The Labor Theory of Value and Capitalist Exploitation

This article examines the main problems in one of the fundamental constructs of Marx's theory of capitalist economics. The shortcomings of the labor theory of value are pointed out in Marx's Capital to show how this leads to the collapse of the "capitalist exploitation" thesis. The subjective theory of value in its Mengerian (Austrian) interpretation is also explained.

In the labor theory of value adopted by classical economists, Marx found the path to communism through the progressive impoverishment of the proletariat, subjected to expropriation by the unproductive capitalist class. This theory is the basis not only of his criticism of capitalism, but also the starting point for the bloody revolution that will lead humanity to the final historical stage - socialism.

Obviously, if the labor theory of value proves untenable, so too must the inexorable laws of history that Marx claims to have discovered. With this in mind, Marx, in composing his works, pays great attention to the definitions of commodity and value, so that they fit into the theory. In the very first lines of the first chapter of Capital, we find the following statement:

“A commodity is, above all, an external object, something that, with its properties, satisfies human needs of some kind.” [1]

By excluding services from the definition, Marx greatly facilitates the task of deriving a theory of the origin of value, which, however, because of this exclusion, cannot be universally valid. Prices arise on the market for services and for “immaterial” goods and these are exchanged, so that obviously acting individuals recognize utility in them as well. In the following lines, utility is mentioned as a condition for considering a given object as a commodity, but according to Marx this utility does not “hang in the air”, but derives from the properties of the commodity:

“Determined by the properties of the commodity body, it does not exist without it. Therefore the commodity body itself, e.g. iron, wheat, diamond, etc., is a use value or good. This character of the commodity body does not depend on whether the appropriation by man of its use properties costs him much or little labor.” [2]

As we see, Marx views utility as a physical phenomenon inherent in the commodity, but still recognizes that utility has no connection with the labor required to produce it. Since this fact does not fit at all into the labor theory of value, Marx repeats Ricardo's division between use value and exchange value, but both, in his opinion, are objectively measurable values, and gives an example from geometry to reinforce this view:

“In order to determine and compare the areas of all rectilinear figures, the latter are divided into triangles. The triangle itself is reduced to an expression quite different from its apparent figure, — half the product of the base and the height. In the same way, the exchange values of commodities must be reduced to something common, of which they represent greater or lesser quantities.” [3]

And this common denominator for all goods represents the average socially necessary labor time for their production:

“A given use value or commodity has value only because abstract human labor is objectified or materialized in it. But how can the magnitude of its value be measured? By the quantity of the “value-creating substance” contained in it, by the quantity of labor. The quantity of labor itself is measured by its duration, and labor time has its scale in certain fragments of time, such as an hour, a day, etc. […] Each of these individual labor powers represents the same human labor power as all the others, insofar as it has the character of a social average labor power and acts as a social average labor power, that is, it uses only the average or socially necessary labor time for the production of a commodity . ” [4]

 

Marx insists that exchange value has nothing to do with use value. However, several questions immediately arise here, such as what, if not the subjective preferences of consumers, determines which work creates goods and which does not, what is this external unit of value? Moreover, how would Marx's theory explain the value of a glass of water in the desert, for example? First, water does not require human labor to produce, and moreover, a physically equivalent unit of water would have very little or no exchange value in areas where it is abundant compared to the Sahara. In general, natural resources that have arisen without human intervention also clearly have both use and exchange value, which, however, cannot be explained by labor theory.

Also, what can we say about the value of unique and unreproducible goods such as works of art? This example actually illustrates another serious problem even with “ordinary” mass-produced goods. It is obvious that we cannot measure the works of Michelangelo or Da Vinci in “average necessary” labor time, precisely because the quality of their work is clearly incomparable to the imaginary average social value. The collection of the labor of many mediocre artists cannot lead to a masterpiece. The same applies to seemingly homogeneous goods produced in millions. To arrive at a product ready for consumption, development and design work, logistics, preparation for production, multiple stages of manufacturing, technical and financial control, distribution and countless more working hours performed by different people, with different qualifications and with different quality are necessary. Instead, Marx decides to ignore the real circumstances of the inhomogeneity of labor, abstracts from its use value and thus

“the different concrete forms of these types of labor also disappear: they no longer differ from each other, but are all reduced to the same human labor, to abstract human labor.” [5]

Marx perceives the amount of abstract labor embodied in a commodity as the basis for exchange relations and prices:

"Now let us take two commodities, e.g. wheat and iron. Whatever their exchange ratio may be, it can always be expressed by an equation in which a given quantity of wheat is equated with a certain quantity of iron, e.g. 1 quarter of wheat = a centner of iron."

