Mr. Osterfeld of Cincinnati, Ohio, is a graduate student majoring in political theory.
The writings of the classical economists were beset by an internal contradiction. On the one hand, they believed that labor was the source of all value and that wage rates were determined by an antagonistic struggle with capital. On the other hand, they were aware that since one could only make a profit by providing consumers with what they desired to buy, men out for their own gain were led as if "by an invisible hand" to promote the common good. The classical economists were unable to resolve their dilemma, and their writings gave rise to two mutually exclusive interpretations of the workings of the capitalist system: the "conflict of interest" and the "harmony of interest" doctrines.
In Capital, Karl Marx claimed that commodities "in which equal quantities of labor are embodied, or which can be produced in the same time, have the same value."’ Thus, labor was held to be the sole source of all value. It follows from this premise that supply and demand can regulate nothing but the "temporary fluctuations" of market prices. They can explain merely "why the market price of a commodity rises above or sinks below its value, but they can never account for that value."’ For Marx, "that which determines the magnitude of the value of any article is the amount of labor socially necessary… for its production."3 It was at this juncture that Marx felt he uncovered the antagonistic nature of capitalism.
• Formulation of Wage Rates. Since the laborer doesn’t own the means of production, he is forced, in order to live, to sell his "labor-power" to the capitalist at its value, i.e. subsistence. `’ But in buying his labor-power the capitalist gets the labor for the entire day. It takes only a portion of the day for the worker to produce the value of his wage. The remaining portion of the day the worker produces profit, or "surplus value," for the capitalist. The laborer, therefore, doesn’t get the full value of his product. He is exploited by the capitalist who lives off of the labor of the workers.
Marx felt that there was an inverse relationship between wages and profits.
For one to rise the other had to fall. Since, by the nature of the capitalist system, the interest of the workers was diametrically opposed to that of the capitalists, there would be irreconcilable class conflict so long as this system persisted.
• Principles of Exchange. While Marx focused on the relationship between the workers and capitalists, his collaborator, Frederick Engels, helped to complete the picture by dealing with the more general aspects of exchange. Since the "true value" of commodities was determined by labor-time, the only just basis for trade would be an exchange of objects of equivalent labor-times. Since value was held to be objective, it was obvious that profit was exploitive: the profit of one would necessarily entail the loss of another. But if the exchange were just, i.e., equivalent was exchanged for equivalent, then there would be no profit and capitalism would collapse. As Engels neatly puts it, "In every purchase and sale… two men with diametrically opposed interests confront each other. The confrontation is decidedly antagonistic, for each knows the intentions of the other — knows they are opposed to his own. Therefore, the first consequence is… the application of immoral means to attain an immoral end…." Hence, concluded Engels, "In a word, trade is legalized fraud.” Profit was always synonymous with exploitation.
The Subjectivity of Value
While Marx concentrated on the conflict features of classical economics, the “ Austrian School ” set the stage for the further development of the embryonic "harmony doctrine" by their destruction of the labor theory of value. Value, argued the Austrians, was not something objective; on the contrary, it was an individual subjective phenomenon that had little to do with the amount of labor-time involved in production. It did not lie in the object produced but in the perceptions of the valuing individual.6 An ashtray, for example, is more valuable to a smoker than a non-smoker, regardless of the amount of labor and materials involved in its production.
This cognition led to the conclusion that since value is subjective, there could be no objective or "real" value determined by adding up the hours of labor involved in production. On the contrary, one starts with the final price of a good as determined by the subjective valuations of the consumers. Prices for the factors of production, including labor, are then derived from the final price. The famous Law of Value was therefore demonstrated to be only a particular law and, even where it was applicable, it was shown that "those costs are not final, but only an intermediate cause of the value of goods. In the last analysis they do not give value to their products; but receive it from them." As Eugen von Bohm-Bawerk illustrated, "it would be erroneous to assert that Tokay wine is valuable because Tokay vineyards possess value;" rather, "those vineyards have a high value because their product is highly valued."7
Mises and the Harmony Doctrine
In direct opposition to the Marxian conflict doctrine, Ludwig von Mises, drawing on the insights of the "Austrians," developed a comprehensive counter-philosophy that viewed capitalism as a system premised on the harmony of interests of all participants. His thought can be broken down into three interrelated parts : the demonstration (1) that freedom is integrally connected with laissez-faire capitalism; (2) that laissez-faire capitalism is able to harmonize diverse interests, and (3) that laissez-faire capitalism constitutes a complete and viable self-regulating system.
