The End of Marxian Exploitation Theory
The second and third volumes of Marx’s Kapital were published posthumously under the editorship of his close associate Friedrich Engels in 1883 and 1894, respectively. It is a curious fact that by then the underlying foundations of Marx’s economic system as presented in the first volume in 1867 were completely outdated. In a sense, the whole starting point of Marx’s analysis was obsolete before its ending saw the light of day. This obsolescence has not hampered in the slightest the tremendous success of Marxism in the political and cultural realm. The narrative of the inherent exploitation of wage workers by capitalists is alive and well today, in spite of a growing material standard of living and ever more innovative technological amenities that only a few years ago were unimaginable.
Marx had of course acknowledged that capitalism enhances the standard of living of the vast majority of people, workers included. Marx’s acknowledgment is precisely the reason why the idea that workers are always remunerated at the subsistence level had to be rescued by redefining the concept of subsistence. Subsistence was no longer considered to be about mere survival, but rather about living a fulfilled life which is contingent on the stage of economic development. Some critical commentators have found this idea of subsistence to be sufficient to discard the Marxian exploitation theory, but strictly speaking, the mere fact that the material standard of living of workers is increasing under capitalism, does not at all imply that workers are not exploited. It might well be the case that workers still do not get their fair share even today.
However, to the extent that exploitation exists in society, it does not emanate from any inherent features of the relationship between capital and labor in a free-market order. This argument was demonstrated early on by the great Austrian economist Eugen von Böhm-Bawerk in his masterful critique Karl Marx and the Close of His System (1896).
Even after more than 120 years, it is worthwhile to understand Böhm-Bawerk’s critique and not merely because he provided several interesting examples for which the labor theory of value does not seem to hold. After all, such examples might only be the exceptions that leave the rule untouched. It is especially worthwhile to read Böhm-Bawerk, because he exposed an inner contradiction that jeopardizes the entire Marxian framework.
To the lasting embarrassment of all self-proclaimed modern-day Marxists, nobody has yet presented a viable solution to Böhm-Bawerk’s critique. This article will look at Marx’s serious blunder step by step as it developed into self-defeat, as first exposed in Böhm-Bawerk.
The Labor Theory of Value
In the first volume of Das Kapital, Marx presented his fundamental principle of value, namely the notion that the value of any given commodity is determined by the socially necessary labor time involved in its production. This labor time is the production time necessary under socially normal conditions at any given time, with the socially necessary degree of skill and intensity of labor. Labor according to Marx is thus the only determinant of value. And what is more, the fact that certain quantities of different goods exchange on the market for one another signifies that the same amount of socially necessary labor time is stored up in these quantities.
This strict formulation of the labor theory of value, just like any other theory of value for that matter, must ultimately serve as the basis for explaining the exchange ratios of various goods on the market. Thus, Marx explained:
that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour-time socially necessary for its production.... Commodities, therefore, in which equal quantities of labour are embodied, or which can be produced in the same time, have the same value. The value of one commodity is to the value of any other, as the labour-time necessary for the production of the one is to that necessary for the production of the other. (Capital, Vol. I, ch. 1)
This thesis implies that the market price of a commodity ultimately stands in proportion to the labor time necessary for its production. Furthermore, this rule is also true for wages, i.e. the market price for labor services. Wages stand in proportion to the labor time necessary to produce the goods and services that are needed to maintain the worker’s labor power.
Surplus Value and Exploitation
Wage workers are thus, according to Marx’s theory, remunerated at a price that is equivalent to the value of a bundle of goods and services necessary to stay alive and healthy so as to be able to continue to expend labor power. Marx’s theory is reminiscent of a subsistence wage theory, but, as pointed out above, the subsistence level is allowed to increase with capitalist development. One fact, however, remains: The total value of the goods produced exceeds the sum of wages paid to the workers. This excess means that labor, being the only source of value, produces a surplus value over and above its own remuneration. This surplus value is the source of the exploitation of the working class. In other words, workers expend more labor time than would be necessary to produce a quantity of goods equivalent in value to their own remuneration. The value of the goods produced during the additional labor time is extracted by the capitalist-entrepreneur. This alleged form of exploitation is all-pervasive in the capitalist mode of production.
From the vantage point of modern subjective-value theory, which reached its breakthrough in the 1870s shortly after the first volume of Das Kapital appeared, it is rather surprising how the labor theory of value, on which the whole exploitation theory is based, could ever have been so influential. It certainly did not start with Marx. The seeds of the exploitation theory can be found in the writings of classical economists such as Adam Smith and even more so David Ricardo. Marx merely pushed the idea of labor being the only source of value to its ultimate conclusion.
Nuance in the Classicalists
There are passages in Adam Smith’s work that point in the direction of Marx’s exploitation theory. In the Wealth of Nations, Smith stated for example that in a developed economy, “the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock [i.e., capital] which employs him” (Book 1, ch. 6). In other parts of the book, however, Smith laid the groundwork for what came to be called the productivity theories of capital interest, pointing out that the use of capital renders labor more productive and in that sense increases both value and revenue. This point implies that the remuneration of capital is not necessarily paid out of a reduction of wages. Marx entirely ignored Smith’s second point, choosing instead only to adopt the first.
