A hundred years ago, if you were an economist living in the United States,
you might have subscribed to a journal called the Quarterly Journal of Economics.
And you might have gone out to the mailbox one day in October 1888 and found the latest issue.
And if one found the latest issue of the Quarterly Journal of Economics, October 1988,
you would have opened it to its lead article.
And its lead article was by a man named James Bonner.
100 years ago this month, and the title of the article was
The Austrian Economists and Their View of Value.
100 years ago this month was the first English exposition
in detail of the Austrian School.
In this exposition, James Bonner, an admirer of Menger
and Boehm-Bawerk, offered to the English-speaking world
the first systematic, thorough, methodical understanding
of how the Austrians viewed value, how from value
and they explain the emergence of price and market processes.
Now what Bonner enabled the reader in America and England to see was that the Austrians were
developing an alternative way of understanding the economic process.
One that on the one hand challenged the classical economists, including Marx as a labor theorist
who offered a new vision of how to construct economic theory for an understanding of the real world.
Right there, the first English exposition this month, 100 years ago.
Now what Boehm-Bawerk did was more in his writings than just present a positive theory.
He was a brilliant economist who had mastered all of the economics literature up to his own time
And he proceeded to first criticize and attack his opponent before he went on to present his positive theory.
In fact, it was Boehm-Bawerk who opened the first clash that the Austrians had with the socialists.
In the 20th century, we are most familiar with the Austrian challenge to socialism through the works of Ludwig von Mises.
His challenge against the socialists of how would a central planning system work
where the planners had overthrown private ownership of the means of production
and eliminated therefore the price mechanism.
For as I'm sure most of you are familiar with,
Mises argued that where there is no private property, there is nothing to buy and sell.
Where there is nothing to buy and sell, there is nothing to make offers for or bids for.
Where there are no bids and offers, there are no agreed upon terms of trade.
Where there are no agreed upon terms of trade, there are no prices.
And when there are no prices, there is no way for agents in the market to form estimates concerning the value that individuals are placing upon the means of production
as a calculative device to determine how to in an efficient and economizing manner apply the means of production to alternative uses in a society of scarcity.
But that was really the second challenge. The first one was Boehm-Bawerk's.
He first made this challenge and criticism in Volume 1 of Capital and Interest, his history and critique of interest theories, in 1884, the year after Marx passed away.
He had a chapter on the exploitation theory, in which he criticized another German named Robertus and Marx.
Then he had another opportunity to extend and elaborate on his criticism, and that was in 1886,
Shortly after volume three of Das Kapital had appeared posthumously, von Boehm-Bawerk was asked to make or write and give a contribution to a Fischer for a German economist.
And his contribution was a Henry Page monograph called Carl Marx and the Clothes of His System,
in which he attempted to update his criticism in the light of the second and third volume coming out,
and showing that there were insoluble problems in Marx's system.
In fact, the interesting thing that one can understand historically is that if one looks at most accounts today on Marx and his economic system and his social system and his conception of the social order,
Most proponents will present a conception of Marx's theory of exploitation, his notion of alienation, his idea of superstructure,
his idea of exploitation and potential search for imperialist capture of markets via the Leninist interpretation.
But there is one thing that they tend to brush over now, one thing that they devote little attention to in their expositions of Marx,
Marx, and that is the labor theory of value. They usually devote the least amount of time
to it. They give short expositions, they mention that it was essential to Marx's conception,
but they basically brush over it. They go on to other aspects of Marx's critique of
the capitalist order. Now this is in contrast to earlier in this century, in the late 19th
At that time, the heart of Marx's system was considered the labor theory of value.
It was only with the labor theory of value, it was argued, that one could have a scientific analysis
to explain why capitalism inherently was exploitive.
Now why has the labor theory of value fallen into the background?
