Occupy protesters* are rightly outraged by the harm done by corporations, enabled by government. Against this backdrop Marxist accounts of the injustice of capitalism can sound plausible. This article is intended to highlight the foundational weakness in Marx’s exploitation theory.

The apparent theft of surplus value

Marx believed that a product created by a worker had an objective value, derived from the socially necessary labour time that was spent to create it, and that this value tended to determine its market price. This meant that when capitalists kept profit for themselves from the sale of the goods created by the workers, they were effectively stealing value. Marx believed that the portion of sale price claimed by the capitalist as profit rightfully belonged to the workers. This is known as exploitation theory.

Marx’s exploitation theory depended on the idea that a product has intrinsic value. That is, value that doesn’t change depending on whoever is considering the product.

Marx believed in a version of what’s called the labour theory of value. His idea was that the value intrinsic to a thing was determined by the amount of ‘socially necessary labour’ time that was spent to create it.

Socially necessary labour time

Marx appreciated that products that cost a given amount of actual labour time (referred to by Marx as concrete labor) to create weren’t necessarily valued equally. If I take twenty minutes to create a mud pie, and twenty minutes to make an apple pie, people will usually value the apple pie more highly.

Marx defined socially necessary labour time as:

the labor required to produce an article under the normal conditions of production and with the average degree of skill and intensity prevalent at the time

Marx believed that the socially necessary labour time needed to create a given product varied according to:

the average amount of skill of the workman, the state of science, and the degree of its practical application, the social organisation of production, the extent and capabilities of the means of production and by physical considerations

Socially necessary labour time is an abstract concept. It won’t be equal to actual labour time for any product. So how do we know how much socially necessary labour a particular product embodies?

The only answer Marx gave was to observe the behaviour of the market. If a product sells well, some of the labour it embodies was clearly ‘socially necessary’. Or if no one buys the thing, then it didn’t contain socially necessary labour after all.

But it’s clear that the prices people are willing to pay for goods depend on their subjective valuation of those goods. Even though people often pay a lot of money for items that cost a lot of labour, there’s no necessary connection between the amount of labour spent on manufacture, and the price people are willing to pay for the resulting good. At this point we have to ask whether the concept of socially necessary labour is helpful at all.

Subjective theory of value

The subjective theory of value, formalised by Carl Menger, says that the value of a thing is not inherent. Instead it’s potentially different for each person considering it. A thing’s value to me ultimately derives from its expected usefulness in helping to achieve goals I consider important. Manger wrote:

Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs.

On this view, when two people trade it’s possible for both of them to benefit. In fact, the expectation of benefit on both sides is the reason trade happens in the first place. Each party to the trade swaps something he values less, for something he values more.

In other words trade is mutually exploitative–both traders use the other to their advantage. Wage labour is a particular kind of recurring trade: the worker trades his time and energy for money.

Why prefer Marx’s labour theory of value over the more simple and elegant subjective theory of value? One reason may be to clear the way for exploitation theory, which depicts successful owners of capital as villains, legitimising hostility towards them.

Further reading

http://mises.org/daily/1349
http://mises.org/daily/2610
http://www.econlib.org/library/Enc/bios/Menger.html

* A version of this post was originally published as a PDF hand-out during the Occupy protests.