iron. What does this equation mean? That something of the same magnitude exists in two different things, in a quarter of wheat and in a hundredweight of iron. Therefore both are equal separately to a third thing, which in itself is neither the one nor the other. So each of these two things, in so far as it is an exchange value, must

can be reduced to this third.” [6]

 

From this paragraph we understand that the exchange of two goods necessarily means that they are of equal value, objectively commensurate with something third, and we can represent them as two sides of an equation. We do not understand, however, why some people then bother (and accept the transaction costs) to exchange two goods whose objective exchange values are equal, so that the choice given to them should leave them indifferent. Nor is the converse of this question clear - why other people in similar circumstances do not make such an exchange of equal for equal? In a later paragraph Marx nevertheless returns to this question, making an implicit concession to the subjective theory of value, stating that exchange occurs because two individuals have a different assessment of the use value of the commodity.

In fact, the circumstance of equivalent exchange is the basis of Marx's theory of exploitation. Since commodities are always exchanged on the basis of the average labor necessary for their production, i.e., equivalent is always exchanged for equivalent, there is no place to take profit (and in this sense, loss). It is possible only because the capitalist pays the wage worker the equivalent of the average labor necessary for his "reproduction", but requires him to work more than would be necessary to create the products necessary for his survival. If, for example, 6 hours of labor are sufficient for the worker's subsistence, the capitalist forces him to work 8, and thus the additional 2 hours constitute surplus value (Mehrwert) that the capitalist acquires by exploiting the worker. Moreover, Marx even comes to the conclusion that the worker always credits his employer, because the latter consumes his labor power now, and pays for it only at the end of the contractual period:

“So everywhere the worker advances the use-value of his labor-power to the capitalist; he lets the buyer consume it before he has paid him its price; therefore the worker everywhere credits the capitalist.” [7]

Menger, methodological subjectivism and marginal utility

It is not unequivocally historically proven whether Menger's interest in the problems of the theory of value arose due to his journalistic activity related to monitoring developments on the Vienna Stock Exchange, but it sounds logical that someone confronted with constantly and sharply changing prices, speculation based on expectations rather than the past, would have difficulty seeing reality explained and analyzed by the naive labor theory of value (used by Marx).

Perhaps this is why Menger approaches things in a fundamentally different way, placing the acting person and his perceptions at the center of the study, laying the foundations for the scientific principle of methodological individualism. [8] Thus, the definition of a “good” is oriented primarily towards the individual and in particular towards the needs, knowledge and resources at his disposal. Menger formulates four conditions for considering something as a good:

"1. Human need.

2. Such properties of the thing that make it suitable should be placed in a causal relationship with the satisfaction of this need.

3. The person's knowledge of this causal relationship.

4. The disposition to this thing so that it can actually be attracted to satisfy this need.” [9]

That is, only the fulfillment of all four conditions leads to the emergence of the status of a commodity, and the omission of one of them removes the considered object or service from the sphere of human action. For example, almost universal needs for heating and transportation can be satisfied (in combination with other goods) by oil (i.e., processed oil products), fulfilling the second condition. Oil as a raw material was formed millions of years ago, but only relatively recently did humanity learn that this resource has an application for satisfying needs (fulfillment of the third condition) and technologies for its processing began to be developed, covering the fourth criterion. Previously, in the few places where oil was so close to the surface that it gushed out independently, local people viewed the same physical units as a problem rather than as a valuable resource. Also, the technology for extracting oil from unconventional sources has been known for several decades, but only the decreasing costs caused by improvements in technology and rising prices make extraction by this method economically "affordable", fulfilling the fourth characteristic of this commodity type of oil.

Menger develops the argument further in the following lines by mentioning various types of goods that do not show a direct or even any objective connection with the satisfaction of human needs, but are nevertheless considered as goods by acting individuals. As an example, Menger gives almost all cosmetic products, amulets, most medicines used by primitive peoples, love elixirs and the like. All objects that can only be subjectively considered as an appropriate means to achieve the ultimate goals set by the acting individual. It follows from this that even the causal relationship between the object or service and the ultimate goal does not need to be objectively provable, the subjective judgment of the acting individual that such a relationship exists is sufficient. On the other hand, Menger introduces the classification of “economic” and “non-economic” goods, the latter obviously having utility, but being available in such quantities that the loss of a certain amount of them does not lead to the non-coverage of any human need. It follows that such "goods" (the most common example being air) do not need to be economized and thus do not fall directly into conscious human action.

