Austrian Exploitation Theory
Marx had no monopoly.
Eugen von Böhm-Bawerk (1851-1914), the second-generation giant of Austrian economics, famously refuted the theory, most commonly associated with Marx, that the employer-employee relationship is intrinsically exploitative. Less well known is that Böhm-Bawerk had an exploitation theory of his own, which he expressed in his 1889 masterpiece, Positive Theory of Interest, volume two of his three-part Capital and Interest.
To recap his critique, which is found in History and Critique of Interest Theories (volume one of Capital and Interest, 1884): Marx (and pre-Marxian thinkers) believed workers are routinely exploited by being paid less than what their products fetch in the market. That’s because, as the Stanford Encyclopedia of Philosophy notes, for Marx labor is priced “in terms of the amount of socially necessary labour power required to produce it,” that is, the products necessary just to keep the worker alive. (Marx derived this from the labor theory of value he inherited from Adam Smith and David Ricardo.) Yet a worker may produce more than that bare amount in a day. In that case the “surplus value” goes to the employer, or capitalist. Capitalists get away with this because they control the means of production. Workers, having been deprived of those means, have no choice but to offer themselves as laborers and take whatever they can get. The alternative is starvation. Thus they are ripe for exploitation.
“Distribution” Taken for Granted
In focusing on the exploitation question, Böhm-Bawerk took the legitimacy of the “distribution” of the means of production for granted, and of course he rejected the labor theory of value, or of price formation. (I can’t discuss here the legitimate objection that historically governments arranged for the few to control the means of the production at the expense of the many, forcing them onto the labor market. To the extent that is true, the wage system isexploitative, but the culprit is the State, not the market.)
Böhm-Bawerk responded to the exploitation theorists that the difference between what a worker is paid and the market price of his product can be explained without resort to exploitation theory. One component of the employer’s profit is interest on the money he advances workers as wages while the product is being readied for sale. Making and marketing products take time. Typically, Böhm-Bawerk said, workers cannot afford to wait until the product is sold before they are paid. They want a check every week. But how can they be paid before their products have been sold? Their employers pay them out of money accumulated previously. Thus wages are in effect a loan, which like all loans is repaid with interest. This is so because of time preference: We value present goods more highly than future goods, meaning present goods are discounted from their future value. Other things equal, X future dollars are worth less than X dollars today. Or to look at it from the other direction, if you want to use my X dollars today, requiring me to abstain from using them, I’ll want to be paid more than X dollars when the loan comes due. The interest payment is my reward for abstention.
As Böhm-Bawerk wrote, “We have traced all kinds and methods of acquiring interest to one identical source — the increasing value of future goods as they ripen into present goods.”
If Böhm-Bawerk is right, and wages are in effect a loan to be “repaid” when the product sells, then we shouldn’t be surprised if the revenue from the sale is greater than wages paid (and other input costs). No exploitation need have occurred. (“Profit” has other components as well, including pure entrepreneurial profit from arbitrage, that is, from actualizing the hitherto overlooked potential value of undervalued resources.)
Pure Theory
Böhm-Bawerk was writing pure theory, as if he were saying, “In a free market here is what would happen.” He was not implying that the theory would describe a particular time and place where the market was less than free “[T]he essence of an institution is one thing, and the circumstances which may accidentally accompany it in its practical working out are another,” he wrote.
In fact, Böhm-Bawerk noted, exploitation can occur when competition among employers is suppressed, raising the employer’s rate of interest to a level higher than it would have been under free competition and thus lowering wages. That, he said, was usury.
He writes, “It is undeniable that, in this exchange of present commodities against future, the circumstances are of such a nature as to threaten the poor with exploitation of monopolists.”
Böhm-Bawerk was merely applying the more general exploitation theory held by free-market thinkers at least back to Adam Smith: Monopolies and oligopolies (suppressed competition) harm consumers and workers through higher prices and lower wages. For Smith monopoly was essentially the result of government privilege. This largely has been the view of later Austrians, also. (Mises allowed for the theoretical possibility of a resource monopoly without government privilege.) However, Böhm-Bawerk did not explicitly attribute monopolistic exploitation to the State in this discussion.