Likewise, Marx only acknowledged those parts in Ricardo’s writings that supported his own preconceptions while other parts remained untouched. In particular, in the first chapter of his Principles Ricardo highlighted an important exception to the labor theory of value invoking the time element. This exception was ignored by Marx without expressly denying it, as Böhm-Bawerk pointed out in his account of the history of capital and interest theories. BöhmBawerk keenly remarked that there is a good reason for Marx’s selective reading of the classics, because the fact “that an oak-tree of a hundred years possesses a higher value than corresponds to the half minute’s labour required in planting the seed is too well known to be successfully disputed” (Böhm-Bawerk 1890, p. 387).
In this vivid example, Böhm-Bawerk directly hinted at what he considered to be the true source of capital income – not exploitation of the workers, but time, or rather time preference. This idea was fully developed in his Positive Theory of Interest and has since stimulated the writings of next generation Austrian-school economists such as Ludwig von Mises and Murray Rothbard. However, regardless of whether one subscribes to Böhm-Bawerk’s particular theory, economic scholarship made it clear that value cannot be accounted for by labor alone.
The final nail in the intellectual coffin of the Marxian exploitation theory became apparent only after the publication of the third volume of Das Kapital. In the third volume, Marx explicitly tried to prove that his fundamental principle of value does not contradict the empirically observable phenomenon of a tendency towards the equalization of the rate of profit across various economic sectors. Here, Marx failed. Remarkably, Böhm-Bawerk anticipated this failure prior to the publication of the third volume, but only after its publication did it become undeniable.
Marx separated capital into two distinct parts. The first part he called variable capital. It is that part which is “converted into labour power” or simply that sum of money in any given investment project that is expended on labor services. The other part he called constant capital. It is expended on capital goods such as machines as well as raw materials. Now, according to Marx’s fundamental law of value, it is only the variable part of capital that can yield a surplus value and hence a profit for the capitalist.
The proportion of surplus value to variable capital is called the rate of surplus value and is an expression of the degree of exploitation. However, what is of interest to the capitalist-entrepreneur is not the degree of exploitation per se, but rather the total rate of profit, which is given by the proportion of surplus value to total capital expenditure (constant and variable). Any given productive endeavor is characterized by a certain combination of variable and constant capital which Marx referred to as the organic composition. This organic composition, as he acknowledged, is necessarily very different from one sector of the economy to another. This implies that at any given rate of surplus value the rate of profit varies from one sector to another according to the organic composition of capital.
The higher the proportion of constant capital in any given productive endeavor, the lower the rate of profit. How then, could there ever be a tendency towards the equalization of the profit rate throughout the economy? There could not, unless one is willing to reject the fundamental premise that goods exchange for each other according to their values as measured by the labor power necessary to produce them.
Marx himself saw the problem clearly and admitted that “it appears therefore that here the theory of value is irreconcilable with the actual movement of things, irreconcilable with the actual phenomena of production, and that, on this account, the attempt to understand the latter must be given up.” His attempt at solving the problem ends up repudiating the idea that value, and hence market prices, are determined by labor. It simply cannot be the case that profits equalize when prices and exchange values of goods and services form in proportion to the labor power used in their production. As Marx himself wrote:
[A]ssume that all commodities in the different branches of production are sold at their real values. What would then be the outcome? According to the foregoing, very different rates of profit would then reign in the various spheres of production.
In order for profit rates to equalize, those goods for which a larger proportion of variable capital is used would have to sell systematically below “value” and those goods for which a smaller proportion of variable capital is used would have to systematically sell above “value.” But this is just to admit that labor is not the only determinant of value, and if that is the case, the exploitation theory crumples. The latter relies on the premise of labor being the only source of value. Hence, in the third volume, Marx eventually has to reject the premise laid out in the first. As Böhm-Bawerk summarized in the last and yet untranslated German edition of his history of capital and interest theories: “The beginning of any theoretical system has probably never been belittled more thoroughly and conclusively by its ending.”
Despite the tremendous and fatal blow that Marx’s exploitation thesis received at the hand of Böhm-Bawerk, the exploitation theme continues to thrive in the hearts of those who operate from envy or even a misconstrued sense of justice. Exploitation has a compelling emotional element that can animate the spirit of those who tend to be aghast at the very existence of a separation between a laborer and an owner of the means of production.
But despite the temptation to cling to an easy storyline, we must recognize two things: first, emotional perception of an unjust relationship between the capitalist and the recipient of wages does not itself prove the existence of this relationship. Economic analysis, which especially in the Austrian tradition focuses on the element of cause-and-effect in interpersonal relations, cannot make sense of the exploitation theory. It challenges the logical stream of analysis to deny first the subjective nature of value and second the equalization of profit rates. Exploitation theory therefore is an unjustified disregard of economic logic.
And secondly, it is important that the defender of the capitalist-based market remind any who might listen that it is capitalism that brings about prosperity for all who take part in a society based on the division of labor. That is, in a society that depends on the free market for the distribution of resources, the beneficiaries are not merely the so-called capitalist class, but even the wage earners.
As the standard of living in this free economy grows over the years, decades, and centuries, it is this system which fuels the growth of wages; not merely in the nominal sense, but more fundamentally in the “real” sense. That is, wage earners benefit in that they can satisfy a greater number of needs as these goods become more affordable. To bring prosperity to the wage earner, to eradicate the remaining vestiges of a natural state of poverty, capitalists play an important and benevolent role. Far from exploiting the workers, capitalism improves their lives compared to what they otherwise would have been.