Here we see the clear contradiction with the naive objective theory of value, which accepts utility as a derivative solely of the physical properties of the object, without taking into account the actions of the individual.

Menger concludes that

“Value is therefore nothing attached to commodities, it is not their property, nor is it an independent, separate thing. Value is a judgment that economizing people make about the importance of the commodities that are at their disposal for the preservation of their life and well-being, and for this reason it does not exist outside the consciousness of the same. It is therefore wrong when a commodity that has value for economizing subjects is called “value” or when economists speak of “values” as if they were independent real things, thus objectifying value. For what exists objectively is always only the things, respectively the quantities of them, and their value is something essentially different, namely the judgment that economizing individuals create about the importance that having them has for the preservation of their life and well-being. The objectification of commodity value, which is by its nature subjective, has contributed greatly to the confusion of the foundations of our science.” [10]

The “discovery” of marginal utility is attributed in standard texts equally to three economists who arrived at the theory independently and almost simultaneously – Leon Walras, William Stanley Jevons and Menger. In fact, beyond the superficial similarities between the texts of the three, fundamental differences in methodology are hidden. Walras and Jevons are mathematical economists and according to them utility can be measured, added up, subtracted and in general any mathematical functions can be derived from it. In general, the mathematical approach, aimed at deriving a series of equations describing a timeless state of general equilibrium, is useless in an attempt to explain the cause-and-effect relationships behind economic phenomena. And Menger considers this to be precisely the purpose of economic science [11].

In fact, the term marginal utility (Grenznutzen), which entered modern economics, was introduced by one of Menger's students, Friedrich Wieser. Menger himself does not give an explicit name to this concept, but discusses it, for example, in this paragraph:

If the need for a commodity exceeds the available quantities, then we find that since a part of the needs will remain unsatisfied anyway, there is no way that the available quantity of the commodity in question can be noticeably reduced without thereby leaving some need, previously covered, un- or incompletely satisfied, compared to the situation we would have had without the occurrence of this contingency.

In all commodities which are in the above-mentioned quantitative relation, the satisfaction of some human need depends on the possession of any concrete, practically significant quantity of the same. And when economizing individuals recognize the circumstance that the satisfaction of any of their needs depends on the possession of the commodities in question, respectively of any concrete commodity in the above-mentioned quantitative relation, then these commodities acquire that significance which we call value and thus represent the value of the significance which concrete commodities or commodity quantities acquire for us, that we are aware of the dependence of the satisfaction of our needs on the possession of the same commodities. [12]

Considering specific quantities of a good, which in any case cannot be sufficient for all needs, we come to the conclusion that the last unit of this good will be used for the last most important need. Reducing the available quantity by one unit then leaves the need in question unsatisfied. It is this difference that is the marginal utility, and the sequential arrangement of needs according to their importance for the acting person is determined by the subjective preferences of the same.

Once we have concluded that value is subjective, we should not expect that both parties to a transaction will value the goods exchanged equally. On the contrary, it is precisely because two economizing individuals recognize greater value in the acquired good than in the given good that an exchange occurs at all. Menger lists three conditions necessary for this to happen:

"a) At the disposal of an economizing subject there must be quantities of goods which have a lower value for him than other quantities of goods at the disposal of another subject, and in the latter case the inverse ratio must be given in the assessment of value

b) The two economizing entities must have come to know about this ratio and

(c) it must be within their power to effect the aforementioned exchange.” [13]

The theory that prices are determined by the costs of producing a commodity in Marx's view, of course, also applies to the wages that capitalists pay the proletariat. They are always just enough to cover the most basic living expenses, i.e. the costs of producing labor power - the survival of the worker and possibly his family. Even if we assume for the moment that Menger did not unequivocally refute the labor theory, the idea that surplus value arises solely from human labor has serious consequences in considering the percentage of profit that capitalists extract from the exploitation of the worker.

In fact, the labor theory of value in combination with his capital theory confronts Marx with an insoluble contradiction that requires him to abandon one or the other, which is what he ultimately does. We will deal with this in more detail when we present Böhm-Bawerk's critique of Marx in the next article. For the moment, it is sufficient to mention that later apologists for Marx such as Paul Sweezy and Hilferding try to save [14] the labor theory by claiming that Marx never tried to explain actually occurring prices, but rather some mystically inscribed "values" in the nature of commodities, without any connection to the real world. Not a particularly plausible claim, considering what Marx literally says:

The constant fluctuations of market prices, their rise and fall, compensate for each other, cancel each other out, and themselves reduce to the average price as their internal norm. [15]

This approach is more familiar to us from religious sects, which, confronted with their unfulfilled predictions, change their content.

---