Competition Suspended
“[E]very now and then,” he wrote,“ something will suspend the capitalists’ competition, and then those unfortunates, whom fate has thrown on a local market ruled by monopoly, are delivered over to the discretion of the adversary…. [H]ence the low wages forcibly exploited from the workers — sometimes the workers of individual factories, sometimes of individual branches of production, sometimes — though happily not often, and only under peculiarly unfavourable circumstances — of whole nations” (emphasis added).
Böhm-Bawerk doesn’t say what that “something” might be. Maybe he means private collusion; maybe he means government protection from competition. He gives only this clue: “[L]ike every other human institution, interest is exposed to the danger of exaggeration, degeneration, abuse; and, perhaps, to a greater extent than most institutions.” (Alas, thanks to government-corporate collusion, what he thought was rare has actually been the rule in so-called “capitalist” countries.)
He cautions that “what we might stigmatise as ‘usury’ does not consist in the obtaining of a gain out of the loan, or out of the buying of labour, but in the immoderate extent of that gain…. Some gain or profit on capital there would be if there were no compulsion on the poor, and no monopolising of property…. It is only the height of this gain where, in particular cases, it reaches an excess, that is open to criticism, and, of course, the very unequal conditions of wealth in our modern communities bring us unpleasantly near the danger of exploitation and of usurious rates of interest.”
The Essence of Interest
Böhm-Bawerk takes pains to emphasize that he is not condemning interest per se: “But what is the conclusion from all this? Surely that, owing to accessory circumstances, interest may be associated with a usurious exploitation and with bad social conditions; not that, in its innermost essence, it is rotten.”
Yet he asks, “[W]hat if these abuses are so inseparably connected with interest that they cannot be eradicated, or cannot be quite eradicated?” His response:
Even then it is by no means certain that the institution should be abolished…. Arrangements absolutely free from drawback are never allotted to us in human affairs….
Instead of the absolute good, which is beyond reach, we must choose what, on the whole, is the relative best, where the balance, between attainable advantage and the drawbacks that must be taken into the bargain, is the most favourable possible for us.
In the end he doesn’t believe abuse is inseparably connected to interest: “There is no inherent blot in the essential nature of interest. Those, then, who demand its abolition may base their demand on certain considerations of expediency, but not, as the Socialists do at present, on the assertion that this kind of income is essentially unjustifiable.”
There are unanswered questions about Böhm-Bawerk’s position, but we do know that the thinker who refuted Marx’s exploitation theory had one of his own.
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Well that was annoying, the computer went down – still try, try, again.
An employee is paid for their work – not for the product (not for the materials or anything else – bar their work). As economic value is subjective there is no correct just wage (and thus no “exploitation”) other than the wage that is determined by supply and demand (wages may be very low – but that is not “unjust” or “exploitation”).
In short David Ricardo (or rather the interpretation of Ricardo by Karl Marx and others) was just wrong – and the Labour Theory of Value was shown to be wrong by economists long before the Austrian School (even in Britain many economists had shown the Labour Theory of Value to be wrong as early as the 1820s – although J.S. Mill ignored the refutations, which meant the job had to be done again after the Mills left this mortal coil).
As for interest – interest rates should be determined by supply and demand, the supply and demand of REAL SAVINGS (not credit expansion – either government or private scam).
Savers asking for “high” interest rates is also in no way “exploitation” – and wages (in the long term) are not lower than they would be if one goes for either government or private credit expansion scams. Indeed monetary expansion actually undermines the living standards of most people (although it helps a few connected people) – meaning that with monetary expansion (clever plans to lend out more money than was ever really saved) actually makes real wages lower than they otherwise would be.
By the way………
The late Murray Rothbard was wrong about many things – Northern Ireland and the IRA, the American Civil War, Israel, World War One, World War II, the Cold War (and hot wars in it – such as Korea), and on and on…..
HOWEVER – the late Murray Rothbard was very rarely wrong about economics and the history of economic thought. It would be a pity if modern Rothbardians (now that Rothbard is not around to guide his followers) tried to push a lot of stuff about “exploitation of the workers” and other such.
“Exploitation” (which can indeed exist) is nothing to do with “usury” or whatever – real exploitation if from the state (or private gangs) using force (or the threat of it) to take money from people.
“An employee is paid for their work – not for the product (not for the materials or anything else – bar their work). As economic value is subjective there is no correct just wage (and thus no “exploitation”) other than the wage that is determined by supply and demand (wages may be very low – but that is not “unjust” or “exploitation”).”
I agree with Paul Marks.
