Eugen von Boehm-Bawerk's Critique of Karl Marx

Recorded 15 October 1988.


[Transcript (provided by Mr. Kaan Dişli. The text is also
available in Turkish.)]


100 years ago If you are an economist living in the United States
you might have subscribed to a journal called the “Quarterly
Journal of Economics” and you might have gone out to the mailbox
one day in October 1888 and found the latest issue and if one
found the latest issue of the Quarterly Journal of Economics
October 1888 you would have opened it to its lead article and its
lead article was by a man named James Bonar. 100 years ago this
month, and the title of the article was the “Austrian economists
and their view of value”. 100 years ago this month was the first
English exposition in detail of the Austrian school.


In this exposition James Bonar, an admirer of Menger and
Böhm-Bawerk, offered to the English-speaking world the first
systematic, thorough, methodical understanding of how the
Austrians viewed value, how from value they explained the
emergence of price and market processes. Now what Bonar enabled
the reader in America and England to see was that the Austrians
were developing an alternative way of understanding the economic
process. One that on the other one hand challenged the classical
economists ,including Marx as a labor theorist, and offered a new
vision of how to construct economic theory for an understanding
of the real world. Right there the first English exposition this
month 100 years ago


Now what Böhm-Bawerk did was more in his writings than just
present a positive theory, he was a brilliant economist who had
mastered all of the economics literature up to his own time and
he proceeded to first criticize and attack his opponent before he
went on to present his positive theory. In fact, it was
Böhm-Bawerk who opened the first clash that the Austrians had
with the socialists.


In the 20th century we are most familiar with the Austrian
challenge to socialism through the works of Ludwig von Mises, his
challenge against the socialists, how would a central planning
system work where the planners had overthrown private ownership
of the means of production and eliminated therefore the price
mechanism ,for as I'm sure most of you are familiar with, Mises
argued that where there is no private property there is nothing
to buy and sell, when there is nothing to buy and sell, there is
nothing to make offers or bids for, when there are no bids and
offers there are no agreed-upon terms of trade, when there are no
agreed-upon terms of trade there are no prices, and when there
are no prices, there is no way for agents in the market to form
estimates concerning the value that individuals are placing upon
the means of production as a calculative device to determine how
to an efficient and economizing manner apply the means of
production to alternative uses in a society of scarcity.


But that was really the second challenge, the first one was
Böhm-Bawerk’s. He first made this challenging criticism in Volume
one of “Capital and Interest”, his history and critique of
interest theories, in 1884 the year after Marx passed away. He
had a chapter on the exploitation theory, in which he criticized
another German named Rodbertus and Marx. Then he had another
opportunity to extend and elaborate on his criticism and that was
in 1886, shortly after volume 3 of ” Das Kapital” had appeared
posthumously. Böhm-Bawerk was asked to give a contribution for a
German economist. And his contribution was a hundred page
monograph called “Karl Marx and the close of his system” in which
he attempted to update his criticism in the light of the second
and third volume coming out and showing that there were insoluble
problems in Marx’s system.


In fact, the interesting thing that one can understand
historically is that if one looks at most accounts today on Marx
and his economic system and his social system and his conception
of the social order, most proponents will present a conception of
Marxist theory of exploitation, his notion of alienation, his
idea of superstructure, his idea of exploitation and potential
search for imperialist capture of markets via the Leninist
interpretation… But there is one thing that they tend to brush
over now, one thing that they devote little attention to in their
expositions of Marx and that is the “Labor theory of value”. They
usually devote the least amount of time to it, they give short
expositions, they mention that it was essential to Marx’s
conception but they basically brush over it. They go on to other
aspects of Marx's critique of the capitalist order. Now this is
in contrast to earlier in this century, at that time the heart of
Marx's system was considered the labor theory of value. It was
only with the labor theory of value, it was argued, that one
could have a scientific analysis to explain why capitalism
inherently was exploitive. Now why has the labor theory of value
fallen into the background? Why has it become an embarrassment,
something that is briefly talked about rather than made the
center of the exposition and the discussion? I would like to
suggest that it's precisely because of the critique that
Böhm-Bawerk made a hundred years ago.


Because through this critique, Böhm-Bawerk raised questions about
the logic of the labor theory itself and the inconsistencies of
Marxist theory with the empirical workings of real market
processes. But before one can understand Marxist criticisms, it
is useful and important to briefly summarize Marxist system
itself.


