WEBVTT NOTE Eugen von Boehm-Bawerk's Critique of Karl Marx 1 00:00:00.000 --> 00:00:05.200 A hundred years ago, if you were an economist living in the United States, 2 00:00:05.200 --> 00:00:09.960 you might have subscribed to a journal called the Quarterly Journal of Economics. 3 00:00:09.960 --> 00:00:17.720 And you might have gone out to the mailbox one day in October 1888 and found the latest issue. 4 00:00:17.720 --> 00:00:22.760 And if one found the latest issue of the Quarterly Journal of Economics, October 1988, 5 00:00:22.760 --> 00:00:25.640 you would have opened it to its lead article. 6 00:00:25.640 --> 00:00:28.560 And its lead article was by a man named James Bonner. 7 00:00:28.560 --> 00:00:32.960 100 years ago this month, and the title of the article was 8 00:00:32.960 --> 00:00:37.440 The Austrian Economists and Their View of Value. 9 00:00:37.440 --> 00:00:41.320 100 years ago this month was the first English exposition 10 00:00:41.320 --> 00:00:44.200 in detail of the Austrian School. 11 00:00:44.200 --> 00:00:47.080 In this exposition, James Bonner, an admirer of Menger 12 00:00:47.080 --> 00:00:50.040 and Boehm-Bawerk, offered to the English-speaking world 13 00:00:50.040 --> 00:00:53.240 the first systematic, thorough, methodical understanding 14 00:00:53.240 --> 00:00:56.560 of how the Austrians viewed value, how from value 15 00:00:56.560 --> 00:01:02.460 and they explain the emergence of price and market processes. 16 00:01:02.460 --> 00:01:09.720 Now what Bonner enabled the reader in America and England to see was that the Austrians were 17 00:01:09.720 --> 00:01:14.960 developing an alternative way of understanding the economic process. 18 00:01:14.960 --> 00:01:23.400 One that on the one hand challenged the classical economists, including Marx as a labor theorist 19 00:01:23.400 --> 00:01:32.400 who offered a new vision of how to construct economic theory for an understanding of the real world. 20 00:01:32.400 --> 00:01:39.400 Right there, the first English exposition this month, 100 years ago. 21 00:01:39.400 --> 00:01:44.400 Now what Boehm-Bawerk did was more in his writings than just present a positive theory. 22 00:01:44.400 --> 00:01:51.400 He was a brilliant economist who had mastered all of the economics literature up to his own time 23 00:01:51.400 --> 00:02:01.400 And he proceeded to first criticize and attack his opponent before he went on to present his positive theory. 24 00:02:01.400 --> 00:02:08.400 In fact, it was Boehm-Bawerk who opened the first clash that the Austrians had with the socialists. 25 00:02:08.400 --> 00:02:15.400 In the 20th century, we are most familiar with the Austrian challenge to socialism through the works of Ludwig von Mises. 26 00:02:15.400 --> 00:02:20.400 His challenge against the socialists of how would a central planning system work 27 00:02:20.400 --> 00:02:24.400 where the planners had overthrown private ownership of the means of production 28 00:02:24.400 --> 00:02:27.400 and eliminated therefore the price mechanism. 29 00:02:27.400 --> 00:02:29.400 For as I'm sure most of you are familiar with, 30 00:02:29.400 --> 00:02:33.400 Mises argued that where there is no private property, there is nothing to buy and sell. 31 00:02:33.400 --> 00:02:39.400 Where there is nothing to buy and sell, there is nothing to make offers for or bids for. 32 00:02:39.400 --> 00:02:43.400 Where there are no bids and offers, there are no agreed upon terms of trade. 33 00:02:43.400 --> 00:02:47.400 Where there are no agreed upon terms of trade, there are no prices. 34 00:02:47.400 --> 00:02:56.400 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 35 00:02:56.400 --> 00:03:10.400 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. 36 00:03:10.400 --> 00:03:16.400 But that was really the second challenge. The first one was Boehm-Bawerk's. 37 00:03:16.400 --> 00:03:28.400 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. 38 00:03:28.400 --> 00:03:37.400 He had a chapter on the exploitation theory, in which he criticized another German named Robertus and Marx. 39 00:03:37.400 --> 00:03:44.400 Then he had another opportunity to extend and elaborate on his criticism, and that was in 1886, 40 00:03:44.400 --> 00:03:57.400 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. 41 00:03:57.400 --> 00:04:03.400 And his contribution was a Henry Page monograph called Carl Marx and the Clothes of His System, 42 00:04:03.400 --> 00:04:08.400 in which he attempted to update his criticism in the light of the second and third volume coming out, 43 00:04:08.400 --> 00:04:13.400 and showing that there were insoluble problems in Marx's system. 44 00:04:13.400 --> 00:04:30.400 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, 45 00:04:30.400 --> 00:04:40.400 Most proponents will present a conception of Marx's theory of exploitation, his notion of alienation, his idea of superstructure, 46 00:04:40.400 --> 00:04:50.400 his idea of exploitation and potential search for imperialist capture of markets via the Leninist interpretation. 