A capitalist hires ten labourers to stuff his processed chickens with savoury chicken-stuffing.
It is a simple but laborious process but the businessman calculates that he can sell his stuffed
chickens at a higher price than non-stuffed chickens, indeed at a price and in sufficient quantity to cover the additional cost of the savoury stuffing and the cost of the labour required to perform the stuffing and still leave a profit.
According to Marx, the added value of the stuffed chickens comes wholly from the labour of the chicken-stuffers and the profit which the businessman takes is hence, a deduction from the chicken-stuffers wages; thus the relationship between the businessman and his workers is, by necessity a relationship of exploitation and a source of inequality.
That is entirely and emphatically false.
If the value added to stuffed chickens were the result of the chicken-stuffers’ labour it would not matter what type of stuffing was used to stuff the chickens.
If the chickens were stuffed with unpalatable stuffing the chicken-stuffers’ labour would be exactly the same, requiring the same time and exactly the same effort as before, but the sale of unpalatable stuffed chickens would be at best marginal or at any rate barely sufficient to cover the businessman’s additional costs. There would be no profit.
That is because the profits derive from the entrepreneurial judgment of the businessman and his tools of production. If the chicken stuffers’ wages exceed the costs of producton, or the cost of hiring and operating a chicken stuffing machine, there would be little or no incentive for the businessman to purchase the chicken-stuffers’ labour.
By the same token, if the chicken-stuffers’ wages fall below the wages of other workers of a similar skill level – e.g. pastry-stuffers, – there would be little or no incentive for them to become chicken-stuffers.
Each acts upon his own self-interest – the businessman with regard to his profit – the worker with regard to his wage. Neither loses – both win.
But it is important to bear in mind that the market price of labour is not determined by the whims of a malevolent cartel of grasping employers – businessmen do not pay high wages because they are kind and nor do they pay low wages because they are cruel.
The market price of labour in a free market system is determined solely by its socially objective value, i.e., the sum of the individual judgments of all the men involved in trade in the marketplace at a given time, each in the context of his own life.
Individual businessmen are utterly powerless to decide the value of a product which is, in essence, the sum total of the all the judgements of the market!
All other factors being equal, if the businessman pays wages higher than the market rate for his workers’ labour, his profits fall; if he pays less – his production must fall.
By the law of supply and demand there is no alternative.
In summary then, it is obvious that businessmen do not pay their workers for the things they produce nor for the profits their workers make.
Businessmen pay their workers a wage whether or not their workers produce anything or nothing or whether their workers make a profit – or not.
Businessmen pay their workers for their labour – nothing more.
Without profits it would not be possible to pay wages in the long-term because wages are deductions from the businessman’s profits [from the sale of goods and services] – and not vice versa.
Capitalists therefore, do not impoverish wage earners, but make it possible for people to become wage earners: they are responsible for the very existence of wages in the cycle of production.
Without capitalists, the only way in which one could survive would be by means of producing and selling one’s own products, namely, as profit earners.
But to produce and sell your own products and earn your own profits, you would have to own your own land, your own tools and machinery, your own materials, your own power and utilities, your own buildings and infrastructure, your own advertising and promotion materials, your own
stock and storage facilities, your own transport and maintenance facilities etc., etc..
Few people could survive in this way.
Workers get all of that for free – and they get it from capitalists.
To describe such an extraordinary gratuity as a “trickle-down” is wholly inappropriate: consider the legion of white-collar button-pushers who today earn their living by virtue of capital machinery costing literally billions of dollars.
In this regard, I am reminded of a passage from John Galt’s speech in Ayn Rand’s “Atlas Shrugged” addressing the subject of who benefits most from the business acumen of the steel magnate – Hank Rearden:
“If you worked as a blacksmith in the mystics’ Middle Ages, the whole of your earning capacity would consist of an iron bar produced by your hands in days and days of effort. How many tons of rail do you produce per day if you work for Hank Rearden? Would you dare to claim that the
size of your pay check was created solely by your physical labor and that those rails were the product of your muscles? The standard of living of that blacksmith is all that your muscles are worth; the rest is a gift from Hank Rearden.”
Every businessman already knows this.
The facts are indisputable and have been proven repeatedly both at the local level and on world-wide scale, in practice and in theory.
There you go – I have been polite.
Even when provoked.
Be great way to desire the dear ones on unique occasions.
Quite so, John W., quite so.