Why has it become an embarrassment, something that is briefly talked about
rather than made the center of the exposition and the discussion?
discussion and I would like to suggest that it's precisely because of the
critique that Boehm-Bawerk made a hundred years ago. Because through this
critique Boehm-Bawerk raised questions about the logic of the labor theory
itself and the inconsistencies of Marxist theory with the empirical
workings of real market processes. But before one can understand Marxist
criticisms it is useful and important to briefly summarize Marxist system itself.
Marx begins volume 1 by emphasizing that no commodity can have exchange value unless it has use value, unless it is wanted by someone for some purpose.
It cannot, in other words, unless it has use value, it cannot have exchange value.
But it is not sufficient for a commodity to have use value to have exchange value.
He argues that one has to search for something else than just its usefulness if one wants to understand from whence exchange values between commodities arises.
He argues that use values of a qualitative and diverse nature and therefore cannot be compared.
There is no common denominator from which one can look at them and evaluate them.
One has to look for what is it that commodities have in common other than their quality of being useful
Because uses are so diverse.
He therefore says we have to look beneath it
and to ask what quality do all commodities have in common
other than the diversity of their uses.
And he says the quality that they share in common
is a quantitative dimension.
And that is they all share the common attribute
that they are produced by labor.
He therefore argues that one has to reduce
The use values of commodities, one has to abstract from the use values of commodities to that more general quality of merely having been the product of quantities of labor input.
Only when one has understood the nature of labor as a physical input in the production of commodities can one then return to the surface of the analysis and understand why useful things have exchange ratios in the ways they do in the market.
He therefore is looking for a common denominator among all commodities, and he argues that when one strips it away, what one finds therefore is that all commodities are produced by labor.
But what kind of labor? Well, he argues that if we are to strip away the particular concrete attributes of commodities that make them useful for particular purposes,
We need to strip away the concrete types of labor that go into their production,
and to understand labor purely as an abstraction, quantities of labor in an abstract form.
And he argues that therefore what determines the value of commodities in their specific forms
are their more generic aspect of having been the product of labor of an abstract type.
Now, how shall one measure the amount of labor that goes into a product,
and therefore to determine what the value of one commodity should be in relation to another?
And Marx argues that measurement should be the duration of labor time entering into its production.
But however, he then emphasizes that it is not going to be a conception of concrete labor time,
But a thing that he calls socially necessary labor.
That is, labor necessary to produce an article under normal conditions of production,
an average degree of skill and intensity prevalent at the time.
It is this value set as an average sampling of the class that determines what shall be the measurement of labor.
Now, as an extension of this, that one says that the amount of labor that is going into a product is going to be a socially necessary amount of labor, that is, that time duration, raised another question.
Well, what does one do with the fact that there seems to be a great diversity of types and qualities of labor?
That is, simple labor and complex labor, skilled labor and unskilled labor.
Labor. And Marx argues that that is not a difficult matter. One merely has to
realize that skilled labor is a multiple of simple labor, such as a doctor is ten
times the the labor of a simple worker digging a ditch. Now Marx argues is that
with these basic concepts one can understand that on the basis of socially
necessary labor that the amount of the value of a skilled professional is
is merely a multiple of unskilled labor of this more abstract type
that one should easily see that individuals would trade and exchange commodities
in terms of their labor values.
But this then brings him to his notion of the relationship between the worker
and the social system in which he resides.
Because he then makes a distinction between necessary labor and surplus labor.
Necessary labor is the amount of time duration
It is a consideration that an individual has to incur, sufficient to produce enough products or the value of enough products to sustain himself and his family.
Necessary labor is therefore enough worker to be able to maintain oneself.
Surplus labor would be the amount of product or value of product produced during a period of time in excess of what is required for one's own sustenance.
This conception of the amount of labor necessary just to maintain yourself, and extra labor
during a day beyond that, that would go in excess of that amount in terms of products
made or value of products made, that reaches, takes marks to his conception of exploitation.
Because he argues that under capitalism the workers do not have direct access to the means
of production that they require to be able to produce the products necessary for their
own survival.