47 00:04:50.400 --> 00:04:59.400 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, 48 00:04:59.400 --> 00:05:04.760 Marx, and that is the labor theory of value. They usually devote the least amount of time 49 00:05:04.760 --> 00:05:12.440 to it. They give short expositions, they mention that it was essential to Marx's conception, 50 00:05:12.440 --> 00:05:17.640 but they basically brush over it. They go on to other aspects of Marx's critique of 51 00:05:17.640 --> 00:05:24.520 the capitalist order. Now this is in contrast to earlier in this century, in the late 19th 52 00:05:24.520 --> 00:05:29.520 At that time, the heart of Marx's system was considered the labor theory of value. 53 00:05:29.520 --> 00:05:35.520 It was only with the labor theory of value, it was argued, that one could have a scientific analysis 54 00:05:35.520 --> 00:05:39.520 to explain why capitalism inherently was exploitive. 55 00:05:39.520 --> 00:05:43.520 Now why has the labor theory of value fallen into the background? 56 00:05:43.520 --> 00:05:47.520 Why has it become an embarrassment, something that is briefly talked about 57 00:05:47.520 --> 00:05:51.520 rather than made the center of the exposition and the discussion? 58 00:05:51.520 --> 00:05:55.160 discussion and I would like to suggest that it's precisely because of the 59 00:05:55.160 --> 00:06:00.800 critique that Boehm-Bawerk made a hundred years ago. Because through this 60 00:06:00.800 --> 00:06:05.080 critique Boehm-Bawerk raised questions about the logic of the labor theory 61 00:06:05.080 --> 00:06:10.240 itself and the inconsistencies of Marxist theory with the empirical 62 00:06:10.240 --> 00:06:15.520 workings of real market processes. But before one can understand Marxist 63 00:06:15.520 --> 00:06:21.120 criticisms it is useful and important to briefly summarize Marxist system itself. 64 00:06:21.120 --> 00:06:32.120 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. 65 00:06:32.120 --> 00:06:38.120 It cannot, in other words, unless it has use value, it cannot have exchange value. 66 00:06:38.120 --> 00:06:44.120 But it is not sufficient for a commodity to have use value to have exchange value. 67 00:06:44.120 --> 00:06:54.120 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. 68 00:06:54.120 --> 00:07:00.120 He argues that use values of a qualitative and diverse nature and therefore cannot be compared. 69 00:07:00.120 --> 00:07:05.120 There is no common denominator from which one can look at them and evaluate them. 70 00:07:05.120 --> 00:07:13.120 One has to look for what is it that commodities have in common other than their quality of being useful 71 00:07:13.120 --> 00:07:15.120 Because uses are so diverse. 72 00:07:15.120 --> 00:07:18.120 He therefore says we have to look beneath it 73 00:07:18.120 --> 00:07:23.120 and to ask what quality do all commodities have in common 74 00:07:23.120 --> 00:07:27.120 other than the diversity of their uses. 75 00:07:27.120 --> 00:07:30.120 And he says the quality that they share in common 76 00:07:30.120 --> 00:07:33.120 is a quantitative dimension. 77 00:07:33.120 --> 00:07:36.120 And that is they all share the common attribute 78 00:07:36.120 --> 00:07:39.120 that they are produced by labor. 79 00:07:39.120 --> 00:07:42.120 He therefore argues that one has to reduce 80 00:07:42.120 --> 00:07:53.120 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. 81 00:07:53.120 --> 00:08:09.120 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. 82 00:08:09.120 --> 00:08:22.120 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. 83 00:08:22.120 --> 00:08:34.120 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, 84 00:08:34.120 --> 00:08:40.360 We need to strip away the concrete types of labor that go into their production, 85 00:08:40.360 --> 00:08:47.640 and to understand labor purely as an abstraction, quantities of labor in an abstract form. 86 00:08:47.640 --> 00:08:54.600 And he argues that therefore what determines the value of commodities in their specific forms 87 00:08:54.600 --> 00:09:02.520 are their more generic aspect of having been the product of labor of an abstract type. 88 00:09:02.520 --> 00:09:08.520 Now, how shall one measure the amount of labor that goes into a product, 89 00:09:08.520 --> 00:09:13.520 and therefore to determine what the value of one commodity should be in relation to another? 90 00:09:13.520 --> 00:09:23.520 And Marx argues that measurement should be the duration of labor time entering into its production. 91 00:09:23.520 --> 00:09:31.520 But however, he then emphasizes that it is not going to be a conception of concrete labor time, 92 00:09:31.520 --> 00:09:35.520 But a thing that he calls socially necessary labor. 93 00:09:35.520 --> 00:09:41.520 That is, labor necessary to produce an article under normal conditions of production, 94 00:09:41.520 --> 00:09:46.520 an average degree of skill and intensity prevalent at the time. 95 00:09:46.520 --> 00:09:55.520 It is this value set as an average sampling of the class that determines what shall be the measurement of labor. 