Marx begins volume one by emphasizing that no commodity can have
exchange value unless it has use value, unless it is wanted by
someone for some purpose. In other words, unless it has use value
it cannot have exchange value. But it is not sufficient for a
commodity to have use value to have exchange value, he argues
that one has to search for something else than just its
usefulness if one wants to understand from whence exchange values
between commodities arises. He argues that use values are of a
qualitative and diverse nature and therefore cannot be compared,
there is no common denominator from which one can look at them
and evaluate them. One has to look for what is it that
commodities have in common other than their quality of being
useful because uses are so diverse. He therefore says we have to
look beneath it and to ask what quality do all commodities have
in common other than their diversity of their uses and he says
the quality that they share in common is a quantitative dimension
and that is, they all share the common attribute that they are
produced by labor. He therefore argues that one has to abstract
from the use values of commodities to that more general quality
of merely having been the product of quantities of labor input.
Only when one has understood the nature of labor as a physical
input in the production of commodities can one then return to the
surface of the analysis and understand why useful things have
exchange ratios in the ways they do in the market. He therefore
is looking for a common denominator among all commodities and he
argues that when one strips it away what one finds therefore is
that all commodities are produced by labor.


But what kind of labor? Well he argues that if we are to strip
away the particular concrete attributes of commodities that make
them useful for particular purposes, we need to strip away the
concrete types of labor that go into their production and to
understand labor purely as an abstraction, quantities of labor in
abstract form. He argues that therefore what determines the value
of commodities in their specific forms are their more generic
aspect of having been the product of labor of an abstract type.
Now how shall one measure the amount of labor that goes into a
product and therefore to determine what the value of one
commodity should be in relation to another? Marx argues that
measurement should be the duration of labor time entering into
its production.


However, he then emphasizes that it is not going to be a
conception of concrete labor time but a thing that he calls
“socially necessary labor”, that is labor necessary to produce an
article under normal conditions of production, an average degree
of skill and intensity prevalent at the time. It is these values
set as an average sampling of the class that determines what
shall be the measurement of labor. Now as an extension of that,
one says that the amount of labor that is going into a product is
going to be a socially necessary amount of labor, that is that
time duration raised another question. Well what does one do with
the fact that there seems to be a great diversity of types and
qualities of labor, that is simple labor and complex labor,
skilled labor and unskilled labor? Marx argues that is not a
difficult matter one merely has to realize that skilled labor is
a multiple of simple labor; such as a doctor is ten times the
labor of a simple worker digging a ditch.


Now Marx argues that with these basic concepts one can understand
that on the basis of socially necessary labor that the value of a
skilled professional is merely a multiple of unskilled labor of
this more abstract type, that one should easily see that
individuals would trade and exchange commodities in terms of
their labor values. But this then brings him to his notion of the
relationship between the worker and the social system in which he
resides.


He then makes a distinction between “necessary labor” and
“surplus labor”. Necessary labor is the amount of time duration
that an individual has to incur sufficient to produce enough
products or the value of enough products to sustain himself and
his family. Necessary labor is therefore enough for the worker to
be able to maintain oneself.


Surplus labor would be the amount of product or value of product
produced during a period of time in excess of what is required
for one's own sustenance and it is this conception of the amount
of labor necessary just to maintain yourself and extra labor
during a day beyond that, that would go in excess of that amount
in terms of products made or value of products made that takes
Marx to his conception of exploitation. He argues that under
capitalism the workers do not have direct access to the means of
production that they require to be able to produce the products
necessary for their own survival, rather the means of production
are monopolized in the hands of the owners and therefore the
worker has to go to the owners and negotiate in contract to have
access to that which is essential for them to do the work
required to maintain their own lives and here enters Marx's
conception of exploitation.


He argues that the capitalist by having this monopoly control
over the means of production has the capacity to force the worker
(one presumes by threatening denial of access to the means of
production) to work more hours for him than would be necessary
just to produce product or value of product sufficient to
maintain himself but not pay the individual for that surplus. In
other words, the worker is only paid a value equivalent to his
subsistence and the excess is then garnished by the capitalist
owner of the means of production.


Thus Marx argued through this method the worker is exploited. He
only receives a fraction of that which he has produced, the mere
ownership of property gives the owner the opportunity to live
without effort and therefore the injustice of the system.


Now Marx then tries to analyze the workings of the economic
system and he argues that on the one hand based upon his labor
theory of value commodities should exchange based upon their
labor values but what he notices is that in the market this is
not always the case, in fact generally in the capitalist economy
this is not always the case. He also notices that commodities do
not exchange in terms of their percentages of surplus values but
through an equality of the rate of profit and this is seen as an
anomaly also, and why?