Rather, the means of production are monopolized in the hands of the owners, and therefore the worker has to go to the owners and negotiate and contract to have access to that which is essential for them to do the work required to maintain their own lives.
And here enters Marx's conception of exploitation.
Because he argues is that the capitalist by having this monopoly control over the means of production
has the capacity to force the worker,
one presumes by threatening denial of access to the means of production,
has the capacity to force the worker to work more hours for him
than would be necessary just to produce product or value of product
sufficient to maintain himself but not pay the individual for that surplus.
In other words, the worker is only paid a value equivalent to his subsistence,
and the excess is then garnished by the capitalist owner of the means of production.
Thus Marx argued through this method the worker is exploited.
He only receives a fraction of that which he has produced.
The mere ownership of property gives the owner property the opportunity to live without effort,
and, therefore, the injustice of the system.
Now, Marx then tries to analyze the workings of the economic system.
And he argues that, on the one hand, based upon his labor theory of value,
commodities should exchange based upon their labor values.
But what he notices is that in the market, this is not always the case.
In fact, generally in the capitalist economy, this is not always the case.
And he also notices is that commodities do not exchange in terms of their percentages of surplus values,
but through an equality of the rate of profit.
And this is seen as an anomaly also. And why?
Because Marx says is that there is two aspects of the capital that a producer or a capitalist uses.
There is what he calls constant capital and variable capital.
Constant capital is merely the amount of capital equipment that the capitalist has purchased from other producers.
Variable capital is the amount of labor that he employs to work with that capital equipment in a particular productive endeavor.
Now Marx argues that for the constant capital he pays its full value.
Why does he pay his full value?
Because commodities are expected to trade at their full value.
He is a producer, has bought equipment from some other capitalist.
That other capitalist has exploited his workers,
but that other capitalist, in fact, charges the other capitalist the full value,
labor value of the product,
and therefore there is no exploitive gain from the capital purchase,
capital equipment purchase from other capitalists.
They are really just paid for from their full value.
The only source of surplus value is the workers he hires to work with the capital he is employed,
and garnishing a part of the value of what they have produced.
Now Marx points out that there is an anomaly here,
and that anomaly is that one could imagine a situation
in which many companies or firms in an industry have the same rate of surplus value,
But each of them are experiencing the different rates of profit.
But Marx realizes that in the market, the market tends to equate rates of return.
And therefore, how can this jive with the labor theory of what will determine the value of commodities?
Now, the reason why he argues that there can be different rates of profit
while having the same surplus value,
is because he argues that surplus value is merely a percentage of the amount of excess of one's variable capital invested.
In other words, if a worker's substance is 20 and he produces 40, surplus value is 100%.
But one calculates total profit on investment not on the basis just surplus value, but on all capital invested, constant and variable.
and the larger one's proportion of constant capital,
the smaller one's rate of profit on the total capital investment.
Now, how does Marx attempt to overcome this?
Well, he argues that competition will handle this.
He says that competition will tend to assure that capitalists will shift the types of products they make
and that they will then, by shifting into different lines of production,
assure that there is a common rate of profit.
But how does this jive with his labor theory of value that commodities are to exchange at their labor inputs?
Well, he argues that the market does it by creating what he calls prices of production.
And what he says is that the market will do the following thing.
It will average out the rate of surplus value throughout all sectors of the economy.
When works out an average of what has been constant capital,
when works out what has been an average of surplus capital,
that tells us what is the average rate of surplus profit or surplus value,
and the market will then assure through competition the equating of that.
Now, we'll come back to that when we look at Boehm-Bawerk's criticism.
Now, in a nutshell, now Marx tries to defend this
and present a number of different expositions and numerical examples.
But in a nutshell, that is his explanation.
He argues that labor is the basis of value, commodities based upon labor should exchange
in terms of their labor inputs.
Labor input is measured by socially necessary labor.