96 00:09:55.520 --> 00:10:09.520 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. 97 00:10:09.520 --> 00:10:14.520 Well, what does one do with the fact that there seems to be a great diversity of types and qualities of labor? 98 00:10:14.520 --> 00:10:18.520 That is, simple labor and complex labor, skilled labor and unskilled labor. 99 00:10:18.520 --> 00:10:22.920 Labor. And Marx argues that that is not a difficult matter. One merely has to 100 00:10:22.920 --> 00:10:27.700 realize that skilled labor is a multiple of simple labor, such as a doctor is ten 101 00:10:27.700 --> 00:10:37.480 times the the labor of a simple worker digging a ditch. Now Marx argues is that 102 00:10:37.480 --> 00:10:42.040 with these basic concepts one can understand that on the basis of socially 103 00:10:42.040 --> 00:10:48.320 necessary labor that the amount of the value of a skilled professional is 104 00:10:48.320 --> 00:10:52.320 is merely a multiple of unskilled labor of this more abstract type 105 00:10:52.320 --> 00:10:56.320 that one should easily see that individuals would trade and exchange commodities 106 00:10:56.320 --> 00:10:59.320 in terms of their labor values. 107 00:10:59.320 --> 00:11:03.320 But this then brings him to his notion of the relationship between the worker 108 00:11:03.320 --> 00:11:07.320 and the social system in which he resides. 109 00:11:07.320 --> 00:11:12.320 Because he then makes a distinction between necessary labor and surplus labor. 110 00:11:12.320 --> 00:11:16.320 Necessary labor is the amount of time duration 111 00:11:16.320 --> 00:11:29.320 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. 112 00:11:29.320 --> 00:11:34.320 Necessary labor is therefore enough worker to be able to maintain oneself. 113 00:11:34.320 --> 00:11:45.320 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. 114 00:11:45.320 --> 00:11:50.840 This conception of the amount of labor necessary just to maintain yourself, and extra labor 115 00:11:50.840 --> 00:11:55.600 during a day beyond that, that would go in excess of that amount in terms of products 116 00:11:55.600 --> 00:12:02.240 made or value of products made, that reaches, takes marks to his conception of exploitation. 117 00:12:02.240 --> 00:12:06.400 Because he argues that under capitalism the workers do not have direct access to the means 118 00:12:06.400 --> 00:12:10.400 of production that they require to be able to produce the products necessary for their 119 00:12:10.400 --> 00:12:11.400 own survival. 120 00:12:11.400 --> 00:12:26.400 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. 121 00:12:26.400 --> 00:12:31.400 And here enters Marx's conception of exploitation. 122 00:12:31.400 --> 00:12:37.160 Because he argues is that the capitalist by having this monopoly control over the means of production 123 00:12:37.160 --> 00:12:40.680 has the capacity to force the worker, 124 00:12:40.680 --> 00:12:45.000 one presumes by threatening denial of access to the means of production, 125 00:12:45.000 --> 00:12:50.040 has the capacity to force the worker to work more hours for him 126 00:12:50.040 --> 00:12:53.720 than would be necessary just to produce product or value of product 127 00:12:53.720 --> 00:12:59.720 sufficient to maintain himself but not pay the individual for that surplus. 128 00:12:59.720 --> 00:13:04.800 In other words, the worker is only paid a value equivalent to his subsistence, 129 00:13:04.800 --> 00:13:10.120 and the excess is then garnished by the capitalist owner of the means of production. 130 00:13:10.120 --> 00:13:14.200 Thus Marx argued through this method the worker is exploited. 131 00:13:14.200 --> 00:13:18.400 He only receives a fraction of that which he has produced. 132 00:13:18.400 --> 00:13:26.760 The mere ownership of property gives the owner property the opportunity to live without effort, 133 00:13:26.760 --> 00:13:29.760 and, therefore, the injustice of the system. 134 00:13:32.760 --> 00:13:39.760 Now, Marx then tries to analyze the workings of the economic system. 135 00:13:39.760 --> 00:13:45.760 And he argues that, on the one hand, based upon his labor theory of value, 136 00:13:45.760 --> 00:13:49.760 commodities should exchange based upon their labor values. 137 00:13:49.760 --> 00:13:54.760 But what he notices is that in the market, this is not always the case. 138 00:13:54.760 --> 00:13:59.760 In fact, generally in the capitalist economy, this is not always the case. 139 00:13:59.760 --> 00:14:09.760 And he also notices is that commodities do not exchange in terms of their percentages of surplus values, 140 00:14:09.760 --> 00:14:12.760 but through an equality of the rate of profit. 141 00:14:12.760 --> 00:14:15.760 And this is seen as an anomaly also. And why? 142 00:14:15.760 --> 00:14:22.760 Because Marx says is that there is two aspects of the capital that a producer or a capitalist uses. 143 00:14:22.760 --> 00:14:25.760 There is what he calls constant capital and variable capital. 