Economics

Marxism, Austrian Economics, and Exploitation

Karl Marx had no monopoly on theorizing about exploitation.

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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.)

Pure Theory

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.

Competition Suspended

"[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.)

He cautions that "what we might stigmatise as 'usury' does not consist in the obtaining of a gain out of the loan, or out of the buying of labour, but in the immoderate extent of that gain…. Some gain or profit on capital there would be if there were no compulsion on the poor, and no monopolising of property…. It is only the height of this gain where, in particular cases, it reaches an excess, that is open to criticism, and, of course, the very unequal conditions of wealth in our modern communities bring us unpleasantly near the danger of exploitation and of usurious rates of interest."

The Essence of Interest

Böhm-Bawerk takes pains to emphasize that he is not condemning interest per se: "But what is the conclusion from all this? Surely that, owing to accessory circumstances, interest may be associated with a usurious exploitation and with bad social conditions; not that, in its innermost essence, it is rotten."

Yet he asks, "[W]hat if these abuses are so inseparably connected with interest that they cannot be eradicated, or cannot be quite eradicated?" His response:

Even then it is by no means certain that the institution should be abolished…. Arrangements absolutely free from drawback are never allotted to us in human affairs….

Instead of the absolute good, which is beyond reach, we must choose what, on the whole, is the relative best, where the balance, between attainable advantage and the drawbacks that must be taken into the bargain, is the most favourable possible for us.

In the end he doesn't believe abuse is inseparably connected to interest: "There is no inherent blot in the essential nature of interest. Those, then, who demand its abolition may base their demand on certain considerations of expediency, but not, as the Socialists do at present, on the assertion that this kind of income is essentially unjustifiable."

There are unanswered questions about Böhm-Bawerk's position, but we do know that the thinker who refuted Marx's exploitation theory had one of his own.

This article originally appeared at The Freeman.

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  1. This seems like an awful distance to go to explain what should be obvious about the real flaw in the labor theory of value:

    Workers with machines produce more than workers with no machines.

    Workers in well-planned organizations produce more than workers running around randomly with no plan.

    The delta between value produced by random unplanned labor unassisted by machines (even simple machines, like a frickin’ pulley or lever) and the value produced by workers in conjunction with capital infrastructure and organization isn’t “labor” value at all. It’s capital value. And most workers end up getting paid part of that capital value, and not just their “pure” labor value.

    1. So you’re saying: The workers, they didn’t build that.

      But seriously, while your explanation is correct, it allows some people to make more than others and so is wrong by inequality, according to the Right People. People who buy into any Marxian logic, and are not teenagers, don’t care about your well reasoned arguments or facts.

    2. As I understand it, there are two components of the LTV:

      1. The machines make workers more productive, but labor is what gives the machines any value at all. Without workers, the machines are worthless. Hence value only comes from labor, since it is the sine qua non of production.

      2. Because of state/capitalist collusion, the workers have been denied ownership of the machines and capital. That collusion means unjust profits flow to capitalists that ought to belong to labor.

      That machines make workers more productive is both undisputed and not an answer to LTV.

      1. The LTV can be refuted easily.

        I will use roofing as an example, as there is a guy on my roof right now.

        No matter how hard I worked, if I attempted to fix my roof, I would probably reduce the value of my house, not increase it. But LTV says that my labor is equal to the guy with 15 years of experience that is doing it. Which is bullshit.

        1. But LTV says that my labor is equal to the guy with 15 years of experience that is doing it.

          No it doesn’t.

            1. The fact that the LTV claims to explain things but no two people ever seem to be able to agree on exactly what it tells us should be a pretty good clue the theory is bogus.

      2. Only if the workers in question are the same workers who built the machines.

        If different workers built the machines, then the value created by those machines belongs to the workers who built the machines, and not the workers using the machines.

        And if different workers devised the organizational plan, then the value created by the organizational belongs to the workers who devised it, and not the workers following it.

        And you know what you could call a worker who built a bunch of machines, devised an organizational plan, and then hired a bunch of different workers to operate those machines and follow that organizational plan, paying them the value they contributed, and keeping the value contributed by the machines and the plan? A capitalist.

        1. If different workers built the machines, then the value created by those machines belongs to the workers who built the machines, and not the workers using the machines.

          See, you’re still misunderstanding LTV. Machines can’t create value without labor. A factory without workers is literally worthless.

          And you know what you could call a worker who built a bunch of machines, devised an organizational plan, and then hired a bunch of different workers to operate those machines and follow that organizational plan, paying them the value they contributed, and keeping the value contributed by the machines and the plan?

          Mises Institute fairy tales are no substitute for history, sport.

          1. Do you have a point buried within this obvious ignorance?

            Should we cite the countless examples of those individuals who started as “workers” and became CEOs of major companies?

            1. Anyone can start a defense contracting firm today and start picking up DOD contracts. Does that mean that defense contracting is a free market? Of course not.

              The fact that the occasional worker can become a capitalist doesn’t change state/capitalist collusion.

          2. A factory without workers is literally worthless.

            To whom?

            1. It produces nothing.

          3. “A factory without workers is literally worthless.”

            I think in the near future (10-40 years) technology will make it feasible to pretty much eliminate every worker that would be considered “labor” instead of management or professional in parts of many industries. So, no. Not inherently, at least.

          4. Capitalists are people too, dude.

            If I own a shoe factory and the workers go on strike, I can still make shoes.

            And the LTV holds that the value of the product accrues to the worker who made the product. But every possible tool is at one point in its life cycle a product. A hammer is a product. Machine tools are products. Conveyor belts are products.

