Category: Economy

Karl Marx had the idea that all value is derived from labor. This was not an original idea. He picked up this idea from what is now called ‘classic economics’. Mainly Adam Smith and David Ricardo. If all value comes from labor than where does profit come from? Profit must be the exploitation of the worker. The employee worked for 8 hours and only got paid for 7 hours. One hour went into the capitalist pocket. This was what Marx called ‘surplus value’.
Karl Marx correctly observed that rates of profit normalize. In his first volume of Capital, Marx promised he would solve what seemed like a contradiction in subsequent volumes. That on one hand, he believed in the labor theory of value. On the other hand, rates of profits normalize.
These two ideas don’t appear to be contradictions as Marx said. They are contradictions. If profits are the sole source of exploitation of the workers than we would see profits higher in labor intensive fields. In fact, in order for a capitalist to get more profit, the capitalist could just hire more workers. This flies right in the face of what is observed in the real world. Unfortunately for Karl Marx a man named Eugen Bohm von Bawerk lived. In Eugen Bohm von Bawerk work, Capital and interest, he attacks this idea:

Either products do really exchange, in the long run, in proportion to the labour incorporated in them, and the amount of rent in a production is really regulated by the amount of labour employed in it,-in which case an equalization of profits is impossible; or there is an equalization of the profits of capital,-in which case it is impossible that products should continue to exchange in proportion to the labour incorporated in them, and that the amount of labour spent should be the only thing that determines the amount of rent obtainable.

In other words, Bawerk said Marx would never solve this problem. Marx had Volume I of Capital published in 1867. Karl Marx died in 1883. The lie is he died before he got to finish Volume II and Volume III of Capital. The truth is Karl Marx went on to work on other subjects. Math, science, agricultural, statistics, etc. He never published a full book about economics again. He really did not publish any thing after that.
In corresponding letters between Marx and Engels, Engels pleaded with Marx to finish his books. Marx told Engels he was working on them. He had stopped working on them long ago.
After Marx died, Engels rummaged through Marx’s desk and found Capital Volume II and III. Engels edited them and published them. Eugen Bohm von Bawerk hit back hard:

MANY years ago, long before the above-mentioned prize essays on the compatibility of an equal average rate of profit with the Marxian law of value had appeared, the present writer had expressed his opinion on this subject in the following words: “Either products do actually exchange in the long run in proportion to the labor attaching to them—in which case an equalization of the gains of capital is impossible; or there is an equalization of the gains of capital—in which case it is impossible that products should continue to exchange in proportion to the labor attaching to them
From the Marxian camp the actual incompatibility of these two propositions was first acknowledged a few years ago by Conrad Schmidt. Now we have the authoritative confirmation of the master himself. He has stated concisely and precisely that an equal rate of profit is only possible when the conditions of sale are such that some commodities are sold above their value, and others under their value, and thus are not exchanged in proportion to the labor embodied in them. And neither has he left us in doubt as to which of the two irreconcilable propositions conforms in his opinion to the actual facts. He teaches, with a clearness and directness which merit our gratitude, that it is the equalization of the gains of capital. And he even goes so far as to say, with the same directness and clearness, that the several commodities do not actually exchange with each other in proportion to the labor they contain, but that they exchange in that varying proportion to the labor which is rendered necessary by the equalization of the gains of capital.
In what relation does this doctrine of the third volume stand to the celebrated law of value of the first volume ? Does it contain the solution of the seeming contradiction looked for with so much anxiety? Does it prove “how not only without contradicting the law of value, but even by virtue of it, an equal average rate of profit can and must be created”? Does it not rather contain the exact opposite of such a proof, namely, the statement of an actual irreconcilable contradiction, and does it not prove that the equal average rate of profit can only manifest itself if, and because, the alleged law of value does not hold good?
I do not think that any one who examines the matter impartially and soberly can remain long in doubt. In the first volume it was maintained, with the greatest emphasis, that all value is based on labor and labor alone, and that values of commodities were in proportion to the working time necessary for their production. These propositions were deduced and distilled directly and exclusively from the exchange relations of commodities in which they were “immanent.’ We were directed “to start from the exchange value, and exchange relation of commodities, in order to come upon the track of the value concealed in them” (I, 55). The value was declared to be “the common factor which appears in the exchange relation of commodities” (I, 45). We were told, in the form and with the emphasis of a stringent syllogistic conclusion, allowing of no exception, that to set down two commodities as equivalents in exchange implied that “a common factor of the same magnitude” existed in both, to which each of the two “must be reducible” (I, 43). Apart, therefore, from temporary and occasional variations which “appear to be a breach of the law of the exchange of commodities” (I, 177), commodities which embody the same amount of labor must on principle, in the long run, exchange for each other. And now in the third volume we are told briefly and dryly that what, according to the teaching of the first volume, must be, is not and never can be; that individual commodities do and must exchange with each other in a proportion different from that of the labor incorporated in them, and this not accidentally and temporarily, but of necessity and permanently.

Here is the intellectual death blow (if there is not a word for this phrase there should be):

I cannot help myself; I see here no explanation and reconciliation of a contradiction, but the bare contradiction itself. Marx’s third volume contradicts the first. The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value. This is the impression which must, I believe, be received by every logical thinker.

People still use the word exploitation. Discard them. They are confused. All they have left is a slogan with no meaning. Many people have tried to revive Marx’s economics since Bawerk sent it to the graveyard in 1896. They have all failed. Serious economist have long ago jettisoned the labor theory of value and the exploitation theory.  Even though Bawerk drove a stake through the heart of Marxian economics, Marx’s philosophy remained untouched. Dialectical materialism would go on to dominate twentieth century thought.