144 00:14:25.760 --> 00:14:32.760 Constant capital is merely the amount of capital equipment that the capitalist has purchased from other producers. 145 00:14:32.760 --> 00:14:42.760 Variable capital is the amount of labor that he employs to work with that capital equipment in a particular productive endeavor. 146 00:14:42.760 --> 00:14:47.760 Now Marx argues that for the constant capital he pays its full value. 147 00:14:47.760 --> 00:14:49.320 Why does he pay his full value? 148 00:14:49.320 --> 00:14:52.880 Because commodities are expected to trade at their full value. 149 00:14:52.880 --> 00:14:56.480 He is a producer, has bought equipment from some other capitalist. 150 00:14:56.480 --> 00:14:59.440 That other capitalist has exploited his workers, 151 00:14:59.440 --> 00:15:03.400 but that other capitalist, in fact, charges the other capitalist the full value, 152 00:15:03.400 --> 00:15:05.080 labor value of the product, 153 00:15:05.080 --> 00:15:08.640 and therefore there is no exploitive gain from the capital purchase, 154 00:15:08.640 --> 00:15:11.080 capital equipment purchase from other capitalists. 155 00:15:11.080 --> 00:15:14.560 They are really just paid for from their full value. 156 00:15:14.560 --> 00:15:21.360 The only source of surplus value is the workers he hires to work with the capital he is employed, 157 00:15:21.360 --> 00:15:25.680 and garnishing a part of the value of what they have produced. 158 00:15:25.680 --> 00:15:29.040 Now Marx points out that there is an anomaly here, 159 00:15:29.040 --> 00:15:34.240 and that anomaly is that one could imagine a situation 160 00:15:34.240 --> 00:15:41.920 in which many companies or firms in an industry have the same rate of surplus value, 161 00:15:41.920 --> 00:15:47.200 But each of them are experiencing the different rates of profit. 162 00:15:47.200 --> 00:15:53.080 But Marx realizes that in the market, the market tends to equate rates of return. 163 00:15:53.080 --> 00:15:59.320 And therefore, how can this jive with the labor theory of what will determine the value of commodities? 164 00:15:59.320 --> 00:16:06.240 Now, the reason why he argues that there can be different rates of profit 165 00:16:06.240 --> 00:16:08.320 while having the same surplus value, 166 00:16:08.320 --> 00:16:16.840 is because he argues that surplus value is merely a percentage of the amount of excess of one's variable capital invested. 167 00:16:16.840 --> 00:16:25.560 In other words, if a worker's substance is 20 and he produces 40, surplus value is 100%. 168 00:16:25.560 --> 00:16:33.640 But one calculates total profit on investment not on the basis just surplus value, but on all capital invested, constant and variable. 169 00:16:33.640 --> 00:16:36.800 and the larger one's proportion of constant capital, 170 00:16:36.800 --> 00:16:42.000 the smaller one's rate of profit on the total capital investment. 171 00:16:42.000 --> 00:16:44.600 Now, how does Marx attempt to overcome this? 172 00:16:44.600 --> 00:16:48.000 Well, he argues that competition will handle this. 173 00:16:48.000 --> 00:16:54.520 He says that competition will tend to assure that capitalists will shift the types of products they make 174 00:16:54.520 --> 00:16:58.240 and that they will then, by shifting into different lines of production, 175 00:16:58.240 --> 00:17:01.360 assure that there is a common rate of profit. 176 00:17:01.360 --> 00:17:08.560 But how does this jive with his labor theory of value that commodities are to exchange at their labor inputs? 177 00:17:08.560 --> 00:17:14.600 Well, he argues that the market does it by creating what he calls prices of production. 178 00:17:14.600 --> 00:17:19.320 And what he says is that the market will do the following thing. 179 00:17:19.320 --> 00:17:30.120 It will average out the rate of surplus value throughout all sectors of the economy. 180 00:17:30.120 --> 00:17:33.560 When works out an average of what has been constant capital, 181 00:17:33.560 --> 00:17:36.680 when works out what has been an average of surplus capital, 182 00:17:36.680 --> 00:17:43.000 that tells us what is the average rate of surplus profit or surplus value, 183 00:17:43.000 --> 00:17:47.640 and the market will then assure through competition the equating of that. 184 00:17:47.640 --> 00:17:54.280 Now, we'll come back to that when we look at Boehm-Bawerk's criticism. 185 00:17:54.280 --> 00:17:56.920 Now, in a nutshell, now Marx tries to defend this 186 00:17:56.920 --> 00:18:02.400 and present a number of different expositions and numerical examples. 187 00:18:02.400 --> 00:18:04.400 But in a nutshell, that is his explanation. 188 00:18:04.400 --> 00:18:11.680 He argues that labor is the basis of value, commodities based upon labor should exchange 189 00:18:11.680 --> 00:18:13.700 in terms of their labor inputs. 190 00:18:13.700 --> 00:18:17.220 Labor input is measured by socially necessary labor. 