On Value: Part 2, The Subjective Theory vs The Labor Theory
Mutualism Co-op Note: The following is the second transcript of a three part YouTube video series on Value Theory, created by @tak_kakYT. Part One explores the the Labor Theory of Value, Part Two reviews the Subjective Theory of Value as compared to the LTV, and Part Three will cover Mutualist and Individualist insights on the topic. Subscribe to Hades’ YouTube channel here.
PART 2: The Subjective Theory and its Critiques
Hello, this is Part two of my inquiry into Value Theory, so check out Part 1 if you are unfamiliar with the Labor Theory of Value. In this video I will presume you understand the basics of the Labor Theory and its implications. With that out of the way, let us explore the Subjective Theory of Value and its critiques of the Labor Theorists.
Section IV – The Subjective Theory of Value
§1 – Overview
The Subjective Theory of Value is set up by the Austrians as the opposing theory. It was formulated independently around the same time by three different economists but the one we will be concerned with is Carl Menger. Although we will limit our focus on Menger for the sake of brevity, we focus on him because Menger is foundational for the Austrian School, for Ludwig von Mises wrote: “What is known as the Austrian School of Economics started in 1871 when Carl Menger published a slender volume under the title Principles of Economics" [source]. The Subjective Theory of Value bases a good’s value on a person’s dependency on its capacity to satisfy needs and provide utility, and we are taking for granted people are acting in self-interest when we look at this in the economy. These idealized rational agents are what Menger calls “economizing individuals”. The Subjective Theory is unique, in that the “value” of a good varies with the individual, and prices form incidentally from an individual’s valuation of goods’ and their exchanges.
§2 – Carl Menger: Value
Value, for Menger, works only on goods of an economic character. So, we must first establish what types of things value acts on. For something to be a good, it must be known to and be capable of satisfying some human desire. (pg 52) A good gains an economic character “wherever men recognize that the requirements for [said] good are greater than its available quantity ...” (pg 95), and when economizing individuals realize this, they begin to realize that some of those requirements are not going to be satisfied by the available quantity of goods present. This realization, says Menger, results in four objectives for economizing individuals.
1. “[T]o maintain at their disposal every unit of [the] good standing in this
quantitative relationship ...”
2. “[T]o conserve [the good’s] useful properties.”
3. “[T]o make a choice between their more important needs, which they will satisfy
with the available quantity of the good in question, and needs that they must leave
unsatisfied to obtain the greatest possible result with a given quantity of the good
...”
4. “[T]o direct the quantities of consumers’ goods available to them, and
particularly the available quantities of the means of production, to the satisfaction
of their needs in the most appropriate manner ...” [Carl Menger, Principles of
Economics] (pg 95)
Non-economic goods, such as air and sunlight, do not result in these objectives, as they have a dramatic overabundance compared to our demand. The characterization of goods as economic and non-economic varies with an individual’s desires and the relative access to such goods, as freshwater may be non-economic to people near a lake but would become economic to those stranded in a desert. The source of the economic character of a good is intrinsic to Menger’s account of value, “[for] goods subject to the quantitative relationship responsible for non-economic character cannot attain value at all” (pg 116), as he explains: “[Economic] goods attain for them the significance we call value. Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. The value of goods, accordingly, is a phenomenon that springs from the same source as the economic character of goods—that is, from the relationship, explained earlier, between requirements for and available quantities of goods.” [Carl Menger, Principles of Economics] (pg 115). We value goods because we are dependent on them to satisfy our needs and desires, and so, if we have a great surplus above our needs and desires, destroying part of that surplus is not going to result in any loss of ability to satisfy any wants, and thus, an individual unit of those goods are valueless due to their non-economic character. “Value”, for Menger, is thus said to be entirely subjective for individuals based on the importance of our desires that they satisfy. Therefore, “the differences we observe in the magnitude of value of different goods in actual life can only be founded on differences in the magnitude of importance of the satisfactions that depend on our command of these goods.” (pg 122). These differences boil down into two variables, what he calls a Subjective and an Objective factor. The Subjective factor is the difference in the importance that different satisfactions have to us. To illustrate how this plays into our valuation of goods, we may use this table to see how one might evaluate different satisfactions. Suppose, purely for the sake of demonstration, that the most important needs are represented by a “10”, and they diminish into irrelevance at “0”. As we can see, a person’s hunger might be the need that is most prioritized, and so food is going to be the most valuable to them at that point in time. If they satisfy this need to a point where more food would give them a satisfaction of “5”, then this person may find it more gratifying to satisfy some other need instead. Perhaps they would find drinking or smoking to be the next most satisfying activity. Point is, goods can attain different values depending on how much they are valued based on the importance of satisfaction they can provide. The Objective factor is which need is ultimately dependent on our command of a particular good, or what Menger shows us now, is how we subjectively value quantities of goods. As we have just seen, we must consider that we will have satisfactions of varying importance. To see how having a fungible quantity of goods impacts their value, let us consider an example, consider a farmer who grew an excess of grain, and now has to decide how to allocate his resources. “The farmer is, therefore, dependent upon the grain in his possession for satisfactions of very different degrees of importance. At first he secures with it his own and his family’s lives, and then his own and his family’s health. Beyond this, he secures with it the uninterrupted operation of his farm, an important foundation of his continuing welfare. Finally, he employs a portion of his grain