Complex labor is reduced to simple labor.
And one then sees in the market a situation where anomalies may occur between the rate
of Surplus Value and the Rate of Profit competition by averaging out the rates of return, guaranteeing
that while not directly commodities exchange at their labor values, they do so indirectly.
Now Boehm-Bawerk approaches this by wanting to take up two criticisms.
One is, does Marx's theory fit with the facts?
And second of all, what is the basis of his theory of value?
And before I discuss this, I want to suggest the different approach that Boehm-Bawerk comes
with that.
Boehm-Bawerk argues in his critique of Marx and in his positive theory of capital in which
he has a long section on value and price, is that there are two starting principles
Methodological individualism argues that if we are to understand the nature and structure and emergence of social phenomena, we must begin with those elemental components from which all social phenomena arises, and that is the individuals of which the society is constructed and composed.
It is individuals who act, individuals who choose, individuals who decide.
Bavar clearly says that all economic processes begin with man and his purposes.
And it is from man and his purposes that emerge the evaluations of commodities
and their actions that bring about market phenomena.
His second statement is that commodities only have value not only because individuals are the actors,
for the Actors, but precisely because it is only in terms of how the actors evaluate, decide, conceive, determine, perceive that anything occurs in the social world.
In other words, if we are to understand social phenomena in general and economic phenomena in particular, we must always do so from the actor's point of view.
Now this means that for Boehm-Bawerk one cannot abstract from the nature and qualities of the use value of commodities as perceived by the actor.
by the Actor. It is precisely because of the concrete attributes or possibilities
to serve ends that an individual sees in a commodity that he assigns value to it
and wishes to do various productive activities to bring that commodity into
existence. So therefore, von Boehm-Bawerk is saying that we must begin with the
individual, we must begin with his evaluations, and that one can have to
think not in the abstract of use values in general but the specific purpose and
ends in mind for which an individual would want a commodity. Now on the basis
of this Marx then proceeds to look at, von Boehm-Bawerk begins to look at Marx's
theory of value. First of all he says is that Marx has proceeded to try to glean
what is the basis of the value of commodities in a peculiar fashion and
And that peculiar fashion is that he defines commodities precisely in a way
that the only thing that he will be left with in his analysis
is the presumption that only labor can be the common denominator.
For example, Boehm-Bawerk points out that Marx does not discuss
things given to us by nature that have value.
Commodities that cannot be reproduced by labor that have value.
And therefore, Marx guarantees that he will have the result that he wants
precisely because he defines a commodity in a way
that when he reduces all commodities to a common denominator,
the only common denominator that he is left with is that which he is looking for.
He also argues that the same problem exists with the reduction of skilled labor to unskilled labor.
Because Boehm-Bawerk argues that just as one evaluates commodities
in terms of the concrete purposes and usefulnesses they have for the individuals,
We evaluate labor on the same basis. We are not interested in labor in the abstract, but we are interested in labor of particular kinds, qualities, attributes, and skills, precisely because those are the types of labors that can serve the purposes in mind to create the product we desire.
There is also a reasoning in a circle, von Boehm-Bawerk argued, in the same way here.
Because Marx says that skilled labor is merely a multiple of unskilled labor.
And how does Marx attempt to show that?
Well, he says, look, in the marketplace, skilled labor is offered a wage or a price,
many times the value of an unskilled labor.
And therefore, the fact that skilled labor is given in terms of its market value,
a multiple of unskilled labor demonstrates that skilled labor is merely a multiple of unskilled labor.
In other words, he presumes that which he is to prove.
Rather than trying to show how one multiplies unskilled labor into skilled labor,
and then derive an analysis that shows why the market then generates these differences in remuneration,
he argues that the evidence that there are differences in remuneration,
and how much the differences of remuneration are, demonstrates that his premise is correct.
Now, Boehm-Bawerk argues in contrast to Marx's analysis of the discrepancy between his theory of value and surplus value
and a tendency for rates of profit to be equalized in the following way.