191 00:18:17.220 --> 00:18:20.100 Complex labor is reduced to simple labor. 192 00:18:20.100 --> 00:18:25.200 And one then sees in the market a situation where anomalies may occur between the rate 193 00:18:25.200 --> 00:18:31.480 of Surplus Value and the Rate of Profit competition by averaging out the rates of return, guaranteeing 194 00:18:31.480 --> 00:18:42.280 that while not directly commodities exchange at their labor values, they do so indirectly. 195 00:18:42.280 --> 00:18:51.440 Now Boehm-Bawerk approaches this by wanting to take up two criticisms. 196 00:18:51.440 --> 00:18:55.440 One is, does Marx's theory fit with the facts? 197 00:18:55.440 --> 00:19:00.200 And second of all, what is the basis of his theory of value? 198 00:19:00.200 --> 00:19:05.960 And before I discuss this, I want to suggest the different approach that Boehm-Bawerk comes 199 00:19:05.960 --> 00:19:06.960 with that. 200 00:19:06.960 --> 00:19:14.600 Boehm-Bawerk argues in his critique of Marx and in his positive theory of capital in which 201 00:19:14.600 --> 00:19:21.140 he has a long section on value and price, is that there are two starting principles 202 00:19:21.140 --> 00:19:46.140 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. 203 00:19:46.140 --> 00:19:52.140 It is individuals who act, individuals who choose, individuals who decide. 204 00:19:52.140 --> 00:19:58.140 Bavar clearly says that all economic processes begin with man and his purposes. 205 00:19:58.140 --> 00:20:02.140 And it is from man and his purposes that emerge the evaluations of commodities 206 00:20:02.140 --> 00:20:08.140 and their actions that bring about market phenomena. 207 00:20:08.140 --> 00:20:14.140 His second statement is that commodities only have value not only because individuals are the actors, 208 00:20:14.140 --> 00:20:26.140 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. 209 00:20:26.140 --> 00:20:35.140 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. 210 00:20:35.140 --> 00:20:43.140 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. 211 00:20:43.140 --> 00:20:48.420 by the Actor. It is precisely because of the concrete attributes or possibilities 212 00:20:48.420 --> 00:20:53.740 to serve ends that an individual sees in a commodity that he assigns value to it 213 00:20:53.740 --> 00:20:59.280 and wishes to do various productive activities to bring that commodity into 214 00:20:59.280 --> 00:21:04.420 existence. So therefore, von Boehm-Bawerk is saying that we must begin with the 215 00:21:04.420 --> 00:21:09.280 individual, we must begin with his evaluations, and that one can have to 216 00:21:09.280 --> 00:21:14.160 think not in the abstract of use values in general but the specific purpose and 217 00:21:14.160 --> 00:21:20.480 ends in mind for which an individual would want a commodity. Now on the basis 218 00:21:20.480 --> 00:21:25.960 of this Marx then proceeds to look at, von Boehm-Bawerk begins to look at Marx's 219 00:21:25.960 --> 00:21:31.400 theory of value. First of all he says is that Marx has proceeded to try to glean 220 00:21:31.400 --> 00:21:35.600 what is the basis of the value of commodities in a peculiar fashion and 221 00:21:35.600 --> 00:21:40.400 And that peculiar fashion is that he defines commodities precisely in a way 222 00:21:40.400 --> 00:21:43.600 that the only thing that he will be left with in his analysis 223 00:21:43.600 --> 00:21:46.800 is the presumption that only labor can be the common denominator. 224 00:21:46.800 --> 00:21:50.300 For example, Boehm-Bawerk points out that Marx does not discuss 225 00:21:50.300 --> 00:21:53.800 things given to us by nature that have value. 226 00:21:53.800 --> 00:21:58.100 Commodities that cannot be reproduced by labor that have value. 227 00:21:58.100 --> 00:22:02.400 And therefore, Marx guarantees that he will have the result that he wants 228 00:22:02.400 --> 00:22:05.400 precisely because he defines a commodity in a way 229 00:22:05.400 --> 00:22:08.800 that when he reduces all commodities to a common denominator, 230 00:22:08.800 --> 00:22:13.000 the only common denominator that he is left with is that which he is looking for. 231 00:22:18.600 --> 00:22:26.200 He also argues that the same problem exists with the reduction of skilled labor to unskilled labor. 232 00:22:26.700 --> 00:22:30.900 Because Boehm-Bawerk argues that just as one evaluates commodities 233 00:22:30.900 --> 00:22:34.800 in terms of the concrete purposes and usefulnesses they have for the individuals, 234 00:22:34.800 --> 00:22:53.040 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. 235 00:22:53.040 --> 00:22:59.440 There is also a reasoning in a circle, von Boehm-Bawerk argued, in the same way here. 236 00:22:59.440 --> 00:23:05.360 Because Marx says that skilled labor is merely a multiple of unskilled labor. 