually owned and then working out the average from all the individual divisions we’re then going to disperse them in equal proportions back to the divisions of our economy and therefore we will equalize the amount of return each sector receives through this conception”

Böhm-Bawerk’s response is that the economy is not a single unit, he argues that there is no relationship between the actions of the individual parts and treating them as if the economy was a single firm that a planner then determines how much each division has earned, works out an average and then disperses that average among the component parts. Rather than explaining how competition would equate the rates of profit among sectors of the economy, Marx has created out of his own mind a construction of how an economy could work if it was an economy that was going to function in a manner that Marx wanted. That it is not a theory of how real economies function, but rather is a construction of his mind in which he treats the economy as a whole, it is not a theory of how competition and individuals have incentives to act and respond and shift resources in various ways but is a construction that Marx has created to reach the conclusion that he desires. Böhm-Bawerk takes him precisely to task for this, by arguing that it would have been a simple method for Marx to see if competition had a tendency to function the way he wanted, in the manner he suggested it did. That is to begin with the introspective element of how any individual acts under the constraints of means that are scarce in relation to ends and opportunities that exist before him in responding to those opportunities. Böhm-Bawerk argues using the older terminology, each individual who is a social analyst has the opportunity to follow the psychological method that is to imagine and reflect in your own mind what you would do confronted with constraints of means and desires and profit opportunities before you. He argues that is the only theoretical and sound basis whence one can construct a theory of market response, equality of returns through sectors of the economy, readjustments and redistributions of resources among sectors of the economy and yet that is the very method that Marx turns against. Because like the classical economists, Marx chose to treat demand as an element that obviously could not be ignored but was put in appendix not to be dealt with in any great detail.

Finally Böhm-Bawerk argues that what Marx has confused is profit and interest. What Marx has confused is that which is transitory and that which is permanent. Marx asked the question: “How can it be that a producer hires a set of workers, pays them one price, they produce or work up raw materials into a product and the employer is able to sell that product for a higher price than he has paid out in terms of the prices of the factors of production?” How else can it be if the work has been done by those he has hired other than that he has taken from them something that belongs to them and does not belong to the owner?

Basically what Böhm-Bawerk argues that Marx has left out an ingredient that is essential, inseparable from all human decision-making and that is the element and evaluation of time. That there is a difference in the evaluation and estimate of things in the present and things in the future. That the worker is receiving present goods, in exchange for working on commodities that reflect future goods. The employer is advancing the worker commodities in the present rather than the workers working up products themselves or deferring their receipt of payment until the product is ready in its finished form at some point in the future. That in fact what the worker and the employer are doing is making an inter-temporal exchange, that the worker chooses not to wait either in making the product himself for sale or to make the product and wait till it is sold later by the entrepreneur for payment. That he is willing to work now, for payment now, at a price less than the product will sell for in the future and in turn the employer is willing to advance commodities for the workers sustenance in the present with the understanding that the employer has the opportunity to sell that product in the future at a price that reflects the remuneration that is his due for having forgone the use of commodities and income in the present that he has forwarded to those workers.

Böhm-Bawerk argues that profit is transitory, it is that which arises out of changing market conditions but which competition has as its purpose to compete away but that interest is inseparable from the market itself. Interest is not a transitory element but is a price like any other price, its uniqueness is that it is the price of time. It is not the price of apples in the present versus pears in the present but apples in the present versus apples in the future, pears in the present versus pears in the future. It is an exchange across time and therefore one cannot do away with the discounting of the value of the laborers product unless one wishes to say that time and the evaluation of time is no longer inherently an element in the judgment of all actors in the market. Because as Böhm-Bawerk clearly explains that all action is forward-looking, it is prospective, it is a judgment concerning the future in relation to today.

Now I would like to suggest that no one has surpassed Böhm-Bawerk’s criticism. The apologists and proponents of Marxism have attempted to get around these issues. They’ve argued “well Marx really didn’t mean this”, “he wasn’t attempting really to explain the exchange values in the market”, “he had other purposes for the labor theory of value” but you can’t get around the fact that Marx says in Capital itself but for all the other purposes that he wishes to develop a labor theory and have labor as a basis of understanding the value of commodities, one of its functions is to enable an understanding and an explanation of what determines the relative prices in an economy. Once you appreciate Böhm-Bawerk’s criticism of Marx’s conception of how competition works and that, that is not the nature of competition or market processes then one has to realize that in fact, Marx has given no theory of how prices and exchange ratios emerge in the market on the basis of his own theory of value. In fact once one critically evaluates how Marx rigs the argument to assure that the only thing left in a commodity is labor as a common denominator and realizes that it is a false universal principle because it is not universal at all. One realizes that there are many different bases upon which one can say commodities are valued. Of course Böhm-Bawerk is on the Austrian school that value originates through the relationship of ends, desires and means to which they can be applied to them that are scarce in terms of ends desired.

The Austrians have fought two battles with the socialists, and the result of those two battles is that, for all intents and purposes, socialism and Marxism is dead. A hundred years ago Böhm-Bawerk was able to show that Marx’s theory of value was inherently flawed, inherently inconsistent and was not the avenue to understand either the value of commodities or the nature of the market process. And in the 20th century that criticism was completed by Ludwig von Mises. Mises recognizes that he is starting where Böhm-Bawerk left off because if you read Mises’ “Socialism” he briefly talks about the problems with the labor theory of value, he just doesn’t devote much time to it because he realizes that Böhm-Bawerk had settled one level of the debate. Mises was to show that once you eliminate other elements of a market economy it is impossible for that economy to function. At the beginning of this century if there was one thing that was obvious in most people’s minds, it was that socialism was inevitable. If anything was clear in most people’s minds it was that “planning” was the economic system of the future. If anything was obviously inevitable to people at the beginning of this century, it was that capitalism was going to die that capitalism was undesirable because it was it was exploitive that capitalism was inefficient and wasteful and that planning was a method to achieve all the things that we supposedly admired capitalism for but with none of its abuses, exploitation, waste or inefficiencies. We end the 20th century with socialism being nothing more than a bad taste in people’s mouths and I would like to suggest that we leave the 20th century, a hundred years after the arrival of the Austrian school on the international scene of economic ideas, because of what Böhm-Bawerk for us did at the end of the 19th century and Mises completed in the early part of the 20th. Because there is no value other than that which resides in an individual evaluating commodities and there is no way for those values that interact in an economy to be reflected for people to use for their economizing purposes without prices and markets and that means that the 21st century will hopefully be a century in which the Austrian school stands as the school, the dominant school of economics because the Austrian school will have refuted all the economics of this century. Thank you very much.