• Capitalism and Freedom. By centering his attention on individuals instead of classes, Mises was able to formulate his "action axiom." The action axiom asserts that human action is purposeful behavior which always aims at making the actor happier, at substituting a more satisfactory state of affairs for a less satisfactory one. While Mises admitted that this axiom was tautologicals — since what one actually values most at any one time can only be revealed by his actions — he did believe that it had important ramifications. For the more free the society, the better able all individuals would be to choose their own individual goals and run their lives accordingly. Hence, the happier they would be. Only a free society could maximize all individual utilities.
Mises realized, however, that there could never be a society free from all constraint. Regardless of the type of society, one’s freedom of choice would always be limited by the laws of logic and nature. Action always has consequences, and one cannot attain incompatible ends. An individual is free to take poison. If he does, however, he is not free to continue living.
Similarly, an individual is free to be lazy. But then he must be prepared to suffer the consequences of his laziness, such as poverty, just as a rude salesman must be prepared to suffer the loss of his customers. As Mises points out, "In nature there are no such things as liberty and freedom. There is only the adamant rigidity of the laws of nature to which man must unconditionally submit if he wants to attain any ends at all."9 To live, man must eat, sleep and drink. While man’s ability to fashion his own destiny will always be limited by the laws of nature, the scope of governmental power and the efficiency of the economic process, Mises felt, were the two crucial factors in determining the scope and extent of freedom in a society.
The popular distinction between the administration of things and of people, he argued, was facile. If the government institutes price controls, for example, this means that people are now forced to alter their behavior from what it would have been in the absence of the controls. Since according to the "action axiom" people always choose the course of action which they deem will provide them with the greatest possible satisfaction, the prohibition of any such nonviolent activity, by reducing options, restricts the scope of freedom of its citizens, and therefore reduces their happiness. This is so even when the ostensible aim of the interventionists is to make people freer. Aside from the economic fallacies of such intervention, "the liberty its supporters advocate," he pointed out, is always the "liberty to do the ‘right’ things, i.e., the things they themselves want to be done."¹º But liberty is meaningless if it is only the liberty to agree with those in power. Liberty is therefore always limited by the prohibition of any non-violent activity." Since the power to resort to violent actions is a government monopoly, Mises defined freedom as "that state of affairs in which the individual’s discretion to choose is not constrained by government violence beyond the margin within which the praxeological law restricts it anyway."¹² A laissez-faire society, he believed, where coercion can be used only defensively, would provide the maximum scope of freedom for all its citizens.
The second determinant of freedom is the efficiency of the economic system. While in a laissez faire society, all citizens have the same freedom, to engage in any non-violent activity they desire, it is obvious that the standard of living has a significant bearing on the ability to use that freedom. The wealthier one is, other things being equal, the more options one has. Hence, the more efficient and productive the economic system, the larger the freedom of choice open to its individual participants. Since, for reasons sketched below, Mises demonstrated that a pure laissez-faire system was far more productive than any alternative, it follows that such a society would greatly extend the realm of choice.
• Capitalism and the Harmony of Interests. Next, Mises argued that in a free society everyone’s long run interests can be harmonized. Since consumers buy only what is useful to them, there can be no distinction between production for use and production for profit. Those eager to make profits can do so only by producing, better than others, what the consumers wish to buy. The more satisfactorily one serves the consumers, the more profit he will earn and, therefore, the better able he will be to pursue his own goals. In this way the market is able to harmonize a plethora of diverse and seemingly incompatible individual goals. Under the free market everyone is free to pursue any interest he desires, running the gamut from purely selfish to altruistic. But it is evident that the best way to attain one’s own ends is to offer services desired by others. Thus, in the capitalistic exchange society everyone serves, but in doing so everyone is served by others. For it follows from the subjectivity of values that under a system of voluntary exchange each party must value what he receives more than what he gives up, otherwise no exchange would be made. This applies to all members of society, workers, employers and consumers. Under capitalism, therefore, society can be maintained by voluntary exchange for mutual benefit and without the need for coercion.
• Capitalism as a Self-Regulating System. While it is commonly believed that a society where all individuals would be free to engage in any and all peaceful activities they desire would produce a chaotic state of affairs that would require regulation by the state, Mises demonstrated that the exact opposite is true: a capitalist society is in fact a highly complex but orderly and self-correcting system. On the other hand, any type of government intervention reduces the standard of living and generates societal conflicts. Mises’ reasoning runs as follows.