237 00:23:05.360 --> 00:23:07.280 And how does Marx attempt to show that? 238 00:23:07.280 --> 00:23:13.280 Well, he says, look, in the marketplace, skilled labor is offered a wage or a price, 239 00:23:13.280 --> 00:23:15.760 many times the value of an unskilled labor. 240 00:23:15.760 --> 00:23:19.840 And therefore, the fact that skilled labor is given in terms of its market value, 241 00:23:19.840 --> 00:23:25.940 a multiple of unskilled labor demonstrates that skilled labor is merely a multiple of unskilled labor. 242 00:23:25.940 --> 00:23:30.340 In other words, he presumes that which he is to prove. 243 00:23:30.340 --> 00:23:36.240 Rather than trying to show how one multiplies unskilled labor into skilled labor, 244 00:23:36.240 --> 00:23:43.340 and then derive an analysis that shows why the market then generates these differences in remuneration, 245 00:23:43.340 --> 00:23:47.340 he argues that the evidence that there are differences in remuneration, 246 00:23:47.340 --> 00:23:52.340 and how much the differences of remuneration are, demonstrates that his premise is correct. 247 00:23:59.340 --> 00:24:09.340 Now, Boehm-Bawerk argues in contrast to Marx's analysis of the discrepancy between his theory of value and surplus value 248 00:24:09.340 --> 00:24:14.340 and a tendency for rates of profit to be equalized in the following way. 249 00:24:14.340 --> 00:24:20.340 And that is, he says that Marx suffers from methodological holism. 250 00:24:20.340 --> 00:24:28.340 And Marx suffers from treating an abstract concept that is a construction of Marx's own mind, 251 00:24:28.340 --> 00:24:34.340 as if it is an expression and a theoretical framework to understand the real world. 252 00:24:34.340 --> 00:24:36.340 Now, why does Boehm-Bawerk argue that? 253 00:24:36.340 --> 00:24:43.340 Because Boehm-Bawerk explains that when Marx attempts to explain the equality of rates of profit across industries, 254 00:24:43.340 --> 00:24:48.620 Mark says, well let us imagine that the economy was a single firm and we're 255 00:24:48.620 --> 00:24:55.340 averaging out the amount of return each division has individually owned 256 00:24:55.340 --> 00:25:00.140 and then working out the average from all the individual divisions we're then 257 00:25:00.140 --> 00:25:04.220 going to disperse them in equal proportions back to the divisions of our 258 00:25:04.220 --> 00:25:09.640 economy and that therefore we will equalize the amount of return each sector 259 00:25:09.640 --> 00:25:13.080 receives through this conception. 260 00:25:13.080 --> 00:25:17.120 Well, Boehm-Bawerk's response is that the economy is not a single unit. 261 00:25:17.120 --> 00:25:19.720 He argues that there is no relationship 262 00:25:19.720 --> 00:25:22.640 between the actions of the individual parts 263 00:25:22.640 --> 00:25:26.400 and treating them as if the economy was a single firm that a planner then 264 00:25:26.400 --> 00:25:29.920 determines how much each division has earned, works out an average, 265 00:25:29.920 --> 00:25:34.360 and then redisperses that average among the component parts. 266 00:25:34.360 --> 00:25:38.360 And that rather than explaining how competition would equate the rates 267 00:25:38.360 --> 00:25:43.040 of Profit Among Sectors of the Economy, Marx has created out of his own mind a construction 268 00:25:43.040 --> 00:25:48.440 of how an economy could work if it was an economy that was going to function in a manner 269 00:25:48.440 --> 00:25:53.880 that Marx wanted, but that it is not a theory of how real economies function, but rather 270 00:25:53.880 --> 00:25:58.080 is a construction of his mind in which he treats the economy as a whole. 271 00:25:58.080 --> 00:26:03.800 It is not a theory of how competition and individuals have incentives to act and respond 272 00:26:03.800 --> 00:26:12.800 and shift resources in various ways, but is a construction that Marx has created to reach the conclusion that he desires. 273 00:26:12.800 --> 00:26:27.480 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. 274 00:26:27.480 --> 00:26:36.880 And that is to start with that approach that is open to any individual who wishes to understand the workings of market processes. 275 00:26:36.880 --> 00:26:46.080 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 276 00:26:46.080 --> 00:26:50.920 and opportunities that exist before him in responding to those opportunities. 277 00:26:50.920 --> 00:26:53.760 Boehm-Bawerk argues, using the older terminology, 278 00:26:53.760 --> 00:26:59.360 each individual who is a social analyst has the opportunity to follow the psychological method. 279 00:26:59.360 --> 00:27:03.420 That is, to imagine and reflect in your own mind what you would do 280 00:27:03.420 --> 00:27:09.320 confronted with constraints of means, ends desired and profit opportunities before you. 281 00:27:09.320 --> 00:27:15.280 And he argues that that is the only theoretical and sound basis from whence one can construct 282 00:27:15.280 --> 00:27:22.000 a theory of market response, equality of returns through sectors of the economy, 283 00:27:22.000 --> 00:27:27.400 adjustments and redistributions of resources among sectors of the economy, 284 00:27:27.400 --> 00:27:31.640 and yet that is the very method that Marx turns against. 