            That means that by the terms of the LTV itself, those tools can never be worthless, because they are the product of labor.

            Since the LTV holds that the value of all products belongs to the workers who made the products, and you concede that workers create more value with machines than without them, then that marginal additional value created by the machines has to accrue to the workers who made them and not the workers who are using them.

            Mises Institute fairy tales are no substitute for history, sport.

            The exploitation theory requires the surplus value to belong to the workers making any particular product. If more than one group of workers can claim the surplus value, the entire theory collapses.

            And you know what? The actual history of industrialization would show you that early capital formation just about always took place in exactly the way I described – by owner/operators adding workers to production schema they had previously devised. You go back far enough in the chain, and you always find an intention and a man. And I only have to find it once to justify capital.

          5. All that stuff you and the other workers made in your factory is worthless to me.

  2. Eugen von B?hm-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.

    Oh, I beg to differ, Sheldon! He not only refuted it, he hanged it, drew it, quartered and left it to rot under the hot sun! In a most elegant way, of course.

  3. “the value produced by workers in conjunction with capital infrastructure and organization isn’t “labor” value at all.”

    In other words – You Didn’t Build That.

    I’m sure we will see Liz Warren incorporate this into her next lecture.

    No, of course we won’t. Only the value of the roads counts to a Progressive, not the value contributed by private capital or management.

    It is as if I worked as a contracted janitor as Microsoft for a few months, then 20 years later came back and announced “How would you have built this company with trash all over the office? Now that you are a success, where is my cut?”

    “Well, you sent us a bill for your services when you did the work, and we paid it.”

    “Yes, but now that you have made the business into a success, I want a larger percentage. After all, you couldn’t have done this without me to pick up the garbage.”

    “Well, now that you mention it. Your garbage pickup was inconsistent and inefficient. We could have easily done that task ourselves for less that what we paid you, except that the law forbids anyone but you from doing it.”

    “You just aren’t patriotic. Now, time to pay your fair share.”

  4. Thanks for the insight, Sheldon. Note to Reason editors: more of these articles, please.

    1. Go to Mises.org, they’re much better with this stuff.

  5. Typically, B?hm-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.

    Here lies the elegance of Bohm-Bawerk’s refutation of Marx’s exploitation theory. Besides the fallacy that ills the labor theory of value that Marx applies, Bohm-Bawerk argues that Marx is not taking into account the time preference of the workers. Money obtained today cannot have the same value as money received later, especially if you’re in a hurry to spend. So even if the labor theory of value was correct, it would still NOT mean that workers are being exploited, as they’re merely receiving their wage TODAY at a discount rate rather than receive the supposedly full value of their participation after the item is sold – whenever and IF that happens. In other words, the workers are not burdened with the risk that the capitalist has to bear, which has value in itself – the labor of the capitalist to stock and sell the item – but they can perfectly share in the risk and wait until the damned thing is sold!

    1. Bohm-Bawerk argues that Marx is not taking into account the time preference of the workers.

      Why do the workers have lower time preference than the capitalists?

      1. Because capitalists have already accumulated a surplus of money. They can survive off their savings account, as opposed to workers who may live paycheck to paycheck.

      2. Why do the workers have lower time preference than the capitalists?

        Because they are different individuals with different values, expectations for the future, etc. Even within a family, kids raised by the same parents exhibit time/value differences. Where have you been??

        1. If I took all your property away, would it lower your time preference? Of course it would. You need to eat now.

          What if I left you some personal property, but denied you the ability to accumulate capital yourself? How about if I made your personal/informal business illegal, or put up expensive regulatory barriers? What if I taxed your land so highly that you were unable to farm it, feed your family, and keep the tax man away? What if I banned your cooperative institutions?

          The capitalist state constructs time preferences through its protection, subsidies, and defense of capitalists, and by discouraging or banning alternatives to wage labor and capitalist heirarchy.

      3. By definition, a Capitalist has refrained from present consumption in order to make that wealth available for future investment, and even further postponed their ability to spend it on consumption.

        Given that, in order to be a capitalist, you have to have chosen to defer current consumption, it is reasonable to assume that capitalists as a whole apply a lesser discount to the utility of future consumption than do people with no savings.

  6. Another point of view: if it’s exploitation for capitalists to profit off of workers, is it still exploitation if the capitalists are temporarily operating at a loss (in, say, an economic downturn) and still paying workers out of debt just to maintain their operations? Technically, in this case, workers are getting the better deal than their bosses, with guaranteed income instead of debt obligations.

    If the latter is not exploitation, I’m not seeing how the former would be exploitation as profit is largely a function of successful speculation on future market conditions.

  7. The quicker we eliminate the employer/employee “laborer/management/capitalist” false dichotomies and/or trichotomies, the better. All such terms collapse under scrutiny.

  8. Mr. Richman should try reading another 19th century economist, Henry George. George refuted the then-prevailing “wages fund” theory, and pointed out that workers are not usually paid until they have produced. You get your week’s pay after you have helped make x thousand tee shirts, or have placed so many steel girders in a rising skyscraper, so your employer does not advance capital to you. He may advance liquid capital to you — you get paid now, rather than when the skyscraper is sold as condominiums — but that’s a secondary consideration. If you offered to work for higher pay, with the pay not due until the tee shirts or the skyscraper had been sold, you could negotiate more pay, but not enormously more, in most cases.

    George concluded that low pay was due to exploitation by landowners and other monopolists, not capitalists as such (to make a long book short).

    1. So? The price of inputs goes down and their purchasing power increases.

      No one deserves anything, Austrian economics is correct anyway.

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