Since profit can only be made by serving the consumers, it follows that the consumers direct production by their buying and abstention from buying. If a desired object is in short supply, the price tends to rise. The lure of higher profits will tend to attract capital into the area. The resulting increased production will cause the price to return to its equilibrium level. But to produce the product in the first place, the capitalist needs workers and must therefore offer wages high enough to attract the laborers he needs. Since what the capitalist can pay in wages is limited by his expected return from the sale of his product, the consumers also determine the height of wages. If returns are not high enough to cover the cost of a particular operation this means that there is, in the eyes of the consumers, a more important use for the factors of production elsewhere.13 In this way Mises felt that not only was the purely free market completely self-regulating but, in the long run, it also worked to increase the subjective utilities of all participants by employing "every factor of production for the best possible satisfaction of the most urgent needs of the consumer." Consequently, if "government interferes with this process, it can only impair satisfaction; it can never improve it."14
If subsidies or tariffs, for example, are granted to those groups favored by the government, then everyone else is forced to engage in activities they consider less desirable than those they would have adopted. The privileged groups are therefore benefited at the expense of the rest of society, and political conflicts are then generated by the desire of every group to use the coercive arm of government for their own benefit. But if the practice of granting privileges becomes general, everyone loses as much by the privileges granted to others as he gains by those granted to him.
What is more is that since government interference distorts the operations of the market it must necessarily misallocate resources. Since that will lower output, the long run effect is to hurt everyone, even the initial beneficiaries of the privileges, by reducing their standards of living below what they would have been on the free market.15
For Mises, the two crucial determinants of freedom were seen as integrally interrelated. As the scope of government was extended, not only would the citizens’ freedom of action be ever more limited by the threat of government violence, but the more inefficient the economic process would become. Both would work to generate social conflict and limit the scope of free choice. Conversely, he felt that capitalism was a viable system, premised on the long-run harmony of interests of all participants, and that it served to maximize individual freedom.
Conflict or Harmony?
From this outlook Mises derived the following conclusions regarding the Marxian theory of exploitation.
• The Formulation of Wages. Contrary to Marxian doctrine, wages and profits are not inversely related, and there is no "class conflict" between workers and capitalists. What enables wages to rise is precisely that the capitalists, interested in increasing their profits, save and invest their money in productive machinery. Since this augments the marginal productivity of labor, real wages are forced up, i.e., either money wages rise or prices fall, or both. But artificial attempts to raise wages beyond the increase in marginal productivity ultimately result in lower, rather than higher, real wage rates. For if wages are forced above their respective equilibrium levels, the income of the entrepreneurs will be reduced, forcing the marginal producers out of business. The resulting restriction of production will then enable prices to rise, restoring the former ratio between wages and profits. However, those who lost their jobs when production was curtailed will be forced either to remain unemployed, or look for jobs in other areas, thereby lowering wage rates in those areas. Further, since less will have been produced due to the distortion of the market and the restriction of production, real wages for those still employed will not be much higher, and may even be lower, than that prior to the rise in money wages.
The problem, believed Mises, is aggravated if an attempt is then made to effect a permanent rise in real wages by recourse to price controls. For if wages are raised above their free market rates while prices are held below theirs, the result will be a decline in the amount of capital accumulated. Since more is now being spent on consumer goods, there is a shifting of production in the direction of more consumers’ goods and less producers’ goods. This can temporarily bring about an increase in the standard of living. However, once the machines currently in existence begin to be used up and wear out, there will not have been enough new ones produced to replace them. Productivity will suffer, causing a decline in real wages. And since the only way this process can be reversed is through a resuscitation of capital accumulation, real wages, initially, will have to be reduced even further.
Thus, far from varying inversely as assumed by Marx, wages and profits tend to vary positively. And any deviation from the market process produces, in the long run, effects detrimental to both capital and labor.
• Principles of Exchange. If profits aren’t obtained at the expense of the worker, neither are they obtained at the expense of the consumer. "The only means to acquire wealth and to preserve it, in a market economy not adulterated by government-made privileges and restrictions," argues Mises, "is to serve the consumers in the best and cheapest way."16Far from the wealth of one implying the poverty of others, the reverse is true: one can only acquire wealth by serving others. As soon as an entrepreneur ceases to serve the consumers, they will take their business elsewhere.