for purposes of pleasure, and in so doing is again employing his grain for purposes that are of very different degrees of importance to him.” [Carl Menger, Principles of Economics] (pg 130). So we will find that given a quantity of grain, this farmer will allocate the grain chiefly to more important needs and then will allocate grain to less urgent desires. As a sum total, the value of the grain to the farmer would therefore be equal to all the desires it satisfies for the farmer, but what if we were only to consider the value of a portion of the sum? It is evident by the same reason that the value of the whole quantity of grain is equal to all the desires that depend on the command of those goods, a portion of that whole’s value will depend on the least important desires it satisfies. So, for example, if we take away some grain from the farmer’s surplus, he will have to choose which desires to satisfy. Since he finds his and his family’s hunger and health to be of utmost priority, he will first allocate grain for their food. He would then satiate his desires of descending importance, until we will find that he cannot satisfy a desire of least importance previously satisfied by that portion of grain we have taken away. The utility of these least important desires, now unsatisfied, are therefore equal in value to that portion of the whole amount of grain, since these wants are what depend on that portion of grain specifically. The utility of the satisfaction of this least important desire in the context of the whole is what is termed that portion of grain’s “marginal utility”. The same portion of grain within the context of a larger and larger stock of grain would thus have lower and lower value, and this is called the “Law of Diminishing Marginal Utility”. As for the types of goods being valued, they can differ quantitatively and qualitatively in ways that affect their value. A good may differ quantitatively in a simple multiplication of its properties, like containing twice as much energy or being twice as durable. A good may also qualitatively satisfy different desires, such as one food tasting spicy while another tastes sour. A spicy food is no substitute for a food satisfying our desire for sourness and does not represent a multiplication or division of its properties. The spicy food satisfies a distinct hankering than sour food does, and thus it is qualitatively valued differently based on the importance of such desire comparatively. Goods must come from somewhere, and they often come from the means of production. So, what determines the value of capital or our instruments of production? Menger calls goods that are used to produce others for more immediate consumption “higher order goods”. Since higher order goods are used to make the goods that actually fulfill our wants, Menger concludes: “[That] it is evident that the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve. The existence of our requirements for goods of higher order is dependent upon the goods they serve to produce having expected economic character and hence expected value.“ [Carl Menger, Principles of Economics] (pg 150) So essentially, the value of the inputs into production are going to be equal to the prospective value of the products. Goods of a higher order are one part of this, but he believes that the services of capital and the entrepreneurial activity not yet performed also needs to be taken into account. This is why Menger concludes that the present value of capital is lower than that of the prospective products in the future.
§3 – Carl Menger: Price
By placing his theory on a subjective basis, Menger also sees exchange and prices originating from the subjective valuation of goods. Trade happens when someone else’s goods are valued more highly than your own and vice versa. Trade essentially increases the value of your own lot, and trade ceases to happen when nothing more is gained in the exchange by one or all parties. Prices, says Menger, are “are only incidental manifestations of these activities.” (pg191) It is wrong that exchanges are considered as equivalents, since as we have understood with the subjective account of value that different people value goods differently. Put simply, both parties increase the value of their stock in an exchange. On equilibrium in regards to value, the Austrians, from Menger onward, have actually denied the existence of this special equilibrium price. Every price for them was seen as an equilibrium price. “[T]he prices of goods are symptoms of an economic equilibrium in the distribution of possessions between the economies of individuals” [Carl Menger, Principles of Economics]. This perspective would live on for the following Mengerists, such as Eugen von Böhm-Bawerk, who we will discuss soon. This is part of the radical skepticism that Austrians have in terms of a special equilibrium price. Prices form in trade when people exchange goods. When they evaluate both their stocks, one trader will have a minimum and a maximum of their own goods that they are willing to trade for another’s based on their respective marginal utilities. Where these minimum and maximums overlap between the two parties is where the price will be, and if bargaining power is equal, we can expect it to fall in the middle of these, although it might not play out like that in real exchanges. The price may fall anywhere between the minimums and maximums of the traders depending on their bargaining power and skill. If there is no overlap, no trade will be made. Under monopoly, a good may be traded by the monopolist to the highest bidder(s), which are the people who subjectively value their good highest, so the monopolist may reap maximum gains from the exchange. The monopolist may even have the luxury to withhold parts of his supply from coming to market simply because the scarcity will produce higher gains from exchanges. Although, under competition, this cannot happen, since one seller destroying parts of their stock will only produce those immediate benefits for their competitors. Competition can lower prices because it can introduce greater amounts of a good to market and undercut the artificial rise of prices under monopoly. “When there is no natural limitation to the means of production, this means that more and more classes of society are able to consume the commodity at falling prices, and that the provisioning of society in general becomes ever more complete.” [Carl Menger, Principles of Economics] (pg 224).
Section V – Critiques of the Labor Theory
§1 – Overview and Context
Upon discussing what these Theories of Value have to say, we will now dissect the criticisms Subjectivists over the years have levied against the Labor Theory of Value. In responding to critics I will treat the labor theories as synonymous for my answers unless I explicitly treat varying doctrines differently.