And that is, he says that Marx suffers from methodological holism.
And Marx suffers from treating an abstract concept that is a construction of Marx's own mind,
as if it is an expression and a theoretical framework to understand the real world.
Now, why does Boehm-Bawerk argue that?
Because Boehm-Bawerk explains that when Marx attempts to explain the equality of rates of profit across industries,
Mark says, well let us imagine that the economy was a single firm and we're
averaging out the amount of return each division has individually owned
and then working out the average from all the individual divisions we're then
going to disperse them in equal proportions back to the divisions of our
economy and that therefore we will equalize the amount of return each sector
receives through this conception.
Well, Boehm-Bawerk's response is that the economy is not a single unit.
He argues that there is no relationship
between the actions of the individual parts
and treating them as if the economy was a single firm that a planner then
determines how much each division has earned, works out an average,
and then redisperses that average among the component parts.
And that rather than explaining how competition would equate the rates
of Profit Among Sectors of the Economy, Marx has created out of his own mind a construction
of how an economy could work if it was an economy that was going to function in a manner
that Marx wanted, but that it is not a theory of how real economies function, but rather
is a construction of his mind in which he treats the economy as a whole.
It is not a theory of how competition and individuals have incentives to act and respond
and shift resources in various ways, but is a construction that Marx has created to reach the conclusion that he desires.
And Boehm-Bawerk takes him precisely to task for this by arguing is that it would have been a simple method for Marx to see if competition had a tendency to function the way he wanted, in the manner he suggested it did.
And that is to start with that approach that is open to any individual who wishes to understand the workings of market processes.
And that is to begin with the introspective element of how any individual acts under the constraints of means that are scarce in relation to ends
and opportunities that exist before him in responding to those opportunities.
Boehm-Bawerk argues, using the older terminology,
each individual who is a social analyst has the opportunity to follow the psychological method.
That is, to imagine and reflect in your own mind what you would do
confronted with constraints of means, ends desired and profit opportunities before you.
And he argues that that is the only theoretical and sound basis from whence one can construct
a theory of market response, equality of returns through sectors of the economy,
adjustments and redistributions of resources among sectors of the economy,
and yet that is the very method that Marx turns against.
Because like the classical economist, Marx chose to treat demand as an element that obviously could not be ignored,
but was put in appendix not to be dealt with in any great detail.
And finally, Boehm-Bawerk argues that what Marx has confused is profit and interest.
What Marx has confused is that which is transitory and that which is permanent.
Marx asked the question, how can it be that a producer hires a set of workers, pays them one price,
They produce or work up raw materials into a product, and the employer is able to sell that product for a higher price than he has paid out in terms of the prices of the factors of production.
How else can it be if the work has been done by those he's hired, other than that he has taken from them something that belongs to them and does not belong to the owner?
Basically, what Boehm-Bawerk argues is that Marx has left out an ingredient that is essential, inseparable from all human decision making,
and that is the element and evaluation of time.
That there is a difference in the evaluation and estimate of things in the present and things in the future.
that the worker is receiving present goods in exchange for working on commodities that reflect future goods.
The employer is advancing the worker commodities in the present rather than the workers working up products themselves
or deferring their receipt of payment until the product is ready in its finished form at some point in the future.
that in fact what the worker and the employer are doing is making an inter-temporal exchange
that the worker chooses not to wait either in making the product himself for sale
or to make the product and wait till it's sold later by the entrepreneur for payment
that he is willing to work now for payment now at a price less than the product will sell for in the future
And in turn the employer is willing to advance commodities for the worker's sustenance in the present
with the understanding that the employer has the opportunity to sell that product in the future
at a price that reflects the remuneration that is due for having foregone the use of commodities and income in the present
that he has forwarded to those workers.
What Boehm-Bawerk argues is that profit is transitory.
It is that which arises out of changing market conditions, but which competition has as its
purpose to compete away, but that interest is inseparable from the market itself.
