Eugen von Böhm-Bawerk (1851-1914), the second-generation giant of Austrian economics, famously refuted the theory, most commonly associated with Marx, that the employer-employee relationship is intrinsically exploitative. Less well known is that Böhm-Bawerk had an exploitation theory of his own, which he expressed in his 1889 masterpiece, Positive Theory of Interest, volume two of his three-part Capital and Interest.
To recap his critique, which is found in History and Critique of Interest Theories (volume one of Capital and Interest, 1884): Marx (and pre-Marxian thinkers) believed workers are routinely exploited by being paid less than what their products fetch in the market. That’s because, as the Stanford Encyclopedia of Philosophy notes, for Marx labor is priced “in terms of the amount of socially necessary labour power required to produce it,” that is, the products necessary just to keep the worker alive. (Marx derived this from the labor theory of value he inherited from Adam Smith and David Ricardo.) Yet a worker may produce more than that bare amount in a day. In that case the “surplus value” goes to the employer, or capitalist. Capitalists get away with this because they control the means of production. Workers, having been deprived of those means, have no choice but to offer themselves as laborers and take whatever they can get. The alternative is starvation. Thus they are ripe for exploitation.
“Distribution” Taken for Granted
In focusing on the exploitation question, Böhm-Bawerk took the legitimacy of the “distribution” of the means of production for granted, and of course he rejected the labor theory of value, or of price formation. (I can’t discuss here the legitimate objection that historically governments arranged for the few to control the means of the production at the expense of the many, forcing them onto the labor market. To the extent that is true, the wage system is exploitative, but the culprit is the state, not the market.)
Böhm-Bawerk responded to the exploitation theorists that the difference between what a worker is paid and the market price of his product can be explained without resort to exploitation theory. One component of the employer’s profit is interest on the money he advances workers as wages while the product is being readied for sale. Making and marketing products take time. Typically, Böhm-Bawerk said, workers cannot afford to wait until the product is sold before they are paid. They want a check every week. But how can they be paid before their products have been sold? Their employers pay them out of money accumulated previously. Thus wages are in effect a loan, which like all loans is repaid with interest. This is so because of time preference: We value present goods more highly than future goods, meaning present goods are discounted from their future value. Other things equal, X future dollars are worth less than X dollars today. Or to look at it from the other direction, if you want to use my X dollars today, requiring me to abstain from using them, I’ll want to be paid more than X dollars when the loan comes due. The interest payment is my reward for abstention.
As Böhm-Bawerk wrote, “We have traced all kinds and methods of acquiring interest to one identical source — the increasing value of future goods as they ripen into present goods.”
If Böhm-Bawerk is right, and wages are in effect a loan to be “repaid” when the product sells, then we shouldn’t be surprised if the revenue from the sale is greater than wages paid (and other input costs). No exploitation need have occurred. (“Profit” has other components as well, including pure entrepreneurial profit from arbitrage, that is, from actualizing the hitherto overlooked potential value of undervalued resources.)
Böhm-Bawerk was writing pure theory, as if he were saying, “In a free market here is what would happen.” He was not implying that the theory would describe a particular time and place where the market was less than free “[T]he essence of an institution is one thing, and the circumstances which may accidentally accompany it in its practical working out are another,” he wrote.
In fact, Böhm-Bawerk noted, exploitation can occur when competition among employers is suppressed, raising the employer’s rate of interest to a level higher than it would have been under free competition and thus lowering wages. That, he said, was usury.
He writes, “It is undeniable that, in this exchange of present commodities against future, the circumstances are of such a nature as to threaten the poor with exploitation of monopolists.”
Böhm-Bawerk was merely applying the more general exploitation theory held by free-market thinkers at least back to Adam Smith: Monopolies and oligopolies (suppressed competition) harm consumers and workers through higher prices and lower wages. For Smith monopoly was essentially the result of government privilege. This largely has been the view of later Austrians, also. (Mises allowed for the theoretical possibility of a resource monopoly without government privilege.) However, Böhm-Bawerk did not explicitly attribute monopolistic exploitation to the State in this discussion.
“[E]very now and then,” he wrote, “something will suspend the capitalists’ competition, and then those unfortunates, whom fate has thrown on a local market ruled by monopoly, are delivered over to the discretion of the adversary…. [H]ence the low wages forcibly exploited from the workers — sometimes the workers of individual factories, sometimes of individual branches of production, sometimes — though happily not often, and only under peculiarly unfavourable circumstances — of whole nations” (emphasis added).
Böhm-Bawerk doesn’t say what that “something” might be. Maybe he means private collusion; maybe he means government protection from competition. He gives only this clue: “[L]ike every other human institution, interest is exposed to the danger of exaggeration, degeneration, abuse; and, perhaps, to a greater extent than most institutions.” (Alas, thanks to government-corporate collusion, what he thought was rare has actually been the rule in so-called “capitalist” countries.)