§2 – Mudpies
There are many variations on this argument, but the essential critique is that just because we labor to produce something, doesn’t make it valuable. This was one of Menger’s arguments in asserting the universal validity of his Subjective Theory of Value, as he says: “Goods on which much labor has been expended often have no value, while others, on which little or no labor was expended, have a very high value. Goods on which much labor was expended and others on which little or no labor was expended are often of equal value to economizing men. The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good.” [Carl Menger, Principles of Economics, pg 146-147]. For Menger, the exchange-value of our means of production can only tell us whether those means were efficiently utilized. The costs associated with production, in this case labor, have no effect on a good’s value, since we may produce goods of little worth with large amounts of labor. This is a staple among Capitalist arguments and has been regurgitated, for a lack of a better term, innumerable times. Most commonly this is known as the “mud-pie” argument. The elephant in the room that must be dealt with is the linguistic divide that persists to this day over what the hell “value” is signifying. As we have seen, for Menger, “value” means: “the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs”, and the Classicals made it clear that: “The word Value, when used without adjunct, always means, in political economy, value in exchange.” [John Stuart Mill, Principles of Political Economy] Even for Labor Theorists, though, the usage of “value” was varied, and while Marx used it generally to mean a sort of equilibrium price of commodities, Ricardo used it to refer to prices in general. It is important to make mention of these facts, since this divide still persists in modern discourse between Socialists and Capitalists. If we are to consider the “value” Menger means—the dependency on a good which gives us satisfaction—then he is correct, but this does not show the error of the Labor Theory of Value. The Labor Theorists were no stranger to the knowledge that before an object has value it must first have some utility, or at least be expected by the consumer to give utility. Labor becomes valuable because we depend on that labor to produce objects of desire. Ricardo states explicitly in the very first paragraph of Principles that: “Utility then is not the measure of exchangeable value, although it is absolutely essential to it. If a commodity were in no way useful, - in other words, if it could in no way contribute to our gratification, - it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labor might be necessary to procure it.” [David Ricardo, On the Principles of Political Economy and Taxation]. Further Ricardians made this explicitly clear as well, John Stuart Mill notes: “That a thing may have any value in exchange ... [i]t must be of some use; that is ..., it must conduce to some purpose, satisfy some desire. No one will pay a price, or part with anything which serves some of his purposes, to obtain a thing which serves none of them.” [John Stuart Mill, Principles of Political Economy] Marx’s Labor Theory of Value similarly wouldn’t recognize useless objects as being valuable, since a commodity, the object which the Labor Theory applies, is defined in Capital, on the very first page, as: “A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another.” [Karl Marx, Capital] As Marx further explains: “In order to produce [a commodity], [one] must not only produce use values, but use values for others, social use values. ... To become a commodity a product must be transferred to another, whom it will serve as a use value, by means of an exchange.) ... [N]othing can have value, without being an object of utility. If the thing is useless, so is the labor contained in it; the labor does not count as labor, and therefore creates no value.” [Karl Marx, Capital] So, in conclusion, utility is essential for something to attain value in both the Subjective and Labor Theories of Value. If it seems like I was harping on this point, it is because I am. This argument isn’t so much an argument as a flagrantly insipid rhetorical strategy to strawman the Labor Theorists and shut down any productive conversation. No one should be making this so-called “argument”. If Subjectivists want to destroy the Labor and Cost Theories, this argument isn’t the one.
§3 – Mysticism
Part of Menger’s proto-Mudpie argument is that neither the means of production nor labor expended necessarily imbue its product with a correlative value. The point being that consumers don’t care about the labor necessary to produce a commodity. “Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value.” [Carl Menger, Principles of Economics, pg 146]. Menger’s point is fine in a vacuum, but it is wrong when we compare it to the Labor Theory of Value. Laboring to produce a diamond does not mystically imbue it with value. It is that the diamond has some necessary difficulty to attain it, which represents either a scarce and fixed supply or the labor necessary for its production. “[A] thing must not only have some utility, [but] there must also be some difficulty in its attainment [for it to have value].” [John Stuart Mill, Principles of Political Economy] This is actually a point that is central to Menger’s own doctrine. Goods that we depend on for utility must be scarce to attain value for the Subjectivists. The difference is that Labor Theorists explicitly maintain that this difficulty is represented by labor for reproducible commodities, which make up the bulk of goods circulating in the market. To retort to Menger’s strawman: It is not the labor expended in any project that mystically imbues its product with a correlative exchange value, it is, as Adam Smith says, that the exchange value of reproducible goods depends on “-the quantities of labor necessary for acquiring [the] objects-” [Adam Smith, Wealth of Nations]. Free competition regulates this, as competing producers are going to reduce labor expended in production to its necessity. This insight lives on in the Classicals and Marx. Therefore, assuming diamonds don’t have an inelastic supply, they are valuable because we require labor; by mining, processing, and transporting them; to adapt supply to demand. Again, a commodity is not going to be brought to market unless the price is expected to cover the costs of bringing it to market, and this is shown through the fluctuations of supply and demand, as diamond miners produce more or less in accordance with their oscillation in their tendency towards the natural price of diamonds—which represents the quantities of labor necessary for said diamonds to be brought to market. For Marx who understands value as the socially necessary labor time, Diamonds still require labor even if by some anomaly someone produces a diamond out of thin air. Taken as an average of the sum total of homogenous labor, a single diamond produced without labor will have virtually no effect on the diamond market as a whole, but the more diamonds produced out of thin air will decrease the exchange value of diamonds as less effort is needed to adapt supply to demand. Likewise, if suddenly conditions change and we need to use the employment of a thousand days labor for a single diamond, the prices of diamonds are going to skyrocket since it takes more socially necessary labor time to produce a diamond to meet its demand, because, if people want diamonds, they are required to pay enough to cover the labor of producing the diamonds for them, because otherwise diamonds are not going to be brought to market. So to sum up, no a consumer does not care about labor inherently, but the consumer does care about the effort required to produce diamonds since they need to cover the effort to produce diamonds for their consumption. Not to mention, when a consumer purchases a commodity, they are paying to save themselves of the necessary toil-and-trouble of producing it. This criticism on the supposed mystical relationship between costs and prices is ultimately unfounded in any actual Cost or Labor Theory of Value.