Marx says that there are two aspects of the capital that a
producer or capitalist uses, there is what he calls” constant
capital” and “variable capital”. Constant capital is merely the
amount of capital equipment that the capitalist has purchased
from other producers, variable capital is the amount of labor
that he employs to work with that capital equipment in a
particular productive endeavor. Now Marx argues that for the
constant capital he pays its full value. Why does he pay its full
value? Because commodities are expected to trade at their full
value. He as a producer has bought equipment from some other
capitalist, that other capitalist has exploited his workers, but
that other capitalists in fact charges the other capitalists the
full labor value of the product and therefore there is no
exploitive gain from the capital equipment purchased from other
capitalists, they are really just paid from their full value. The
only source of surplus value is the workers he hires to work with
the capital he has employed in garnishing a part of the value of
what they have produced. Now Marx points out that there is an
anomaly here and that anomaly is that one could imagine a
situation in which many companies or firms in an industry have
the same rate of surplus-value but each of them are experiencing
different rates of profit. But Marx realizes that the market
tends to equate rates of return and therefore how can this jive
with the labor theory of what will determine the value of
commodities?


Now the reason why he argues that there can be different rates of
profit while having the same surplus value is because he argues
that surplus value is merely a percentage of the amount of excess
of one's variable capital invested, in other words if a workers
subsistence is 20 and he produces 40, surplus value is 100
percent. But one calculates total profit on investment not on the
basis of just surplus value but on all capital invested, constant
and variable. The larger one's proportion of constant capital,
the smaller one's rate of profit on the total capital investment.
How does Marx attempt to overcome this? Well he argues that
competition will handle this. He says the competition will tend
to assure that capitalists will shift the types of products they
make and that they will then by shifting into different lines of
production assure that there is a common rate of profit but how
does this jive with his labor theory of value that commodities
are to exchange at their labor inputs? Well he argues that the
market does it by creating what he calls “prices of production”
and what he says is that the market will do the following thing:
it will average out the rate of surplus-value throughout all
sectors of the economy. When one works out an average of what has
been constant capital, one works out what has been an average of
surplus capital that tells us what is the average rate of surplus
value and the market will then assure through competition the
equating of that. Now we'll come back to that when we look at
Böhm-Bawerk’s criticism. Now Marx tries to defend this and
present a number of different expositions and numerical examples
but in a nutshell that is his explanation. He argues that labor
is the basis of value, commodities based upon labor should
exchange in terms of their labor inputs, labor input is measured
by socially necessary labor, complex labor is reduced to simple
labor and one then sees in the market a situation where anomalies
may occur between the rate of surplus-value and the rate of a
profit, competition by averaging out the rate of return,
guarantees that while not directly commodities exchange at their
labor values they do so indirectly.


Now Böhm-Bawerk approaches this by wanting to take up two
criticisms: One is does Marx’s theory fit with the facts? And
second of all what is the basis of his theory of value? Before I
discuss this I want to suggest the different approach that
Böhm-Bawerk comes with. Böhm-Bawerk argues in his critique of
Marx and in his positive theory of capital, in which he has a
long section on value and price, is that there are two starting
principles that one has to begin with in analyzing all market
phenomena and that is “methodological individualism” and
“methodological subjectivism”


Methodological individualism argues that if we are to understand
the nature and structure and emergence of social phenomena we
must begin with those elemental components from which all social
phenomena arises and that is the individuals of which the society
is constructed and composed. It is individuals who act,
individuals who choose, individuals who decide, Böhm-Bawerk
clearly says that all economic processes begin with man and his
purposes and it is from man and his purposes that emerge the
evaluations of commodities and their actions that bring about
market phenomena. The second if statement is that commodities
only have value, not only because individuals are the actors but
precisely because it is only in terms of how the actors evaluate,
decide, conceive, determine, perceive that anything occurs in the
social world. In other words: if we are to understand social
phenomena in general and economic phenomena in particular, we
must always do so from the actors point of view. Now this means
that for Böhm-Bawerk one cannot abstract from the nature and
qualities of the use value of commodities as perceived by the
actor, it is precisely because of the concrete attributes or
possibilities to serve ends that an individual sees in a
commodity that he assigns value to it and wishes to do various
productive activities to bring that commodity into existence. So
therefore Böhm-Bawerk is saying that we must begin with the
individual, we must begin with his evaluations and that one has
to think not in the abstract of use-values in general but the
specific purpose and ends in mind for which an individual would
want a commodity.