285 00:27:31.640 --> 00:27:38.760 Because like the classical economist, Marx chose to treat demand as an element that obviously could not be ignored, 286 00:27:38.760 --> 00:27:43.520 but was put in appendix not to be dealt with in any great detail. 287 00:27:45.280 --> 00:27:55.280 And finally, Boehm-Bawerk argues that what Marx has confused is profit and interest. 288 00:27:55.280 --> 00:28:00.280 What Marx has confused is that which is transitory and that which is permanent. 289 00:28:00.280 --> 00:28:12.280 Marx asked the question, how can it be that a producer hires a set of workers, pays them one price, 290 00:28:12.280 --> 00:28:25.280 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. 291 00:28:25.280 --> 00:28:41.280 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? 292 00:28:41.280 --> 00:28:51.280 Basically, what Boehm-Bawerk argues is that Marx has left out an ingredient that is essential, inseparable from all human decision making, 293 00:28:51.280 --> 00:28:55.280 and that is the element and evaluation of time. 294 00:28:55.280 --> 00:29:03.280 That there is a difference in the evaluation and estimate of things in the present and things in the future. 295 00:29:03.280 --> 00:29:15.280 that the worker is receiving present goods in exchange for working on commodities that reflect future goods. 296 00:29:15.280 --> 00:29:24.280 The employer is advancing the worker commodities in the present rather than the workers working up products themselves 297 00:29:24.280 --> 00:29:32.280 or deferring their receipt of payment until the product is ready in its finished form at some point in the future. 298 00:29:32.280 --> 00:29:39.280 that in fact what the worker and the employer are doing is making an inter-temporal exchange 299 00:29:39.280 --> 00:29:45.280 that the worker chooses not to wait either in making the product himself for sale 300 00:29:45.280 --> 00:29:50.280 or to make the product and wait till it's sold later by the entrepreneur for payment 301 00:29:50.280 --> 00:29:58.280 that he is willing to work now for payment now at a price less than the product will sell for in the future 302 00:29:58.280 --> 00:30:07.280 And in turn the employer is willing to advance commodities for the worker's sustenance in the present 303 00:30:07.280 --> 00:30:12.280 with the understanding that the employer has the opportunity to sell that product in the future 304 00:30:12.280 --> 00:30:19.280 at a price that reflects the remuneration that is due for having foregone the use of commodities and income in the present 305 00:30:19.280 --> 00:30:21.280 that he has forwarded to those workers. 306 00:30:21.280 --> 00:30:24.720 What Boehm-Bawerk argues is that profit is transitory. 307 00:30:24.720 --> 00:30:31.040 It is that which arises out of changing market conditions, but which competition has as its 308 00:30:31.040 --> 00:30:40.120 purpose to compete away, but that interest is inseparable from the market itself. 309 00:30:40.120 --> 00:30:44.880 Interest is not a transitory element, but is a price, like any other price. 310 00:30:44.880 --> 00:30:48.260 Its uniqueness is that it is the price of time. 311 00:30:48.260 --> 00:30:52.940 It is not the price of apples in the present versus pears in the present, but apples in 312 00:30:52.940 --> 00:30:56.220 the present versus apples in the future. 313 00:30:56.220 --> 00:31:01.640 Pears in the present versus pears in the future, but it is an exchange across time, and therefore 314 00:31:01.640 --> 00:31:08.940 one cannot do away with the discounting of the value of the laborer's product unless 315 00:31:08.940 --> 00:31:16.420 one wishes to say that time and the evaluation of time is no longer inherently an element 316 00:31:16.420 --> 00:31:21.820 in the Judgment of All Actors in the Market, because as Boehm-Bawerk clearly explains is 317 00:31:21.820 --> 00:31:26.900 that all action is forward-looking, it is prospective, it is a judgment concerning the 318 00:31:26.900 --> 00:31:56.780 in the judgment of all actors in the market. 319 00:31:56.900 --> 00:32:01.860 Because as Boehm-Bawerk clearly explains is that all action is forward-looking. 320 00:32:01.860 --> 00:32:03.080 It is prospective. 321 00:32:03.080 --> 00:32:19.020 It is a judgment concerning the future in relation to today. 322 00:32:19.020 --> 00:32:25.540 Now I would like to suggest that no one has surpassed Boehm-Bawerk's criticism. 323 00:32:25.540 --> 00:32:31.500 The apologists and proponents of Marxism have attempted to get around these issues. 324 00:32:31.500 --> 00:32:34.300 They've argued, well, Marx really didn't mean this. 325 00:32:34.300 --> 00:32:37.900 He wasn't attempting really to explain the exchange values in the market. 326 00:32:37.900 --> 00:32:43.140 He had other purposes for the labor theory of value. 