§4 – The Five Exceptions
Eugen von Böhm-Bawerk was an Austrian Economist coming after Carl Menger. In his critiques of the prevailing theories of Interest and Capital at the time, he began to dissect the Labor Theory of Value. He is really infamous for destroying the Labor Theory. In his critique of Marx he outlines five instances of deviations of the general prices of goods from labor. Before addressing them, it is first pertinent to understand the context of Böhm-Bawerk’s disagreements with the Labor Theorists. It should be noted, that the main theoretical prediction of the Labor Theory of Value—that reproducible goods tend towards being exchanged in ratios according to their necessary costs in labor—are actually affirmed by Böhm-Bawerk, even if begrudgingly, for he says that: “Experience shows that the exchange value of goods stands in proportion to that amount of labor which their production costs only in the case of one class of goods, and even then only approximately." [Eugen von Böhm-Bawerk, Capital and Interest]. So, in essence, what this means is that his Subjectivist critiques are mainly a matter of quibbling over the generality of the cost principle.
§4.1 – Scarce Goods
The first deviation from labor that Böhm-Bawerk uses for his argument are scarce goods with artificially fixed or limited supply, essentially the same goods that Ricardo mentions that derive most of their exchange-value from their scarce supply. As we have seen, these have already been exempted by the Classicals from working on the cost principle, which is that reproducible goods will tend towards being priced at their cost in necessary financial and labor inputs as they approach equilibrium—their natural price. Ricardo has already stated that the twin determinants of price are both labor and scarcity. A good analogy I believe necessary to bring up is Marshall’s Scissors, which was illustrated by Alfred Marshall in his attempt to synthesize Ricardo and the Marginalists. As he famously stated that: “We might as reasonably dispute whether it is the upper or the underblade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production ...” [Alfred Marshall, Principles of Economics: An Introductory Volume]. This is essentially a logical extension of Ricardo’s original twin principles of scarcity and labor as co-determinants of price. It should be noted that Marshall understood the cost of production to represent both labor and waiting, like Mill, and not purely labor. Despite this, it still provides a useful understanding of Ricardo’s twin determinants of value, and the necessity to consider both utility and cost. Returning to Böhm-Bawerk, he understands this, but disputes the generality of the cost principle based on the amount of these goods said to presently exchange on the market. As he says: “If, however, we consider that to this category belongs the whole of the land, and, further, those numerous goods in the production of which patents, copyright, and trade secrets come into play, it will be found that the extent of these ‘exceptions’ is by no means inconsiderable.” [Eugen von Böhm-Böhm-Bawerk, Capital and Interest, pg 384] What Böhm-Bawerk lists is very conspicuous, for many of what he mentions are results of monopolies on the market granted by the State. Monopolies, of course, distort the price of commodities considerably due to the lack of competition, which is one of the fundamental means by which the cost principle is realized. This is understood by the Classical Economists, as Ricardo states that: “Commodities which are monopolized, either by an individual, or by a company, vary according to the law [of cost]: they fall in proportion as the sellers augment their quantity, and rise in proportion to the eagerness of the buyers to purchase them; their price has no necessary connexion with their natural value: but the prices of commodities, which are subject to competition, and whose quantity may be increased in any moderate degree, will ultimately depend, not on the state of demand and supply, but on the increased or diminished cost of their production.” [David Ricardo, On the Principles of Political Economy and Taxation]. The first instance of monopoly which Böhm-Bawerk lists is land, and this monopolization results from the enforcement of land titles that fall beyond one’s actual occupancy-and-use. Much of this property enforced has been created by State fiat as well, further adding to its artificial scarcity. It dramatically limits access to vacant land and decreases competition, which allows the collection of rent from tenants as a non-labor income. A very considerable exception to the cost principle, all things considered. The economic rent of land due to varying richness of soil, location, &c. is another form of scarcity that will likely persist to some extent no matter what, even if reduced, but is still exempted from the cost principle due to scarcity. The other form of monopolies are that of copyright and patents that are enforced by the State, and thus are deviations due to artificially imposed conditions rather than market forces. These grant individuals or companies the ability to reap monopoly profits outside of competition. The Classicals also understood trade secrets as another form of monopoly, even if a very temporary one, as trade secrets generally don’t last long. Therefore, these examples given by Böhm-Bawerk do not give basis for disregarding the Labor Theory of Value, as stated, it only amounts to quibbling over generality. To clarify, when I say exemptions from the cost principle, I do not say so in the sense that the Classicals’ model couldn’t account for them. The reasons for the cost principle being realized are the same reasons why these commodities don’t tend towards necessary labor in production. Both Theories, as we see, rely on and govern supply and demand for the bringing about of prices. The important element of this for the Labor Theory is that producers can adjust supply to meet demand through their effort, which results in the long-term tendency towards an equilibrium price of cost in labor. If we fix supply lower than demand, then this cannot happen, as no more stock can be produced. This is not against the theoretical unity of the Theory per se, as we can see illustrated with Marshall’s Scissors, although utility gives basis for value, cost is the superior principle when acting that levels prices. In these scarce goods, only one blade of the “scissors” is operating, and thus the second blade cannot push its price to cost in the long-run. Nevertheless, we can therefore see that scarcity and monopoly prices flow naturally from the distorted machinations of the cost principle.