Interest is not a transitory element, but is a price, like any other price.
Its uniqueness is that it is the price of time.
It is not the price of apples in the present versus pears in the present, but apples in
the present versus apples in the future.
Pears in the present versus pears in the future, but it is an exchange across time, and therefore
one cannot do away with the discounting of the value of the laborer's product unless
one wishes to say that time and the evaluation of time is no longer inherently an element
in the Judgment of All Actors in the Market, because as Boehm-Bawerk clearly explains is
that all action is forward-looking, it is prospective, it is a judgment concerning the
in the judgment of all actors in the market.
Because as Boehm-Bawerk clearly explains is that all action is forward-looking.
It is prospective.
It is a judgment concerning the future in relation to today.
Now I would like to suggest that no one has surpassed Boehm-Bawerk's criticism.
The apologists and proponents of Marxism have attempted to get around these issues.
They've argued, well, Marx really didn't mean this.
He wasn't attempting really to explain the exchange values in the market.
He had other purposes for the labor theory of value.
But you can't get around the fact that Marx says in Capital itself that for all the other
purposes that he wishes to develop a labor theory and have labor as a basis of understanding
Understanding the Value of Commodities, one of its functions is to enable an understanding
and an explanation of what determines the relative prices in an economy.
And once you appreciate Boehm-Bawerk's criticism of Marx's conception of how competition works,
and that that is not the nature of competition or market processes, then one has to realize
realizes that in fact Marx has given no theory of how prices and exchange ratios emerge in the market
on the basis of his own theory of value, and that in fact once one critically evaluates
of how Marx rigs the argument to assure that the only thing left in a commodity is labor
as a common denominator, and realizes that it is a false universal principle because
Because it is not universal at all, one realizes that there are many bases and different bases
upon which one can say commodities of value.
And of course, von Boehm-Bawerk's own on the Austrian School that value originates through
relationship of ends, desires and means to apply to which they can be applied to them
that are scarce in terms of ends, desires.
The Austrians have fought two battles, two battles with the socialists, and the result
of those two battles is that for all intents and purposes, socialism and Marxism is dead.
A hundred years ago, von Boehm-Bawerk was able to show that Marx's theory of value
was inherently flawed, inherently inconsistent, and was not the avenue to understand either
the value of commodities or the nature of the market process.
And in the 20th century, that criticism was completed by Ludwig von Mises.
And Mises recognizes that he is starting where Boehm-Bawerk left off.
Because if you read Mises' socialism, while he briefly talks about problems with the labor
theory of value, he doesn't devote much time to it.
Because he realizes that Boehm-Bawerk had settled one level of the debate.
Mises was to show that once you eliminate other elements of a market economy, it is impossible for that economy to function.
At the beginning of this century, if there was one thing that was obvious in most people's minds, it was that socialism was inevitable.
If anything was clear in most people's minds, it was that planning was the economic system of the future.
If anything was obviously inevitable to people at the beginning of this century, it was that capitalism was going to die.
That capitalism was undesirable because it was exploitive, that capitalism was inefficient and wasteful,
and that planning was a method to achieve all the things that we supposedly admired capitalism for,
but with none of its abuses, exploitation, waste or inefficiencies.
We end the 20th century with socialism being nothing more than a bad taste in people's mouths.
And I would like to suggest that we leave the 20th century,
a hundred years after the arrival of the Austrian School on the international scene of economic ideas,
because of what Boehm-Bawerk first did at the end of the 19th century and Mises completed in the early part of the 20th.
because there is no value other than that which resides in an individual evaluating commodities
and there is no way for those values that interact in an economy to be reflected for people to use for their economizing purposes
without prices and markets
and that means that the 21st century, hopefully, will be a century in which the Austrian School stands as the school,
The Austrian School, the dominant school of economics, because the Austrian School will have refuted all the economics of this century.
Thank you very much.