Now on the basis of this, Böhm-Bawerk begins to look at Marx’s
theory of value. First of all he says that Marx has proceeded to
try to glean what is the basis of the value of commodities in a
peculiar fashion and that peculiar fashion is that he defines
commodities precisely in a way that the only thing that he will
be left with in his analysis is the presumption that only labor
can be the common denominator. For example, Böhm-Bawerk points
out that Marx does not discuss things given to us by nature that
have value, commodities that cannot be reproduced with labor that
have value and therefore Marx guarantees that he will have the
result that he wants precisely because he defines a commodity in
a way that when he reduces all commodities to a common
denominator, the only common denominator that he is left with is
that which he is looking for. He also argues that the same
problem exists with the reduction of skilled labor to unskilled
labor. Because Böhm-Bawerk argues that just as one evaluates
commodities in terms of the concrete purposes and usefulness as
they have for the individuals, we evaluate labor on the same
basis. We are not interested in labor in the abstract but we are
interested in labor of particular kinds, qualities, attributes
and skills precisely because those are the types of labor that
can serve the purposes in mind to create the product we desire.


There is also a reasoning in a circle, Böhm-Bawerk argued in the
same way here. Because Marx says that skilled labor is merely a
multiple of unskilled labor and how does Marx attempt to show
that? Well he says look in the marketplace. Skilled labor is
offered a wage or a price many times the value of an unskilled
labor and therefore the fact that the skilled labor is given in
terms of its market value a multiple of unskilled labor
demonstrates that skilled labor is merely a multiple of unskilled
labor. In other words, he presumes that which he is to prove
rather than trying to show how one multiplies unskilled labor
into skilled labor and then derive an analysis that shows why the
market then generates these differences in remuneration. He
argues that the evidence that there are differences in
remuneration and how much the differences of remuneration are,
demonstrates that his premise is correct.


Now Böhm-Bawerk argues in contrast to Marx's analysis of the
discrepancy between his theory of value and surplus value and a
tendency for rates of profit to be equalized in the following
way: and that is he says that Marx suffers from methodological
holism. Marx suffers from treating an abstract concept that is a
construction of Marx's own mind as if it is an expression and a
theoretical framework to understand the real world. Now why does
Böhm-Bawerk argue that? Because Böhm-Bawerk explains that when
Marx attempts to explain the equality of rates of profit across
industries Marx says “Well let us imagine that the economy was a
single firm and we're averaging out the amount of return each
division has individually owned and then working out the average
from all the individual divisions we're then going to disperse
them in equal proportions back to the divisions of our economy
and therefore we will equalize the amount of return each sector
receives through this conception”


Böhm-Bawerk’s response is that the economy is not a single unit,
he argues that there is no relationship between the actions of
the individual parts and treating them as if the economy was a
single firm that a planner then determines how much each division
has earned, works out an average and then disperses that average
among the component parts. Rather than explaining how competition
would equate the rates of profit among sectors of the economy,
Marx has created out of his own mind a construction of how an
economy could work if it was an economy that was going to
function in a manner that Marx wanted. That it is not a theory of
how real economies function, but rather is a construction of his
mind in which he treats the economy as a whole, it is not a
theory of how competition and individuals have incentives to act
and respond and shift resources in various ways but is a
construction that Marx has created to reach the conclusion that
he desires. Böhm-Bawerk takes him precisely to task for this, by
arguing 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. That is to begin with the
introspective element of how any individual acts under the
constraints of means that are scarce in relation to ends and
opportunities that exist before him in responding to those
opportunities. Böhm-Bawerk argues using the older terminology,
each individual who is a social analyst has the opportunity to
follow the psychological method that is to imagine and reflect in
your own mind what you would do confronted with constraints of
means and desires and profit opportunities before you. He argues
that is the only theoretical and sound basis whence one can
construct a theory of market response, equality of returns
through sectors of the economy, readjustments and redistributions
of resources among sectors of the economy and yet that is the
very method that Marx turns against. Because like the classical
economists, Marx chose to treat demand as an element that
obviously could not be ignored but was put in appendix not to be
dealt with in any great detail.


Finally Böhm-Bawerk argues that what Marx has confused is profit
and interest. What Marx has confused is that which is transitory
and that which is permanent. Marx asked the question: “How can it
be that a producer hires a set of workers, pays them one price,
they produce or work up raw materials into a product and the
employer is able to sell that product for a higher price than he
has paid out in terms of the prices of the factors of
production?” How else can it be if the work has been done by
those he has hired other than that he has taken from them
something that belongs to them and does not belong to the owner?