§4.2 – Expertise
The second exception that Böhm-Bawerk uses in his criticism of the Labor Theory of Value is the products of skilled labor. These products present an exchange value above that of the products of common labor of the same duration. For he says: “All goods that are produced not by common, but by skilled labor, form an exception. Although in the day's product of a sculptor, a skilled joiner, a violin-maker, an engineer, and so on, no more labor be incorporated than in the day's product of a common laborer or a factory operative, the former has a greater exchange value, and often a many times greater exchange value.” [Eugen von Böhm-Bawerk, Capital and Interest, pg 384]. Marx was not unaware of such differences, and his account for skilled labor is that it “only [is] simple labor intensified, or rather, [is] multiplied simple labor, a given quantity of skilled [labor] being considered equal to a greater quantity of simple labor.” [Karl Marx, Capital] Adopting the notion of abstract labor presents a fundamental challenge for the theoretical unity of Marx’s labor theory, since he takes the fundamental unit of labor to be time. A simple hypothetical by Böhm-Bawerk clearly illustrates error in this fact: “Suppose that a railway generally graduates its tariff according to the distances traveled by persons and goods, but, as regards one part of the line in which the working expenses are peculiarly heavy, arranges that each mile shall count as two, can it be maintained that the length of the distances is really the exclusive principle in fixing the railway tariff? Certainly not; by a fiction it is assumed to be so, but in truth the application of that principle is limited by another consideration, the character of the distances. Similarly we cannot preserve the theoretical unity of the labor principle by any such fiction.” [Eugen von Böhm-Bawerk, Capital and Interest, pg 385]. This does not present a problem for the Labor Theory of Value per se, but rather a point against certain formulations of it which understand labor as an expenditure of time. This makes Marx’s Labor Theory untenable compared to the Classicals, as he directly states: “[T]he value of any article is the amount of labor socially necessary, or the labor time socially necessary for its production.” [Karl Marx, Capital] It is therefore incoherent to explain value as “socially necessary labor time”, because: “To attempt to measure the expenditure of vital energy with the dial of a clock is tantamount to making an attempt to measure a pound of potatoes with a yard-stick.” [Henry Seymour, The Fallacy Marx's Theory Surplus-Value]. Labor to people is not just an expenditure of time; but a difficulty, challenge, effort expended. The correct solution is to find an underlying essence of labor that is going to explain the disparity between skilled and unskilled labor. This is practically worked out by Smith and Ricardo, who clearly illustrate an understanding of labor as more than mere time expended. As Smith originally stated, the prices of products of labor with a special ingenuity or hardship are adjusted through the organic higgling and bargaining in the market. Therefore, it is not theoretically incoherent to show how the same duration of labor can make products of different exchange value. We have seen so in our recount of Smith in Part 1, but we also find Ricardo repeating Smith’s insight: “In speaking, however, of labor, as being the foundation of all value, and the relative quantity of labor as almost exclusively determining the relative value of commodities, I must not be ... inattentive to the different qualities of labor, and the difficulty of comparing an hour's or a day's labor, in one employment, with the same duration of labor in another. The estimation in which different qualities of labor are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes, and depends much on the comparative skill of the laborer, and intensity of the labor performed.” [David Ricardo, Principles of Political Economy and Taxation]. The strength of the Classicals’ Theory of Value is that it does not fall to this error, and instead relies on the “toil-and-trouble” required to produce a commodity, measuring labor by a common element more essential than a unit of time. The Marxian Theory falls into the trap of circularity—simple labor becomes a measure of complex labor and vice versa rather than being measured by a common unit essential to both. This is not a criticism of using time as a measure to understand labor empirically, but only a criticism of taking expenditure of time for a commodity’s production to be an equivalent to labor imparting value on said commodity.
§4.3 – Products of cheap labor
The third exception that Böhm-Bawerk points out are those goods “that are produced by abnormally badly paid labor. ... The products of these employments have thus an abnormally low value.” [Eugen von Böhm-Bawerk, Capital and Interest, pg 385]. This leads us to an interesting distinction between labor and cost theories of value, as well as some of the features of Capitalism that can explain how this happens. The labor theory of value would say reproducible commodities would tend towards a price that reflects the necessary labor for their production, while the cost theory would say that prices tend towards a price that reflects costs. A pure cost theory simply pushes back the question on why a product’s component parts are worth anything to the price of its means of production. This is the role our presupposition in Part 1 has played for Classical Cost Theorists. To explain these costs is the original cost that Adam Smith identified: labor. “Labor was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.” [Adam Smith, Wealth of Nations]. This is not necessarily true for all Cost Theorists, but this is the part we will consider true for the Cost Theory under consideration. Some Cost Theorists understand cost as labor and waiting, like Mill and Marshall, which alters the picture significantly. So, on the exchange values of commodities; the point is that in a market economy, we need to higgle and bargain with people every step of the way to produce, since labor is the original cost. So, when we consider that the means of production employed are products of labor and also a necessary cost, we will find that the exchange value of products is determined by the labor necessary in their production. This analysis is why the Ricardians and Marx understand that wages and profits do not affect price in themselves. This quote by Ricardo we have seen before and bears repeating: “The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production, and not on the greater or less compensation which is paid for that labor.” [David Ricardo, On the Principles of Political Economy and Taxation]. And Marx reaffirms this insight: “A general rise of wages would, therefore, result in a fall of the general rate of profit, but not affect values.” [Karl Marx; Value, Price, and Profit]. So with these points from the Classicals and Marx thus illustrated, we can actually explain in the Classical’s terms why industries with particularly badly paid labor can offer cheaper products. For the Cost Theorists, this should be a fairly obvious answer: since wages are abnormally low, the price of their product can therefore be lowered. The labor theorists understand it about the same. This is a deviation due to the artificial lowering of wages that free competition would, over time, adjust and adapt. “If a value different from the natural value be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time, for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit, which, under free and active competition, can not long continue to be the case.” [John Stuart Mill, Principles of Political Economy]. What is latently presumed by the Capitalists who object to these theories must be questioned, and we must answer: why are these workers paid such low wages? This ultimately brings us back to the subject of exploitation, as the result of historical and ongoing coercion to engender unequal exchange between wage-workers and Capitalists. The intermediary of the wage-system allows the artificial lowering of wages, and thereby prices. Understanding how the wage-system can be leveraged to artificially lower prices, this “exception” becomes perfectly understandable on the terms of the Classicals and thus doesn’t warrant significant consideration for the Labor Theory’s validity. It may be of even less importance than something like inelastic supply. These artificially low prices are exactly that: artificial, imposed in a manner that a modicum of free competition would immediately rectify. Although, it does raise a point that a Cost Theory based on the original price of labor is going to be more generalizable than simply seeing exchange value based on purely labor. After all, there are innumerable artificial costs that inflate the price of commodities under actually existing Capitalism. The ideas are fundamentally the same, but the theoretical construction of the former is going to be more generalizable in a system that allows Capitalists to artificially lower prices such has been shown. This isn’t very important in the grand scheme of things, but understanding labor as the ultimate necessary Cost gives us a better grip on how labor is going to influence the long-term prices of commodities in the market.