The progressive income tax and other limitations on individual fortunes have several consequences: (1) if the revenue from the tax is spent on current consumption it impedes capital accumulation, bringing about the effects discussed above; (2) it discourages precisely those who best serve the public, and (3) since the only way small firms can expand is to make large profits and then plough them back into their businesses, the confiscation of the greater part of these profits prevents the growth of small businesses, thereby shielding the larger firms from the threat of competition.17 The result is that the poor, usually the intended beneficiaries, are the onces most hurt by government programs to redistribute wealth and limit profits, for it is precisely the poor who can least afford the squandering of scarce resources. The best way to raise the standard of living is to remove government restrictions on profits, for as Mises remarked, "The process that makes some people rich is… the corollary of the process that improves many peoples’ want satisfaction."18
People act on what they believe. If they believe that capitalism is an unstable system based on the conflict of interests, they will either strive to replace the system by one ostensibly more harmonious, or to adopt political programs designed to regulate and mollify the conflict. It is this latter alternative that is popular in this country. Hence the realm of government interference is continually expanded.
This is not really surprising since it is rare for any college text even to acknowledge the existence of the harmony doctrine. Students are taught that conflict is endemic to capitalism. John Kenneth Galbraith’s American Capitalism argues that competition has been replaced by oligopolies. To prevent exploitation by the capitalists, the government must encourage the formation of "countervailing power," i.e., oligopsonies in regard to the consumer via the formation of mass retail buyers on one side of the market, and large labor unions on the other. A social balance is to be attained by having one power center offset another, antagonistic power center. The government is to regulate these struggles to insure that no side gets the upper hand." After a brilliant dissection of contemporary "interest group liberalism" in The End of Liberalism, Theodore Lowi reaches the paradoxical conclusion that what is needed to combat exploitation by governmentally privileged interest groups is more government. And in A History of Economic Thought, John Bell presents a caricature of the harmony of interest doctrine and quickly dismisses it as naive and "open to severe criticism." But none is given.
It is indeed ironic that in a country that is allegedly capitalistic, the writings of Ludwig von Mises should be so little known and discussed. But as Mises, himself, said, "truth persists, even if nobody is left to utter it."²º
• FOOTNOTES •
1 Karl Marx, Capital (New York, 1906), p.46.
2 Karl Marx, Wages, Price and Profit ( Peking , 1972), p. 27.
3 Marx defines "socially necessary" as "that required to produce an article under normal conditions of production and with the average degree of skill and intensity prevalent at the time." Capital, p. 46.
4 Since under capitalism labor is bought and sold, its value "is determined, like that of all other commodities, by the labor-time required for its production…. The value of labor-power is the value of subsistence necessary for the maintenance of the owner…." Frederick Engels, On Capital (New York, 1974), pp. 67-8.
5 Frederick Engels, Outlines of a Critique of Political Economy. Appendix to Karl Marx’s The Economic and Philosophic Manuscripts of 1844 (New York, 1973), pp. 201-2.
6 In fairness to Marx, it should be pointed out that he was aware of the existence of subjective use-value but erroneously contended that "we should leave out of sight the use-value of commodities" since, as exchange-values, commodities "are merely different quantities and consequently do not contain an atom of use-value." Capital, p. 44. Because of his emphasis on labor as the source of value, Marx ignored the function of time in the productive process. He did not realize that without interest, the large-scale "roundabout" methods of production would become impossible.
7 Eugen von Bohm-Bawerk, Capital and Interest (South Holland, Ill., 1959), Vol. II, Positive Theory of Capital, pp. 175-6.
8 Ludwig von Mises, Human Action ( Chicago , 1966), p. 15.
9 Ludwig von Mises, Socialism ( London , 1969), p. 568.
¹º Ibid., p. 541.
11 Mises defined "violent" as the use of physical force, the threat of its use, and the use of such types of implied violence as theft and fraud. All other actions are to be considered non-violent.
12 Mises, Human Action, p. 281.
13 Ibid., p. 340.
14 Ibid., p. 744.
13 Ludwig von Mises, Theory and History (New Rochelle, N. Y., 1969), pp. 32-3, and pp. 236-237.
16 Mises, Socialism, p. 535.
17 Mises, Human Action, pp. 806-9.
18 Ludwig von Mises, The Anti-Capitalistic Mentality (New York, 1956), p. 43.
19 It is somewhat surprising that this book should have attained the stature that it has for there are several curious lapses in logic, not the least of which is the entire thesis of the book. While Galbraith uses the "countervailing power" thesis precisely to explain the prosperity of the 1945-52 period, he emphatically insists that inflation "dissolves" countervailing power. But Galbraith, himself, admits that the 1945-52 period was inflationary. It seems a bit strange that one should try to explain an event by the use of a concept that, by the author’s own admission, shouldn’t even be applicable to it.
²º Ludwig von Mises, The Historical Setting of the Austrian School of Economics (New Rochelle, N.Y., 1969), p. 45.