Jacob G Hornberger |
Celebrating the 200th anniversary of Karl Marx’s birthday, leftists continue reciting his famous exploitation theory, which holds that capitalists exploit workers by stealing the fruit of their labor in the form of profits. The idea is that the value of a product is based on the amount of labor that goes into producing it. Since it is the workers in a business who perform the labor that goes into producing the product, the sales revenue belongs entirely to them.
Since the capitalist doesn’t do any of the actual work that goes into producing the product and yet retains some portion of sales revenue for himself as “profit,” Marx said, he is stealing what rightfully belongs to the workers. There are at least two fatal flaws to Marx’s argument, however, flaws that modern-day American Marxists are loathe to acknowledge. One fatal flaw is that Marx’s exploitation theory is based on a fallacious theory of value.
The labor theory of value on which Marxism is based was certainly the accepted theory of value at the time Marx was writing. And if one accepts the labor theory of value — which holds that the value of an item is based on the labor that goes into producing it — then there is a certain ring of logic to what Marx was claiming. If the value of a car, for example, is based on how much labor was spent in producing it, then one could understand why Marx would say that the entire value of the car rightfully belonged to the workers, not the capitalist, who isn’t on the assembly line producing the car.
Thus, contrary to what Marx suggested about there being a natural conflict between workers and capitalists, the exact opposite is true. It is the interests of workers to have their business succeed and expand. That’s what ensures job security and higher wages.
In around 1870, however, three scholars, each acting independently of each other, demonstrated that the labor theory of value was fatally flawed. The three were Englishman William Stanley Jevons, Austrian Carl Menger, and Frenchman Leon Walras. They were responsible for what has gone down in economic history as the “marginalist revolution,” one in which the labor theory of value was replaced by the subjective theory of value or marginal utility theory of value.
Jevons, Menger, and Walras demonstrated that Marx and all the other classical economists had been wrong when it came to the concept of value. The value of an item, they showed, has nothing to do with how much labor goes into producing it. The value of an item is based entirely on the subjective valuation that people put on it. In other words, value, like beauty, lies in the eyes of the beholder.
Consider, for example, a diamond. What is its value? The classical economists, including Marx, said that its value is based on all the labor that went into digging a mine and bringing the diamond back to the surface. Thus, if the diamond is selling for, say, $5,000, that price reflects all the hard work that went into mining the diamond and bringing it to market.
Not so, said Jevons, Menger, and Walras. The amount of work that went into mining for the diamond is totally irrelevant. All that matters are the subjective valuations that consumers and sellers put on the diamond.
Suppose, for example, that a person is walking across a desert. Suddenly he finds a diamond on top of the ground. He later offers it for sale. Under the labor theory of value, it should be worth close to zero because virtually no labor has gone into producing it. Yet, when the finder offers it for sale, people are willing to pay $5,000 for it. That’s because value is determined by the subjective valuations that people are putting on the product.
Suppose that when the person finds that diamond on the desert, he is dying of thirst. He encounters a person who has a canteen of water, which he offers to sell him for one diamond. Suddenly, the value of the diamond, from the subjective perspective of the diamond finder, has fallen to less than a canteen of water. Value entirely subjective, inevitably turning on the particular circumstances in which people find themselves.
In around 1870, however, three scholars, each acting independently of each other, demonstrated that the labor theory of value was fatally flawed. The three were Englishman William Stanley Jevons, Austrian Carl Menger, and Frenchman Leon Walras.
Or consider mud pies. Suppose twenty hours of labor go into producing a supply of 50 mud pies. Does that mean that the mud pies have been infused with value? Of course not. No one is going to be willing to pay anything for mud pies no matter how much labor has gone into producing them. That’s because the value of an item is based on the subjective valuations that people place on it.
The other fatal flaw is Marx’s exploitation theory involves the inability to grasp the critically important role that the capitalist plays in the production of an item. It is the capitalist that brings the entire operation into fruition. He has the money or borrows it. He acquires the building. He purchases or leases the equipment. He buys the supplies. He hires the workers. He takes charge of the marketing, advertising, and distribution of the product.
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And, critically important, he is using his own money for all this. He pays all those expenses, including worker salaries, not knowing for sure whether consumers are ultimately going to buy his product. He is risking his own money in the venture. If his product doesn’t sell, he loses all the money he spent on the building, equipment, supplies, and salaries.
Suddenly, the value of the diamond, from the subjective perspective of the diamond finder, has fallen to less than a canteen of water. Value entirely subjective, inevitably turning on the particular circumstances in which people find themselves.
Thus, the capitalist’s role in the production of goods and services is just as important as all the other factors that go into production. That’s why it is entirely legitimate, from a moral standpoint, that the capitalist retain a profit for himself. Without capitalists or entrepreneurs, the workers, many of whom do not want to take such an enormous financial risk, wouldn’t even have jobs.
Thus, contrary to what Marx suggested about there being a natural conflict between workers and capitalists, the exact opposite is true. It is the interests of workers to have their business succeed and expand. That’s what ensures job security and higher wages. In fact, it is in the interests of workers to have other businesses succeed and expand too because the more businesses that are competing for workers, the better off workers will be.
So, go ahead, leftists, celebrate Marx all you want. Just keep him and his fallacious and destructive ideas consigned to the dustbin of history.
Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. This article was first published in The Future of Freedom Foundation and is republished here with permission. The views expressed in this article are the author’s own and do not necessarily reflect Global Village Space’s editorial policy.