§4.4 – Supply and Demand
The fourth exception listed are the normal fluctuations of supply and demand on the market prices of commodities. “By the fluctuations of supply and demand their exchange value is put sometimes above, [and] sometimes below the level corresponding to the amount of labor incorporated in them. The amount of labor only indicates the point towards which exchange value gravitates,-not any fixed point of value. This exception, too, the socialist adherents of the labor principle seem to me to make too light of.” [Eugen von Böhm-Bawerk, Capital and Interest, pg 386]. The socialists make too light of this because it is already incorporated as the modus operandi for the Labor Theory of Value. The mechanisms of supply and demand are the means by which the cost principle is realized, and, as we have seen, when these do not take place, such as the case with goods with a fixed supply, we will find deviations from this principle. It is hard not to immediately point this out as a strawman. Böhm-Bawerk in this instant should be immediately seen as ridiculous to anyone who knows how the cost principle operates. The Classicals are not saying every price is going to exactly match with the necessary labor, in economics, we almost always speak in tendencies. Smith has already accounted for this, saying that labor ultimately determines the natural price as the price approaches equilibrium, which reproducible commodities will tend towards as producers react to supply and demand. Prices only match this natural price incidentally through their oscillations. Put shortly, the necessary cost is what governs these oscillations. Ricardo stated that the cost principle is realized through supply and demand, as he directly states in a letter to Malthus that: “it is supply which regulates value, and supply is itself controlled by comparative cost of production.” These costs are said to be superior to supply and demand for the Classicals. It is the costs in labor that govern the supply which is adapted to demand, and through their interplay, the cost principle is realized. “It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed,for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished; but this effect will be only of temporary duration.” [David Ricardo, On The Principles of Political Economy and Taxation] Mill, in his recount, also made this extremely explicit, even saying supply and demand actually depends on value, which would be labor in this case: “It is, therefore, strictly correct to say that the value of things which can be increased in quantity at pleasure does not depend (except accidentally, and during the time necessary for production to adjust itself) upon demand and supply; on the contrary, demand and supply depend upon it.” [John Stuart Mill, Principles of Political Economy]. Marx, in his earlier—more Ricardian part of his career—also clearly and unashamedly acknowledged this as how value operates in the market when he states that: “[C]ontinual deviations of the prices of commodities from their values are the necessary condition in and through which the value of the commodities as such can come into existence. Only through the fluctuations of competition, and consequently of commodity prices, does the law of value of commodity production assert itself and the determination of the value of the commodity by the socially necessary labor time become a reality.” [Karl Marx, The Poverty of Philosophy]. For anyone still radically skeptical of the notion of a natural price, John Stuart Mill has an excellent analogy in this respect. As Adam Smith has noted, the exchange value of commodities by their necessary labor is made real through the natural price which price always tends towards through supply and demand. This is very analogous to the flow of waves in their approach to sea level. This does not negate the reality of sea level as a theoretical construct to better understand the sea, and likewise, shouldn’t for the realness of a natural price as a theoretical construct either. “On an average of years sufficient to enable the oscillations on one side of the central line to be compensated by those on the other, the market value agrees with the natural value; but it very seldom coincides exactly with it at any particular time. The sea everywhere tends to a level, but it never is at an exact level; its surface is always ruffled by waves, and often agitated by storms. It is enough that no point, at least in the open sea, is permanently higher than another. Each place is alternately elevated and depressed; but the ocean preserves its level.” [John Stuart Mill, Principles of Political Economy] Therefore, so-called “deviations” due to disequilibrium of supply and demand are not exceptions to the Labor Theory of Value, they are integral to how the cost principle becomes real. Böhm-Bawerk’s criticism becomes a strawman.