Basically what Böhm-Bawerk argues that Marx has left out an
ingredient that is essential, inseparable from all human
decision-making and that is the element and evaluation of time.
That there is a difference in the evaluation and estimate of
things in the present and things in the future. That the worker
is receiving present goods, in exchange for working on
commodities that reflect future goods. The employer is advancing
the worker commodities in the present rather than the workers
working up products themselves or deferring their receipt of
payment until the product is ready in its finished form at some
point in the future. That in fact what the worker and the
employer are doing is making an inter-temporal exchange, that the
worker chooses not to wait either in making the product himself
for sale or to make the product and wait till it is sold later by
the entrepreneur for payment. That he is willing to work now, for
payment now, at a price less than the product will sell for in
the future and in turn the employer is willing to advance
commodities for the workers sustenance in the present with the
understanding that the employer has the opportunity to sell that
product in the future at a price that reflects the remuneration
that is his due for having forgone the use of commodities and
income in the present that he has forwarded to those workers.


Böhm-Bawerk argues that profit is transitory, it is that which
arises out of changing market conditions but which competition
has as its purpose to compete away but that interest is
inseparable from the market itself. Interest is not a transitory
element but is a price like any other price, its uniqueness is
that it is the price of time. It is not the price of apples in
the present versus pears in the present but apples in the present
versus apples in the future, pears in the present versus pears in
the future. It is an exchange across time and therefore one
cannot do away with the discounting of the value of the laborers
product unless one wishes to say that time and the evaluation of
time is no longer inherently an element in the judgment of all
actors in the market. Because as Böhm-Bawerk clearly explains
that all action is forward-looking, it is prospective, it is a
judgment concerning the future in relation to today.


Now I would like to suggest that no one has surpassed
Böhm-Bawerk’s criticism. The apologists and proponents of Marxism
have attempted to get around these issues. They've argued “well
Marx really didn't mean this”, “he wasn't attempting really to
explain the exchange values in the market”, “he had other
purposes for the labor theory of value” but you can't get around
the fact that Marx says in Capital itself but for all the other
purposes that he wishes to develop a labor theory and have labor
as a basis of understanding the value of commodities, one of its
functions is to enable an understanding and an explanation of
what determines the relative prices in an economy. Once you
appreciate Böhm-Bawerk’s criticism of Marx's conception of how
competition works and that, that is not the nature of competition
or market processes then one has to realize that in fact, Marx
has given no theory of how prices and exchange ratios emerge in
the market on the basis of his own theory of value. In fact once
one critically evaluates how Marx rigs the argument to assure
that the only thing left in a commodity is labor as a common
denominator and realizes that it is a false universal principle
because it is not universal at all. One realizes that there are
many different bases upon which one can say commodities are
valued. Of course Böhm-Bawerk is on the Austrian school that
value originates through the relationship of ends, desires and
means to which they can be applied to them that are scarce in
terms of ends desired.


The Austrians have fought two battles with the socialists, and
the result of those two battles is that, for all intents and
purposes, socialism and Marxism is dead. A hundred years ago
Böhm-Bawerk was able to show that Marx’s theory of value was
inherently flawed, inherently inconsistent and was not the avenue
to understand either the value of commodities or the nature of
the market process. And in the 20th century that criticism was
completed by Ludwig von Mises. Mises recognizes that he is
starting where Böhm-Bawerk left off because if you read Mises’
“Socialism” he briefly talks about the problems with the labor
theory of value, he just doesn't devote much time to it because
he realizes that Böhm-Bawerk had settled one level of the debate.
Mises was to show that once you eliminate other elements of a
market economy it is impossible for that economy to function. At
the beginning of this century if there was one thing that was
obvious in most people's minds, it was that socialism was
inevitable. If anything was clear in most people's minds it was
that “planning” was the economic system of the future. If
anything was obviously inevitable to people at the beginning of
this century, it was that capitalism was going to die that
capitalism was undesirable because it was it was exploitive that
capitalism was inefficient and wasteful and that planning was a
method to achieve all the things that we supposedly admired
capitalism for but with none of its abuses, exploitation, waste
or inefficiencies. We end the 20th century with socialism being
nothing more than a bad taste in people's mouths and I would like
to suggest that we leave the 20th century, a hundred years after
the arrival of the Austrian school on the international scene of
economic ideas, because of what Böhm-Bawerk for us did at the end
of the 19th century and Mises completed in the early part of the
20th. Because there is no value other than that which resides in
an individual evaluating commodities and there is no way for
those values that interact in an economy to be reflected for
people to use for their economizing purposes without prices and
markets and that means that the 21st century will hopefully be a
century in which the Austrian school stands as the school, the
dominant school of economics because the Austrian school will
have refuted all the economics of this century. Thank you very
much.