327 00:32:43.140 --> 00:32:47.820 But you can't get around the fact that Marx says in Capital itself that for all the other 328 00:32:47.820 --> 00:32:54.540 purposes that he wishes to develop a labor theory and have labor as a basis of understanding 329 00:32:54.540 --> 00:32:59.420 Understanding the Value of Commodities, one of its functions is to enable an understanding 330 00:32:59.420 --> 00:33:04.700 and an explanation of what determines the relative prices in an economy. 331 00:33:04.700 --> 00:33:12.820 And once you appreciate Boehm-Bawerk's criticism of Marx's conception of how competition works, 332 00:33:12.820 --> 00:33:18.540 and that that is not the nature of competition or market processes, then one has to realize 333 00:33:18.540 --> 00:33:25.740 realizes that in fact Marx has given no theory of how prices and exchange ratios emerge in the market 334 00:33:25.740 --> 00:33:31.700 on the basis of his own theory of value, and that in fact once one critically evaluates 335 00:33:31.700 --> 00:33:38.540 of how Marx rigs the argument to assure that the only thing left in a commodity is labor 336 00:33:38.540 --> 00:33:44.140 as a common denominator, and realizes that it is a false universal principle because 337 00:33:44.140 --> 00:33:50.180 Because it is not universal at all, one realizes that there are many bases and different bases 338 00:33:50.180 --> 00:33:53.500 upon which one can say commodities of value. 339 00:33:53.500 --> 00:33:57.060 And of course, von Boehm-Bawerk's own on the Austrian School that value originates through 340 00:33:57.060 --> 00:34:02.980 relationship of ends, desires and means to apply to which they can be applied to them 341 00:34:02.980 --> 00:34:11.060 that are scarce in terms of ends, desires. 342 00:34:11.060 --> 00:34:17.660 The Austrians have fought two battles, two battles with the socialists, and the result 343 00:34:17.660 --> 00:34:24.060 of those two battles is that for all intents and purposes, socialism and Marxism is dead. 344 00:34:24.060 --> 00:34:29.060 A hundred years ago, von Boehm-Bawerk was able to show that Marx's theory of value 345 00:34:29.060 --> 00:34:35.300 was inherently flawed, inherently inconsistent, and was not the avenue to understand either 346 00:34:35.300 --> 00:34:39.740 the value of commodities or the nature of the market process. 347 00:34:39.740 --> 00:34:46.620 And in the 20th century, that criticism was completed by Ludwig von Mises. 348 00:34:46.620 --> 00:34:51.340 And Mises recognizes that he is starting where Boehm-Bawerk left off. 349 00:34:51.340 --> 00:34:56.780 Because if you read Mises' socialism, while he briefly talks about problems with the labor 350 00:34:56.780 --> 00:35:00.380 theory of value, he doesn't devote much time to it. 351 00:35:00.380 --> 00:35:05.540 Because he realizes that Boehm-Bawerk had settled one level of the debate. 352 00:35:05.540 --> 00:35:14.540 Mises was to show that once you eliminate other elements of a market economy, it is impossible for that economy to function. 353 00:35:14.540 --> 00:35:22.540 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. 354 00:35:22.540 --> 00:35:30.540 If anything was clear in most people's minds, it was that planning was the economic system of the future. 355 00:35:30.540 --> 00:35:39.540 If anything was obviously inevitable to people at the beginning of this century, it was that capitalism was going to die. 356 00:35:39.540 --> 00:35:47.540 That capitalism was undesirable because it was exploitive, that capitalism was inefficient and wasteful, 357 00:35:47.540 --> 00:35:53.540 and that planning was a method to achieve all the things that we supposedly admired capitalism for, 358 00:35:53.540 --> 00:35:58.540 but with none of its abuses, exploitation, waste or inefficiencies. 359 00:35:58.540 --> 00:36:08.540 We end the 20th century with socialism being nothing more than a bad taste in people's mouths. 360 00:36:08.540 --> 00:36:12.540 And I would like to suggest that we leave the 20th century, 361 00:36:12.540 --> 00:36:20.540 a hundred years after the arrival of the Austrian School on the international scene of economic ideas, 362 00:36:20.540 --> 00:36:27.540 because of what Boehm-Bawerk first did at the end of the 19th century and Mises completed in the early part of the 20th. 363 00:36:27.540 --> 00:36:34.540 because there is no value other than that which resides in an individual evaluating commodities 364 00:36:34.540 --> 00:36:42.540 and there is no way for those values that interact in an economy to be reflected for people to use for their economizing purposes 365 00:36:42.540 --> 00:36:45.540 without prices and markets 366 00:36:45.540 --> 00:36:54.540 and that means that the 21st century, hopefully, will be a century in which the Austrian School stands as the school, 367 00:36:54.540 --> 00:37:02.540 The Austrian School, the dominant school of economics, because the Austrian School will have refuted all the economics of this century. 368 00:37:02.540 --> 00:37:03.540 Thank you very much.