§4.5 – Products of Previous Labor
Böhm-Bawerk’s final exception is found in the advances of previous labor, as he explains: “Of two goods which cost exactly the same amount of social average labor to produce, that one maintains a higher exchange value the production of which requires the greater advance of ’previous’ labor. ... [A]n oak-tree of a hundred years possesses a higher value than corresponds to the half minute's labor required in planting the seed is too well known to be successfully disputed.” [Eugen von Böhm-Bawerk, Capital and Interest, pg 386-387]. There are multiple levels to this argument and this hypothetical that needs to be taken into account. If Böhm-Bawerk is talking about capital as “previous labor”, then this is already accounted for as necessary labor that influences the value of the final product by the Classicals. Secondly, scarcity distorts market prices of goods, so an oak-tree of a hundred years would likely be a scarce commodity in this case, which has been previously discussed. Items become more rare, and thus more scarce, less dependent on labor, as they age. Scarcity was not seen as a problem by Labor Theorists and the validity of their insights, since the supply is inelastic we will find deviations from the norm. Thirdly, different products that require different amounts of time for their production adjust on different time scales in response to supply and demand. John Stuart Mill describes this excellently when he points out that: “[T]hough there are few commodities which are at all times and for ever unsusceptible of increase of supply, any commodity whatever may be temporarily so. ... Agricultural produce, for example, cannot be increased in quantity before the next harvest. ... In the case of most commodities, it requires a certain time to increase their quantity; and if the demand increases, then, until a corresponding supply can be brought forward, that is, until the supply can accommodate itself to the demand, the value will so rise as to accommodate the demand to the supply.” [John Stuart Mill, Principles of Political Economy]. So, oak-trees that take a hundred years to produce will be more distorted in the fluctuations of supply and demand, as demand will fluctuate much faster than it takes to produce a supply of century old oak-trees in response to these oscillations. The supply of century old trees is inelastic, and therefore distorts how the cost principle operates. Nevertheless, the cost principle would still be acting. If Böhm-Bawerk is speaking of time-preference, this will be explored more thoroughly in Part 3. Acknowledging “time-preference” on its own is not necessarily contradictory to a Labor Theory of Value, I might add preemptively. Again, these by no means are exceptions to the Labor theory of value and are already incorporated into it, in what it intends to describe, and the mechanisms by which it functions; thus, it doesn’t present a significant challenge for Labor theorists. Abnormal cases such as those which we have covered make sense to treat as second order deviations from a more dominant principle which governs general exchange values.
§5 – Proofs
The final point that we will discuss, and possibly the most important, are the specific proofs given for labor being the source of exchange value. As Böhm-Bawerk states: “It appears then that neither Adam Smith nor Ricardo have stated the principle that stands in their name in such an unqualified way as they generally get credit for. Still, to a certain extent, they have stated it, and we have to inquire on what grounds they did so. On seeking to answer this question we shall make a remarkable discovery. It is that neither Adam Smith nor Ricardo have given any reason for this principle, but simply asserted its validity as something self - explanatory. The celebrated passage in Adam Smith, which Ricardo afterwards verbally adopted in his own doctrine, runs thus:” [Eugen von Böhm-Bawerk, Capital and Interest, pg 376]. For reference, this is the part of Adam Smith he is referring to, which we have seen in Part 1. “The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. " [Adam Smith, Wealth of Nations, pg 47]. As we have seen earlier, Smith was very brief in narrowing down labor as the principle to which commodities gain exchange value. There is no real rigorous proof to be had in the process. The entire process took no more than a paragraph in the chapter of Wealth of Nations that he presents it in. Even if we assume the proof was supposed to be intuitively understood by the reader, there is still a very significant lack of rigor which has been put into hashing it out explicitly. “Adam Smith [in explaining the labor theory]. simply says, ‘seems to be the only circumstance,’ ‘should naturally,’ ‘it is natural,’ and so on, but throughout he leaves it to the reader to convince himself of the ‘naturalness’ of such judgments-a task, be it remarked in passing, that the critical reader will not find easy.“ [Eugen von Böhm-Bawerk, Capital and Interest, pg 379-380]. The proofs given by Marx are on similarly unsteady ground. One of the steps to proving labor as the source of value for commodities, Marx abstracts use-value, and then confidently declares that crystallized labor is the only part of the commodity that remains. Is this true, though? Is this really a logical step? Böhm-Bawerk thinks not. “If the use value of commodities is disregarded, says Marx, there remains in them only one common property-that of being products of labor. Is this true? Is there only one property? In goods that have exchange value, for instance, is there not also the property of being scarce in proportion to the demand? Or that they are objects of demand and supply? Or that they are appropriated? Or that they are natural products?” [Eugen von Böhm-Bawerk, Capital and Interest, pg 379-380]. Not only this, but the assumption that the prices of commodities in Capitalism are at their real value is a baseless assumption. Marx tries to assume in Capital that this is the case, but it clearly is not so. There are innumerable monopolies in Capitalist production that influence prices, there are taxes on goods, there are copyrights and patents that inflate prices, artificial barriers to entry that allow companies to set prices above the actual value of a product, and many more factors that deviate prices from tending towards their true costs. Marx’s method for proving the Labor Theory is therefore insufficient. Böhm-Bawerk in this case offers a good point, and it’s incumbent for Labor Theorists to give a more explicit proof for how labor is the source of exchange value. This will be solved in Part 3 of our analysis.
§6 – Further Responses
There are many critiques of the Labor Theory of Value, but I have selected some important ones to demonstrate their general impotence. In the future I may find it necessary to respond to others, as there are a lot of weak arguments against the Labor Theory of Value.
Section VI – Inadequacy of Utility
Nevertheless, there are some clear weaknesses that I think the Subjective Theory of Value has in relation to the Labor Theory of Value, and I do not believe these are brought up enough in the discussions between which Theory is more “correct”. When we boil down what the Subjective Theory is, we will find that it can be best summarized as an attempt to generalize use-value of the Classicals into a totalizing conception of exchange-value of goods. The Classicals understood the value of commodities being determined by two models, one where supply is adjusted in free competition which would trend prices towards cost; and another where supply is fixed, so the prices are governed by what the market will bear, or, how much consumers want the goods in question. This is why they make classifications of commodities. The Subjective Theory can therefore be seen as part of an attempt to totalize the second model for all commodities. The area that the Subjective Theory of Value is going to become moot is, ironically, the broader portion of commodities daily exchanged on the market. These ones being the second class of commodities the Classicals noted that could be reproduced at the caprice of labor. Utility is not going to determine the exchange values of any of these goods in the general economy, and only looking at the costs in effort and labor is going to be able to make sense of these exchange values. An excellent illustration of this inadequacy of basing value solely on utility was given by Hugo Bilgram and Louis Edward Levy; “In the society of to-day, composed of men and women of the most variant tastes and desires, of the most divergent abilities and dispositions, surrounded by the most unequal environments and opportunities, the estimations of any one thing by different persons are very far from equal. Even in the case of food, the most important product of labor, tastes differ widely ; and yet more striking differences can be observed in the varying desires for luxuries. While the appreciation of works of art is highly developed in some persons, it is more or less lacking or even totally absent in others. The craving for alcoholic drink or for tobacco becomes irresistible to those who use either habitually, while to others these things are repugnant. Nevertheless, as a rule, and especially for the great staples of production, there is but one market price for all [buyers].” [The Cause of Business Depressions as Disclosed by an Analysis of the Basic Principles of Economics, Hugo Bilgram & Louis Edward Levy] As is broadly known, staple commodities are going to fluctuate within a very narrow margin, yet the utility theory is going to be practically unusable in understanding the exchange value of these goods. It is only by understanding the costs necessary to incur to produce these goods that allows us to understand their general relation. Although, there is also something to be had of the short-term deviations of exchange value based on shifting demands in a market. For the Labor Theory, this can be best treated as a second order deviation, or, as a ripple of the primary acting principle, similar to our wave analogy of earlier. Ultimately, we find again that cost governs the long-term exchange value, so therefore, it would be the superior principle in this case. If the critique by Subjectivists is that the Labor Theory is faulty since it has two different models and does not identify a core element of exchange values to both—this critique is also devoid of substance, and actually brings to light a shortcoming of the Austrian analysis: that is, understanding the respective qualities of scarcity present in different goods. Many ostensibly “non-economic” goods, such as air, become economic when labor is mixed with them. Air fetches an exchange value only when labor is performed to compress it into transportable form for market. The Classicals were aware of the essence of these qualities of scarcity, as was the basis of the classification of commodities, as John Stuart Mill provides a fine summary of such: “The difficulty of attainment which determines value is not always the same kind of difficulty: It sometimes consists in an absolute limitation of the supply. There are things of which it is physically impossible to increase the quantity beyond certain narrow limits. ... But there is another category (embracing the majority of all things that are bought and sold), in which the obstacle to attainment consists only in the labor and expense requisite to produce the commodity.” [Principles of Political Economy, John Stuart Mill]. This difficulty in attainment is the common element that influences the supply part of the supply and demand curves. Just because this difficulty presents itself in different qualities depending on the peculiarities of a good is not detrimental to the theoretical unity of the Labor Theory per se, as we have seen, it is unified by a common element. Although, I should not hasten to ignore the instances where utility is paramount for understanding the exchange-value of the first class of goods Mill makes mention of. For this minority of commodities, utility is going to be the determinant of its exchange-value. This is going to be one instance where Subjectivists are going to succeed in their focus on utility, but, how groundbreaking this is is debatable. Utility is one blade of the scissors, after all, and this understanding of utility is not absent in the Classicals. Proudhon summarizes this best in that “Utility is the basis of value; labor fixes the relation”. [The System of Economic Contradictions, Pierre-Joseph Proudhon]. Although utility gives basis for this class of goods, cost is unable to fix their relation, as an allegory, the Marshallian dynamic would say that “only one blade is acting”. The Subjectivist approach on the whole doesn’t add anything groundbreaking in terms of explanatory features, utility is already understood as a force of value by the Classicals, and the parts that are new and successful developments—such as marginal utility—are not mutually exclusive to the Labor Theory of Value. The virtue of the Classical approach will be its greater understanding of the part of the supply aspect that influences exchange-value in the supply-demand curves. If the Classicals are criticized for emphasizing too heavily on the supply, this will be doubly true for the Subjectivist focus on demand. The Subjective Theory of Value takes supply for granted, and thus, becomes fundamentally static compared to the dynamism of the Classicals. Utility determining anything can only make sense with serious qualifications that it only affects the immediate short-term and takes the supply as a given. Only by understanding the costs which are necessary to incur, psychologically and financially, can we understand how supply is adapted to demand and understand the natural price which not only affects the long-term pricing trends, but also a goods short-term pricing as well. For all these reasons, I find a pure utility theory to be wholly inadequate as a Theory of Value. This is not to say Subjectivists are devoid of any insight. They have done well to create explicit models for how utility influences the short-term prices of commodities. Understanding the margins of utility are also useful insights into the character of use-value. The Subjective Theory on the whole does a good job expanding on areas latent within the Labor Theory of Value, and Subjectivists have also proved to have good critiques of some of the Labor Theorists which we will expand on in Part 3. Something that I have saved for the very last is that the Subjective Theory and the Labor Theory are not mutually exclusive doctrines. Parts of the Labor Theory that are implicitly assumed are going to be explicitly developed by the Subjectivists, and the areas of inadequacy for the Subjective Theory are going to be better understood by the Cost Theory of the Classicals. As Marshall has stated, understanding utility and cost are going to be indispensable in understanding the exchange-value of commodities. These both are going to govern supply and demand, and ultimately determine their relationship. In this regard, the greatest pitfall of the Subjectivists would be to set up their doctrine in opposition to the Classicals, rather than as a development of it.
PART 2: Conclusion
Thanks for watching Part two of my series on Value Theory. My last video on the subject will cover some Mutualist and Individualist sources on the matter of value, including Josiah Warren, Pierre-Joseph Proudhon, and Kevin Carson. I also may upload some shorter videos on topics that don’t make it into these videos in time, like marginal productivity, animal labor, or the transformation problem. Subscribe to the Hades channel to support me and for more content.
Watch the video version of this transcript here.